Germany faces dairy price ferment

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German shoppers are bracing themselves for sharp rises in the cost of milk and butter as producers face rising costs and demand from foreign markets.

Milk and butter prices have already risen by about 15% since May and industry groups have warned they could increase as much as 50% in August.

Rising commodity prices have affected producers and retailers while surging demand from China has curbed supplies.

As Europe's largest milk producer, Germany is accustomed to low prices.

Government study

The price rises are a direct result of new contracts between dairies and supermarket retailers, both of whom are feeling the pinch from rising costs.

Germany's Dairy Industry Association said the rising cost of animal feed meant that milk and cheese prices could rise by a further 50% this month.

The move in milk and dairy prices in Germany appears to be related to a global surge in demand Silvia Pepino, JP Morgan

The German government has launched an investigation into the price hikes which it says "cannot be justified by the higher production costs".

Demand for German produce from China and other countries has contributed to pressure on supplies, with a third of all German milk now exported.

"The move in milk and dairy prices in Germany appears to be related to a global surge in demand and the will to realign domestic prices to higher international prices," said Silvia Pepino, an economist at JP Morgan.

Retailers such as Lidl have admitted that the long period of "stable" milk prices has come to an end, while dairy farmers have said they will struggle to meet their costs, despite being paid more for their products.

The BBC's Tristana Moore in Berlin said the price rises had caused considerable unease among shoppers not known for voicing their anger.

Food prices have been heading upwards across Europe due to a range of factors including extreme weather, high energy costs and more emphasis on sales outside Europe.