Dairy industry in a crisis

I recently overheard a dairy farmer saying that the dairy industry is in a crisis. What is the reason for this?

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The problem started with Clover directors and management misleading their suppliers into believing that they would benefit immensely by converting to a company. Directors and senior management all received shares in the new structure, management were put on profit sharing bonuses and the whole mindset changed from looking after their members to looking after themselves. Maximising profits became the name of the game and what better way to do it than by simply reducing the price of milk paid to suppliers.

All the corporates joined in and dairy farmers were left with no place to turn and simply became price-takers. This action left an opportunity for some far-sighted individuals to start up their own milk processing businesses but the numbers were too small to influence the prices paid by the corporates. Now for the feed industry. Some years ago, a group of like-minded farmers and entrepreneurs in KZN saw an opportunity to start a new feed mill, mainly because of the feeling that farmers were also becoming price-takers and had no influence over the cost of their various feed rations.

The success of the business lay in the way it was structured. The farmers and the entrepreneurs each held a 50% shareholding in the business. Farmer share-holders did not receive extra discounts but were guaranteed quality feed at the right price. Their benefit would come in time when the feed mill became profitable and dividends were paid. Feed prices to ‘outside’ farmers were the same as those to shareholders and feed quality became the buzz word. In addition, the farmer shareholders had equal representation on the board.

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Not only were the entrepreneurs 50% shareholders but were employed in senior positions in running the business and also sat on the board. What an incentive, to run a business in which you had a financial stake, a return on investment in time to come and receiving a salary from day one. As a consequence of this model, the price of animal feed in KZN dropped by R50/t to R60/t to the benefit of all farmers and became the catalyst in keeping feed prices fair.

The business was so successful that it was not long before the factory filled up and expansion of the capacity was envisaged. A second property was purchased and a second mill was strategically placed to keep down the delivery costs of the feed. What has this got to do with the dairy industry crisis? My suggestion would be to set up a milk processing business using the same model.

A group of like-minded dairy farmers would be approached to buy 50% of the business. They would not be paid premiums for their milk but a fair price and again their additional benefits would be a return on investment once the initial five-year start-up period was over. Similarly, entrepreneurs would own 50% of the business and they again would run the business with all the same incentives as in the feed mill model. Again both groups of investors would have equal board representation, attractive milk prices could be paid and the farmers could get on with doing what they do best, that is farm.

The size of the business would depend on the size of the market, at all times looking to not deliver more than 100km from the processing plant. The product range would also be dictated by market demand. The corporates would have no chance in the market place because of the low cost structure of the business, no head office overheads, no directors and senior management feeding off excessive salaries, shares and inflated bonuses. There would be no need for the smaller company to chase excessive profits to attract investors on the JSE as is the case with the corporates.

Farming is not easy, particularly in South Africa, but it is long overdue that farmers take hold of their own futures by getting more involved in the value chain of food production. The more control, the more say in our futures.