W Cape dairy farmers feel the economic pinch

Despite reported global shortages of dairy products, dairy companies in the Western Cape are reducing producer prices. They claim that falling consumer consumption is leaving them with surpluses they’re currently selling at a loss. Glenneis Erasmus investigates.
Issue date : 27 June 2008

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Western Cape Diary farmers are set on reducing milk production in spite of the looming national food crisis and international milk shortages. Dean Kleynhans, chairperson of the Milk Producers’ Organisation (MPO) in the Western Cape, said the situation is ironic considering that SA has become a net importer of milk, which means the country is currently unable to supply full consumer demand.

World supply hit a historic low and prices hit their highest point ever in December 2007. Prices have moved sideways since then, but they’re still much higher than in August 2007. addition to this the weak exchange rate makes it much more expensive to import milk products. Various milk processors and buyers, nevertheless, have reduced their milk intake or their farmgate prices.

Getting to grips with reasons Ladismith Cheese announced they would reduce farmgate milk prices by 20c by 1 July, while Sonnendal Dairies announced new milk quotas, based on farmers’ average production during April and May, minus 10%. This is despite the fact and May yields were significantly lower than in other months, due to cold conditions and feed shortages. Both companies blame consumer resistance for these interventions. Martin Swanepoel, CEO of Sonnendal Dairies, ascribed the resistance to increased pressure on consumer expenditure, rising interest rates and escalating fuel and food prices. Sonnendal’s milk sales have fallen by around 15% since the start of the year.

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Roy Taylor, CEO of Ladismith Cheese, added that it’s not simply a matter of having a bigger supply than before. “Pressure on consumer expenditure is affecting all products, not just dairy products, and as a result prices are coming down.” S wanepoel added that retailers’ market share has declined significantly since the start of the year, and voiced his discontent with the MPO’s message urging farmers to increase production in the Western Cape. “We foresee a huge surplus by October if supply isn’t managed properly,” he warned.

Kleynhans feels milk processors and buyers would find there’s a huge milk shortage if they could communicate with each other. Companies with surpluses could sell milk to companies experiencing shortages. However, Kleynhans acknowledged that milk buyers can’t communicate with each other because of the claims of unfair competition currently being investigated by the Competition Commission. He added that retailers are taking advantage of the situation.

Taylor responded that this isn’t true. He said that milk buyers have never been allowed to consort in this way. He added that retailers could also not be blamed as prices for diary products are slowly but surely being adjusted downwards in shops. E xporting is not necessarily a solution. Swanepoel explained that small to medium-sized companies, like Sonnendal, couldn’t export surpluses due to high transportation costs and small economies of scale. Taylor said Ladismith will definitely explore exports as a means of alleviating supply and demand pressure. Kleynhans admitted that consumer resistance might have lowered milk consumption, but feels that the full impact of xenophobia on milk sales hasn’t been taken into account.

 “A large portion of milk was sold to small-scale entrepreneurs such as Somalians and Nigerians, who then resold the milk in informal settlements,” said Kleynhans. With the outbreaks of xenophobic violence, these entrepreneurs’ milk sales became almost non-existent. Kleynhans added that the diary industry has little information about this part of the market segment and, with these foreign entrepreneurs gone, is in dire need of new entrepreneurs to sell milk products in those markets. However, Taylor believes the amount of milk sold through small enterprises to informal markets is comparatively insignificant. He claims that representatives in informal markets and other milk sellers are reselling milk to cheese producers for less than what they bought it for. In the past surplus milk was used in powder and butter.

It’s now sold to cheese factories and this is turning cheese – which is supposed to be a higher-end product – into a commodity. Surpluses for cheese Kleynhans believes some milk buyers sold milk to cheese processors for R2,20/â„“ – cheese factories usually buy in milk for around R3/â„“. processor needs about 10â„“ of milk to make 1kg of cheese, plus about R10 for production and packaging costs. This means cheese that to used to sell for around R40/kg can sell for R32/kg. Kleynhans fears reducing the amount of milk bought in would force farmers to sell surplus milk for as little as R1/â„“, reducing cheese prices to R20/kg.

However, Taylor doesn’t believe rumours that dirt-cheap milk has been sold to cheese processors, as the amount of cheese produced hasn’t increased significantly. Nevertheless, with production costs reaching almost R3,85/â„“ and farm gate prices falling to around R3,20/â„“ many farmers will be forced to reduce the diary segment on their farms. “Most of the southern Cape farmers have a dairy and cash crop component,” said Kleynhans. “With the good prices realised for wheat we’ll downscale on the diary side.

Farmers can now also get rid of cows that are under-producing and use the time to enhance genetics.” He added that farmers would have to look for alternative markets to ensure sustainable prices.