In a froth

Milk short­ages likely to re­sult in higher prices

Finweek English Edition - - Openers - ANA MON­TEIRO

SOUTH AFRICAN CON­SUMERS will soon be pay­ing more for their milk prod­ucts as re­tail­ers re­port short­ages in cer­tain fresh milk prod­ucts. The short­ages stem from two fac­tors: higher meat and chicken prices (re­sult­ing in con­sumers mov­ing to cheaper milk prod­ucts for pro­tein) and per­sis­tently low prices be­ing paid to milk pro­duc­ers (re­sult­ing in many farm­ers leav­ing the in­dus­try).

Re­tail­ers say the short­age is not yet se­ri­ous and that they’d pull out all the stops to pre­vent pass­ing on price in­creases to con­sumers.

“The cur­rent short­age up north is be­ing driven mostly by drought and lift in the econ­omy, with shop­pers buy­ing more dairy prod­ucts gen­er­ally. While short­ages do tend to put up­ward pres­sure on pric­ing, Pick ’n Pay will hold off pass­ing those on to the con­sumer for as long as pos­si­ble,” says Pick ’n Pay food mer­chan­dise di­rec­tor Paul Con­nel­lan.

Con­nel­lan says that Clover is the only dairy sup­plier that has stopped pro­duc­ing some of its lines, in­clud­ing the one-litre sa­chet and longlife milk. “It will con­tinue pro­duc­ing its twolitre milk, as that’s its most pop­u­lar line.”

Spar mar­ket­ing di­rec­tor Roelf Ven­ter says the com­pany’s ex­pe­ri­ence has been sim­i­lar, with one-litre sa­chets be­ing the only line af­fected thus far. “A 20m litre short­age was fore­cast by the in­dus­try, but that’s been re­duced to 2m litres and the in­dus­try has plans to elim­i­nate the short­ages.”

Clover deputy CEO Manie Roode says: “There are many rea­sons we find our­selves in this sit­u­a­tion, but the bot­tom line is that there’s a big­ger de­mand for milk as a pro­tein and peo­ple turn to cheese as a re­sult of higher red meat prices.”

For the six months to end-De­cem­ber, Clover re­ported a 23,8% de­cline in op­er­at­ing profit to R124,4m, say­ing the short­age of raw milk had af­fected its re­sults. “Due to a tim­ing dif­fer­ence be­tween the ex­pan­sion of the brand prod­uct mar­ket and the de­vel­op­ment of suf­fi­cient sup­plies of raw milk, Clover’s own pro­duc­ers were un­able to meet the in­creased de­mand.” The com­pany has in­creased the milk price in se­lected re­gions to stim­u­late milk sup­ply, de­spite con­sumer sell­ing prices hav­ing not in­creased in two years in cheese and long-life milk, two ma­jor cat­e­gories.

Koos Coet­zee, an econ­o­mist at the Milk Pro­duc­ers’ Or­gan­i­sa­tion, says a ma­jor com­po­nent of the rea­son for the short­ages is the price squeeze farm­ers have been sub­jected to by pro­ces­sors, which has been the sub­ject of an ex­ten­sive Com­pe­ti­tion Com­mis­sion in­ves­ti­ga­tion. “The al­leged ac­tions by milk buy­ers helped them to keep pro­ducer prices down,” Coet­zee says. Two years ago, pro­ducer prices de­creased from R2/litre to a low of around R1,76/litre, Coet­zee says. “Since then the price of an­i­mal feed and other in­puts has in­creased sub­stan­tially, which has forced many milk farm­ers to cut back on pro­duc­tion or stop dairy farm­ing com­pletely.” Though the num­ber of farm­ers in the milk in­dus­try has de­creased sub­stan­tially over the past eight years (from 7 000 to 3 900), there’s been con­sol­i­da­tion, with cows be­ing sold on to big­ger op­er­a­tions.

Par­malat says that, while some of its milk pro­duc­ers ex­ited dairy farm­ing, “scru­tiny of the fig­ures shows a healthy trend among Par­malat’s milk pro­duc­ers, with many farm­ers in­creas­ing their herds and ca­pac­ity”.

In Jan­uary 2004 there were 453 farms that sup­plied milk to Par­malat, com­pared to 422 in Jan­uary 2007. It had a milk in­take for Jan­uary 2004 of 29m litres and 40m litres in Jan­uary 2007.

Par­malat says it will do ev­ery­thing in its power not to re­sort to im­port­ing milk to meet con­sumer de­mand, say­ing it views the SA dairy in­dus­try as a na­tional as­set.

Coet­zee sees price in­creases for con­sumers – and, hope­fully, for farm­ers – as the way out. “Re­tail­ers will have to pay pro­ces­sors more, and they in turn must in­crease pro­ducer prices paid to farm­ers sub­stan­tially.” He adds that it will take a long time – up to two years – to rec­tify the sit­u­a­tion.

Many rea­sons for the sit­u­a­tion. Manie Roode

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