International lessons for SA dairy industry

Dr Thomas Grupp, a leading figure in the German Dairy Producers’ Organisation (BDM) gave his insights on the South African dairy industry at a workshop in Somerset West, and argued that supermarkets should start sharing some interest in helping farmers in production. Wouter Kriel reports.
Issue date: 26 September 2008

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What is the global dairy industry looking like in 2008?
At this stage there’s an overproduction of milk of between 2% and 3% in the European Economic Community (EEC). This should be eliminated in the next few months. The EEC couldn’t compete on the export market against US milk products because of the strong euro. But US dairy farmers don’t benefit from the exports, as the price paid to producers is dropping, while the supermarket price is going up. New Zealand, as one of the biggest dairy exporters, still lacks milk for the contracts [their dairy cooperative] Fonterra has to fulfil. China is increasing its own dairy industry quite fast, so exports to China will go down.

How do you feel about the free market as a dairy supply and demand regulator?
As long as the supermarket chains have their absolute strong position, the free market is a myth. The profit chain only starts when the milk leaves the farm; this has to be changed quickly, otherwise more and more dairy farmers will quit the industry. The supermarkets have an obligation to producers and should start showing interest to keep them in production.

What are the major challenges that dairy producers will face in the near future?
First and foremost the direct relationship between crude oil prices and concentrate cattle feed. Climate change will impact significantly on production, and producers will increasingly be expected to produce more on less land. Water availability is linked to climate change, and I expect this to become a major problem, especially in countries that traditionally had abundant water. South African producers have an additional and unique challenge in land reform and your government’s BEE policies.

As an objective outsider, how would you describe the state of the South African dairy industry regarding producers, organisations such as the Milk Producer’s Organisation (MPO), and the value chain as it is currently managed?
Compared to Germany, SA has an advantage in organisational infrastructure, but producers also face the same problems. German milk producers needed a 10-day milk strike to bring the key players of the milk industry together – government, dairy farmers, milk buyers, supermarkets. Such a meeting was held in Somerset West, but unfortunately the supermarkets withdrew from it. To the dairy farmers it must be clear that only a few groups in society are interested in higher farmgate milk prices. The only way to get more influence is to form a strong group where all or almost all dairy farmers are united. This can easily be done through the MPO. In Germany we have about 100 000 dairy farmers left and it’s quite difficult to bring them under one hat, but things are improving because more and more farmers are aware that only they can strengthen their position in the value chain. Furthermore, 70% of the milk buyers in Germany belong to dairy farmer cooperatives, but these mostly aren’t functioning efficiently. The milk buyers are aware of a “sandwich situation”. Before, the pressure from the supermarkets could be passed onto the milk producers, now the milk buyers are afraid that farmers could create pressure from the bottom. The feeling is that the milk buyers, even the cooperatives, are closer to the supermarket than to farmers. But at the end the buyers need the producers as partners against the supermarkets, which have an oligopoly or monopoly all over the world.

Do you think Western Cape producers are productive enough in terms of milk per cow per day?
South African dairy farmers have a high level of knowledge and good management, they farm with big herds and most of the Western Cape dairy farmers are already on their way to “low cost” farming by using mainly pastures. Local milk yields from pastures are higher than those of New Zealand. So the homework is done. You have to stop fighting expenses only – start fighting income. Because of the future task in hand – global milk and beef production has to be doubled by 2050 – farmers should think about alternative income from the same cow.

You mentioned in Somerset West that Canada has one of the best organised dairy industries in the world. What makes them special?
Canada still has a quota system, controlled by the farmers themselves. Canada does not produce for export markets. The government, milk producers and milk buyers work out the basic milk price according to the costs and the necessary profits that the farmers need. Overproduction is penalised, but the consumers don’t suffer under such a basic price. Compared to the US, the Canadian consumer price is the same for the different milk products, but the dairy farmer’s share of the end product is far higher, 50% compared to 30%. The World Trade Organisation wants to get rid of the Canadian system, but this would be the death blow for the last bastion of happy dairy farmers.

What could South Africa learn from the Canadians?
Create a situation where all key players know about the income situation of the dairy farmers. Dairy producers would benefit significantly if the dairy price could be calculated from the bottom of the production ladder. Contact Thomas Grupp on +49 (0) 89/ 99 15 200 or e-mail [email protected]. |fw

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