German raw milk value breaks through 40-cent mark as butter prices climb again

Germany's most closely watched gauge of raw milk value has moved back above 40 cents per kilogram. Elite Magazin reported in its weekly dairy market review, Milchwoche, that the ife raw material value has broken through the 40-cent mark, that milk deliveries rose slightly in mid-September and that butter prices have increased again. According to the publication, milk prices have been developing positively of late and market signals point to a further recovery in the coming months.

Why the 40-cent mark matters

The ife raw material value, calculated by the Institut fuer Ernaehrungswirtschaft in Kiel, converts traded dairy commodity quotations into a theoretical value for raw milk delivered to the dairy. Because it is built on current spot quotations rather than on contracts already settled, it moves ahead of the farmgate prices that German dairies announce month by month. Processors, farm organisations and traders therefore treat it as a forward indicator, which is why a move across a round threshold such as 40 cents is read as a market signal rather than as an accounting result.

A rising raw material value widens the distance between what the commodity market implies and what dairies are currently paying their suppliers. Where that gap stays open for several consecutive months, it tends to work its way into farmgate price announcements and into supply contract negotiations, especially for producers whose contracts are indexed or renegotiated at short intervals.

Deliveries edge higher in mid-September

German milk deliveries increased slightly in the middle of September, according to Elite Magazin. The direction of the move matters more than its size. The second half of the calendar year is normally the weaker stretch of the delivery curve in northern Europe, and additional volume arriving in that window gives processors more raw material to allocate between butter, cheese and drying lines. It also means the current price recovery is not being driven by a shortage of milk at the farm level.

Butter resumes its climb

Butter prices have risen again, Elite Magazin reported. Butter carries substantial weight in the raw material value calculation alongside skimmed milk powder, so a renewed increase in butter quotations is the most direct route to a higher value for raw milk. For buyers, the sequencing is uncomfortable. European butter demand typically builds into the fourth quarter as retail, bakery and food service requirements are covered for the year-end season, and a market already moving up in September leaves less room to buy into a seasonal dip.

The same mechanism works in the opposite direction for processors with fat-heavy product mixes, who see improved returns on butter and cream feeding back into the milk price they can defend. For cheese makers, the effect is more mixed, since a higher raw material value raises the cost base without automatically lifting cheese returns.

What dairy market participants are watching

Three questions follow directly from the week's data points:

• Whether the ife raw material value holds above 40 cents per kilogram or slips back below the threshold in the coming weeks.
• Whether the slight increase in deliveries continues, which would add volume into a rising market.
• Whether butter's renewed advance carries through fourth-quarter contracting, when annual supply agreements are priced.

The Milchwoche round-up did not publish the individual quotation levels behind the move or a figure for the increase in deliveries. Germany is the European Union's largest raw milk producer, so changes in its delivery volumes and in its reference values are tracked well beyond the domestic market, by butter and cheese buyers across the single market and by exporters pricing powder into third countries.