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Milk crisis looms as farmer's prices slump

According to Bertus de Jongh, CEO of the Milk Producers' Organisation (MPO), "Producer prices are on average 10% below the 2009 level, which is not sustainable.

"Producing enough milk for local consumption as well as some export is not where the problem lies. Doing this profitably is the biggest challenge to our farmers who are amongst the most efficient, non-subsidised milk producers in the world," he says.

"Milk producers also have the right to ply their trade in a fair business environment and all we demand is a fair price for the food we produce and to be respected within the food value chain," adds Dèan Kleynhans, a milk producer in the Western Cape and chair of the MPO.

Input costs

While producer prices decreased since 2009, input prices increased sharply according to Dr Koos Coetzee, chief economist at the MPO.

  • Maize prices increased by 80% and soya prices by 26%, resulting in a 61% increase in concentrate prices
  • The milk to feed price ratio (an important indicator of dairy profitability) has weakened to its lowest level since the beginning of 2010
  • Fertiliser prices increased by between 23% and 39% from September 2010 and the diesel price increased by 26%
  • Farmers now pay 73% more for electricity than in 2008

This combination of lower producer and higher input prices puts serious pressure on milk producers and limits any chances of higher production.

Internationally positive market

In contrast to the South African situation, the international situation remains positive. Dairy product prices increased sharply after the 2008 slump and prices are still substantially above these levels.

  • International prices for butter and milk powders are double that of the 2009 price.
  • International cheese prices increased by 58% over the same period
  • Higher world prices, as well as 21% devaluation in the value of the rand since January 2011, have pushed import parity to more than R4 per litre. The gap between the producer price and import parity is at a record level.

Healthy levels of milk production

According to Dr Coetzee, although milk production in 2011 is at a slightly higher level than during 2010 in all the major dairy exporting countries, EU intervention stocks are practically zero. Rapid growth in the demand in developing countries as well as an expected decrease in production, caused by higher feed and energy prices, will result in upwards pressure on international product prices in following years.

Total production in South Africa during the first ten months of 2011 is marginally higher (+0.3%) than during the same period in 2010. Dairy demand continues to show growth of more than 5% per year.

Retail prices of dairy products have stagnated somewhat. However, according to official Stats SA figures, fresh milk currently sells for 3.5% more than the same period last year. The price of dairy products at processor level (the price milk processors get for their products) was 1.1% higher in September 2011 than during September 2010. Therefore, it seems as if milk processors were able to keep price levels intact while increasing volume growth.

Unless milk producers receive a substantial price increase soon, more farmers will leave the supply chain and milk buyers may find themselves in supply difficulties early in 2012.

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