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Summary

In the autumn of 2007 Denmark experienced a significant increase in food prices. Especially the prices on bread and cereals, milk and butter rose.

Increasing food prices were not just a Danish phenomenon. Globally, market prices on agricultural commodities such as wheat and rice more than doubled within a short period of time from May 2007 till spring 2008. The development of the global markets affected prices on processed foods in the entire EU.

The overall increase in food prices in Denmark was higher than in our neighbouring countries. Thus, from August 2007 till August 2008 food prices in Denmark rose almost 50 per cent more than in Germany and in the Netherlands; and the price increase in Sweden was also less than in Denmark. However, the price development varied between different groups of goods.

In the spring of 2008 the world market prices on inter alia dairy products and grains started to go down. The international fall in prices has until October not had an appreciable impact on Danish consumer prices.

The rising food prices and the fact that Danish prices increased more than in the neighbouring countries led to the Danish Competition Authority in February 2008 initiating an investigation of food prices. The investigation focused on the goods that have increased the most, i.e. flour, bread, milk and butter. The investigation concentrated on the period of time with the highest increase of prices: from August 2007 till February 2008.

The purpose of the investigation was to elucidate whether the international increase in prices could explain the rising prices that consumers have experienced, and to what degree the food supply industry chain increased its prices above this level.

Box 1.1: Main Conclusions

1.1 Milk and Butter

During the examined period of time, there was a considerable variation in the development of prices between the various dairy products. Inter alia, this can be attributed to the differences in the competitive situations of the markets concerned. Overall, the rising prices from August 2007 till February 2008 may be attributed to higher prices on raw milk from the farmers and thereby reflecting the development on the international markets. The dairy companies have contributed significantly to the increasing prices on private label milk, while the supermarkets have increased the price of organic milk.

Milk

Consumer prices on different categories of milk (private label milk, daily fresh milk and organic milk) dealt with in the investigation, have risen between 11 per cent and 30 per cent from August 2007 till February 2008.

Consumer prices on daily fresh milk, which is the group of dairy products that is sold the most, increased by 13 per cent, of which the majority portion fell to the farmers.

The consumer prices on private label milk increased by 30 per cent. Half of the increase can be attributed to the dairy companies, while the other half may be attributed to the farmers. The significant price increase set by the dairy companies is due to the lack of competition from the German dairy companies from August 2007, where prices on the German market rose significantly.

Concerning organic milk, the consumer price increased by 11 per cent. The farmers’ prices increased concurrently with the consumer prices. However, the dairy companies only conveyed 60 per cent of the increase in the farmers’ prices to the supermarkets.  Nonetheless, the supermarkets – probably taking account of rising demand – increased prices by the remaining 40 per cent, and thereby received an increased profit on organic milk.

In August 2007 the farmers received 30-45 per cent of the price for milk paid by the consumers (excl. VAT), mostly from private label milk and the least from daily fresh milk, cf. diagram 1.1a.

From August 2007 till February 2008 the farmers raised their prices about 60 øre (Danish currency worth 1/100 of a DKK pr. litre). The increase was a bit higher on organic milk than on the other dairy products, cf. diagram 1.1b. This may reflect an increase in competition on organic milk between dairy companies.

In February 2008 the supermarkets profited more than twice as much on 1 litre of daily fresh milk and organic milk than on private label milk.

Source: The Danish Competition Authority’s market investigation and calculations

From January 2007 till August 2008 Danish consumer prices on dairy products rose approximately equivalent to the level of the Netherlands and Germany, while prices increased less in Sweden.

Arla Foods, being the dominant player on the Danish market for dairy products, reduced their price on milk to the farmers in June and September 2008 by 15 per cent on regular milk and 11 per cent on organic milk. The company’s wholesale price was not reduced accordingly. Recently, Arla Foods has announced an increase in sales prices to supermarkets on organic milk by 6-7 per cent, effectively by October 13th 2008.
 

Box 1.2: Main conclusions, Milk

Butter

From August 2007 till February 2008 consumer prices on butter and butter blends increased by about 15 per cent.

Consumer prices on butter have increased less than the farmers’ charging price, cf. diagram 1.2b. If consumer prices had increased as much as the farmers’ charging price, prices on butter would have increased by 16-17 per cent. Subsequently, the dairy companies’ and the supermarkets’ profits went down a bit.

Concerning butter blends, the dairy companies passed on the entire price increase from the farmers to the supermarkets and also added a bit extra on the price.

Concerning butter, butter blends margarine etc., the Danish consumer prices, all together, during the second half-year of 2007 increased significantly less than in Germany. In the beginning of 2008 the prices dropped in Germany. Subsequently, from January 2007 till July 2008 the price increases have been slightly higher than in Germany. The Danish prices have increased more than in Sweden and the Netherlands.

Source: The Danish Competition Authority’s market investigation and calculations

Box 1.3 Main conclusions, Butter

1.2 Bread and Flour

The market price on bread wheat (common wheat) in the EU increased from April 2007 till October 2007 by 60 per cent. Danish farmers’ prices on wheat increased a bit later and a bit less.

If nothing extra had been added to the prices in the subsequent levels of the supply chain, the consumer prices on wheat bread would have increased by 4 per cent and on wheat flour by 14 per cent.

The actual increase in prices on manufactured bread, during the period from August 2007 till February 2008, was three to four times higher, and the price increases on flour about twice as high. This reflects that millers (especially on wheat flour), bread producers and supermarkets increased the price further. The price increases in the manufacturing and the retail sector may, to some degree, be attributed to higher expenses on inter alia energy and wages. However, the price increases are considerable and substantially higher than the general cost development. As the markets are highly concentrated, it cannot be precluded that the increases partly reflect a weak competition among the bread producers and millers.

This assumption is further confirmed by the fact that Danish consumer prices on bread and cereals increased substantially more than in our neighbouring countries. The price increases in Denmark were almost twice as high as in Germany and the Netherlands and somewhat higher than in Sweden during the period of time from August 2007 till August 2008.

Bread

Consumer prices on wheat bread rose by 16 per cent from August 2007 till February 2008. Prices on rye bread increased by 12 per cent. The consumer price increases were three to four times higher than the increase in the farmers’ charging price.

The producers of bread were responsible for just under 40 per cent of the increase on rye bread, and 30 per cent on wheat bread.

The supermarkets were responsible for about 30 per cent of the price increase on wheat bread and just under 20 per cent on the price of rye bread.

In August 2007 the producers of bread received about 60 per cent of the price paid by the consumers. The supermarkets received a little less than half as much. The remainder of the price of a loaf of bread was shared by the farmers, the feed stuff companies and the millers cf. diagram 1.3a.

The greater part of the cereals and flour trade on the Danish market takes place between companies within the same conglomerate i.e. Lantmännen (which inter alia owns Schulstad). These conditions may have an impact on price formation.

Millers, bread producers and supermarkets all increased their prices more than attributable to the rise in cereal prices. However, it was especially the bread producers and as for wheat bread the supermarkets that contributed to the large price increase on bread, cf. diagram 1.3b.

Source: The Danish Competition Authority’s market investigation and calculations

The bread producers’ price increase (in excess of the extra costs on flour) corresponds to about 6 per cent of their sales prices in August 2007.  The bread producers have stated that about 80 per cent of their increase, in excess of the extra costs on flour, is due to increased expenses on wages, energy, distribution and other raw materials. However, the increase is much higher than in other parts of the Danish economy. The Danish National Bank’s Core Inflation and Energy Index (which is a simple measurement of how the development of wages and energy influence prices) only rose by about 1 per cent from August 2007 till February 2008.

In our neighbouring countries i.e. Germany, the Netherlands and Sweden, consumer prices on bread and cereals increased far less.

Seen in this light, it cannot be precluded that the considerable contributions to the high Danish bread prices, which originated from the bread producers, partially reflect a weak competition amongst the bread producers. The market for factory-made bread is dominated by the Lantmännen conglomerate (inter alia Schulstad), which primarily competes with Kohberg.

The supermarkets also contributed to the increased prices on bread. This applies for wheat bread, where supermarkets were responsible for almost one third of the overall price increase. The increase was partially a result of the fact that the gross margin of the total price increased, cf. diagram 1.4.

Source: The Danish Competition Authority’s market investigation and calculations

The profit margin of the supermarkets was higher on wheat and rye bread (and flour) than on milk and butter. A high profit margin in itself strengthens the rising prices.

The supermarkets attaining a lower profit margin on milk and especially on butter than on wheat and rye bread (and flour) may be attributed to higher consumer price sensitivity, which results in tougher competition among the supermarkets. The fact that supermarkets contributed by almost one third of the price increase on wheat bread was mainly due to the high profit margin. If the profit margin on wheat bread had stayed unchanged, the total price increase would only have been 1 percentage point less.

Maintaining a high gross margin, as the cost price rises, results in higher profits in the retail sector. In case of efficient competition on the market, a higher profit would quickly be eliminated by competition and the profit margin would drop. However, the development in consumer prices indicates that this is not an option on the markets for bread and cereal products. The Danish Competition Authority, however, does not have the exact information concerning this issue.

In terms of DKK, the bakeries’ prices on wheat bread increased about as much as factory-made bread. The price level of bakery bread was somewhat higher than the price level of bread from supermarkets.

Box 1.4: Main conclusion, Bread

Flour

Consumer prices on flour increased by 30 per cent. Just less than half of the increase was received by the farmers, while the supermarkets received 30 per cent and the millers received 15 per cent.

In August 2007 the farmers and supermarkets each received one fourth of the price that the consumers paid for flour. The millers received almost 40 per cent. The remainder was received by the feed stuff companies, cf. diagram 1.5a.

1 kilogram of flour requires substantially less processing than 1 kilogram of bread. Therefore, the farmer receives a greater part of the price on flour than on bread. Thereby, rising prices on cereals make the prices on flour increase more than the prices on bread, cf. diagram 1.3 and 1.5. The increase in the food stuff companies’ prices on cereals aside, millers and supermarkets both have increased the prices on wheat flour, additionally.

Source: The Danish Competition Authority’s market investigation and calculations

Box 1.5: Main conclusions, Flour