Recently, the German Federal Cartel Office (FCO) introduced an administrative proceeding to take a look at the supply terms set by dairies for farmers. In a test proceeding, the FCO will first inspect the supply terms of the northern German diary giant DMK Deutsches Milchkontor GmbH, as well as its parent company Deutsches Milchkontor eG.

While state quantity control over milk ceased to exist last year, this change has had little effect on the contracts between the producers and the dairies. Long-term contracts, the duty to deliver all of the milk production, and a very transparent pricing system limit the maneuvering room of the farmers and also impacts the food retail industry as a whole. Eventually, these measures may limit competition among dairies for raw milk as well as effective quantity control over the market, ultimately at the expense of the dairy farmers.

The primary focus of FCO’s investigation will be on the long-term contracts as well as any contract provisions that oblige the producers to deliver all of the milk production to “their” dairies, the so-called duty to tender delivery. The reference pricing system—the price change at one dairy immediately after the corresponding price change at another dairy—will also be examined. Such a scheme could eliminate business negotiations altogether, which normally take into consideration the individual added value and the sales power of the dairy as well as the payment practices to the producers. Officials are acting on the suspicion that the agricultural producers and their competitive course of action are constrained by the nationwide chain of long-duration contracts, while the raw milk market is also insulated against the entry of new dairies.

In its final report regarding the inspection of dairy industry in 2012, the FCO already referred to the antitrust issues regarding the delivery terms for raw milk collection. While this newly-introduced proceeding will not solve all of the problems in the dairy market, antitrust-compliant supply terms can contribute to the better functioning of the dairy market in the intermediate term.

Beyond the issue at hand, the case shows that the FCO has a sharp eye on market segments in which a state quantity control or similar policy steering measures, ceased to exist. The FCO is willing to take measures to ensure that market participants and consumers can benefit from the advantages of a free pricing system.