What's behind high milk prices? Look to China

Governments in the United States, Canada, the European Union and Japan have a range of policies, including tariffs and quotas, that insulate their milk from international prices, according to the Food and Agriculture Organization.

These systems are under strain, as high rewards in the globalized market are inspiring milk producers to challenge the old practices.

In Germany, where milk prices are set annually after negotiations between producers and powerful retailers, retailers have been holding prices down to the tune of almost 15 percent since 2002. Since July, they’ve been paying producers an extra 5 to 7 cents a quart after the producers threatened to take their milk elsewhere.

Since May, the price for a half-pound package of butter has gone up from $1.06 to $1.13 in Germany, while the price for a gallon of milk has increased from $3.20 to $3.60.

In a country where beer is cheaper than milk, higher prices for dairy products have led to a flurry of condemnation.

Germany’s HDE retail association blames the Chinese and European Union milk quotas. The quota system, imposed since 1984, prevents farmers from producing more to keep up with demand.

The quota system will come to an end in 2015. In the meantime, EU spokesman Philip Tod said the EU Commission is allowing small — 0.5 percent — annual increases in quotas through 2008.

Hershey Co.’s chief executive officer, Richard H. Lenny, said America’s largest candy maker may adjust its formula to use less lactose because of rising milk costs. Candy bar prices will also be reviewed, he said.

Franck Riboud, head of French yogurt maker Groupe Danone SA, said last month he will raise the price of dairy products in France by 2.5 percent, the first increase in two years, to help compensate for the rise in prices.

In the United States, milk processors and distributors “are being challenged by the most stubbornly inflationary dairy markets in history,” said Gregg Engles, CEO of Dallas-based Dean Foods, the largest U.S. processor and distributor of milk and other dairy products, where profits are down.

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