Milk glut sees cut in price and earnings

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On Monday, the Johannesburg-based company warned of a marked decline in the pace of first-half earnings growth, as the milk surplus it predicted would occur last year had reduced local prices.

Clover said it expected headline earnings per share for the six months to December to rise by between 4.7% and 9.7%, compared with growth of 41% the same time a year ago.

National milk flow had remained much higher month-on-month last year, with the exception of December, the company said.

The supply glut followed last year's milk shortage, which led many producers to upscale production in a bid to benefit from market prices that outpaced costs.

"This national oversupply of raw milk inevitably impacted negatively on local market prices, which were further affected by very low international dairy commodity prices during the calendar year," Clover said.

Last year, Clover ventured into the high-margin yoghurt and custard business, through its acquisition of DairyBelle, to diversify its revenue stream from traditional milk products. It also introduced product lines such as Ice Tea and a functional Smart Drink, a joint venture with FutureLife.

"They are coping with a product that on its own is not a growth market by getting into other things," said Ian Cruickshanks, South African Institute of Race Relations chief economist.

Cratos Wealth analyst Ron Klipin said the milk market's cyclicality was Clover's biggest challenge, as it diluted pricing power.

The drought might increase feed costs, pushing up milk prices, Clover said.