Why dairymen are bleating

Allan Penderis, manager of Midlands Milk, analyses trends in the producer and retail price of milk and explains why dairy farmers are justified in wanting a bigger slice of the consumer cake – and what’s standing in their way of getting it. Robyn Joubert reports.
Issue date : 27 March 2009

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Allan Penderis, manager of Midlands Milk, analyses trends in the producer and retail price of milk and explains why dairy farmers are justified in wanting a bigger slice of the consumer cake – and what’s standing in their way of getting it. Robyn Joubert reports.

What have been the recent trends in producer and consumer prices of fresh milk?
Milk prices have lagged increasingly further behind the Consumer Price Index of food. From about February until September 2007 the global industry began playing “catch-up”. Understandably, such a steep price change, even though it was really only a correction, didn’t endear us to consumers.

Since around September 2007 to present, retail prices have continued to increase, but at a slower rate – about 10,2% per annum. Producer prices, which initially shared in the steep correction phase, increased slowly until about June 2008 and have been steadily declining ever since. Therefore the gap between producer and consumer prices is widening every month.

How does the South African milk producer’s share of consumer spending compare with the rest of the world?
Throughout the world, the difference between the producer’s share of consumer spending is between 40% and 60%, with the UK being the lowest in the world at 41,5% for the last five years. The best or worst, depending on which side of the fence you sit on, is Canada with 60%. As far as I can ascertain, a large number of countries are in the 50% range – in Australia, Western and Eastern Europe and South and North America.

It’s safe to say that, worldwide, the producer gets about 45% to 55% of what the consumer is spending. Currently the local dairy producer, at least in KwaZulu-Natal gets about 38%. This is lower than anywhere in the world that I know of. If we get a price increase now, we could go up to 42%, which would still be among the lowest.

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What share of the consumer rand should milk producers get?
I’m of the opinion, given the rest of the world’s figures, local milk producers should be getting about 50% of consumers’ spending. The weighted average consumer price of 1â„“ of milk in KwaZulu-Natal is currently R7,10 and the farmers should expect to get about R3,50/â„“. But we’re only getting R2,80/â„“ which is 80% of what we should be getting, judging by international norms.

Are farmers justified in wanting a price increase?
Yes, but this should not increase the price the consumer has to pay. If it does, we’ll get no sympathy from anybody, because the whole problem is that the consumer’s paying too much for food.

If the price of milk should not go up, how will the producer earn more?
The retail price doesn’t need to go up. The middlemen are taking a far larger portion of consumer spending than in other countries and they simply need to take a smaller share. The retailer is getting about a 23% to 26% markup. If we then work backwards, the processor is marking up at about 105% to 110%.

That sounds horrendous, but remember the processor has to pay for processing milk, pasteurising, homogonising, cooling, packaging, transport and in many cases, even merchandising. Whether this is good, bad or indifferent, I don’t know. We can only work on the extremes of the milk chain – producers’ realisation versus cost to the consumer. When we look at that, we’re out of step with the rest of the world.

How does the middleman get away with taking such a big cut?
A possible reason is the milk producer has no control over price. Farmers get dictated to by their customers, the processors, as to what price they will pay.
Agriculture is the only industry in the world where the customer walks into the shop (so to speak) and decides how much he will pay, irrespective of production costs, shortages or surpluses.

What is the current status of milk supply?
There’s no milk available, but this has no effect on the price, which is still sitting at R2,80/â„“. But when the market moves into a state of surplus, then suddenly the principles of supply and demand come into play in setting the price.

How important is the quality of milk?
Two rule sets unfortunately apply in the industry. When there’s a shortage of milk, Rule Set 1 applies, which is just about anything goes. When there’s a surplus, Rule Set 2 applies – extremely strict quality controls. We at Midlands Milk want to standardise milk quality and be strict about it, because that’s what the consumer demands, and has every right to demand. Generally farmers aren’t delivering consistently high-quality milk partly because of the unwritten “two-rule system”.

How should this quality control be implemented?
Firstly, by applying one set of quality standards irrespective of current milk supply and demand, so everyone knows where the lines are drawn and what the penalty will be for overstepping the mark. Secondly, by implementing significant penalties for poor-quality milk – not the token tap on the wrist some buyers have in place. Unless we produce milk of the very best quality and do so consistently, we can’t begin to expect to sell our product for the price it deserves.

What would help stabilise the industry?
A price-setting mechanism that doesn’t just rely on periodic arm-wrestling, bully tactics, and ad-hoc announcements. Also as an industry, we seem to be incapable of passing production messages back to consumers soon enough.
When the powers that be, for example, find a shortage is looming, the only way to stimulate production is by price, so they announce an increase to take effect one month hence. But the producer put all his production mechanisms in place at least nine months previously. There’s nothing he can do to respond to the increased demand for milk at that stage.

So the adjustment doesn’t achieve what was desired. And the converse is just as true. Dropping the price with a month’s notice may send a message, but the producer is powerless to react to that message. The result is a somewhat chaotic situation with some very frustrated milk producers looking to bite off someone’s head.
Contact Allan Penderis on (039) 834 1405 or go to www.midlandsmilk.co.za. For additional information, including producer financial averages go to www.tammac.co.za.     |fw