SA dairy industry under pressure

Image courtesy of Danilo Rizzuti / FreeDigitalPhotos.net

"Over the past five years, milk producers have been consistently experiencing unfavourable market conditions, with suppressed raw milk prices and escalating input costs. Producer prices are still unprofitable despite record import parity levels since the second quarter of 2013," said MPO chairman, Tom Turner.

"In contrast to the local scenario, the international dairy industry is booming. This is the result of international markets reacting to increased pressures on farm level by ensuring farming sustainability. Unfortunately, this is not the case in South Africa, and the situation is threatening the future of the entire industry."

International prices

In contrast to the bleak prospects locally, the international dairy outlook is buoyant with product prices at record levels, growing demand the world over, and producer price increases in major dairy regions such as New Zealand, Australia and Europe. International producer prices were on average 44% higher in October 2013 compared to October 2012.

Turner pointed out that although producer prices vary regionally the average South African producer price, which is in the region of R3,90 per litre, does not cover input costs, making dairy farming unprofitable. The situation is exacerbated by reports that loans to dairy farmers are at record levels and that numerous producers have recently exited the industry."

Aggravating dairy farmers' cost squeeze is the recent unexpected sharp increase in South African grain prices. According to Turner, increased prices have already resulted in higher mixed concentrate prices which, combined with a still stagnant milk price, have pushed the milk/feed price ratio to 0.99:1, an unsustainable level. Uncertainty about the size of the 2014 maize crop along with high exports have resulted in an increase in the Safex maize price to R3,080 on 13 January 2014. Soybean prices have also increased sharply along with lucerne prices, with rising exports further aggravating the supply situation.

Outlook for 2014

"Milk supply is expected to come under pressure early in 2014 in view of the stagnant production growth in 2013 compared to the steady growth in demand for dairy products. Furthermore, total exports exceeded imports by 268 million litres on a milk equivalent basis in 2013, resulting in net exports representing 9.6% of estimated total local production for the year," Turner said.

The weakening rand has resulted in sharp increases in input costs such as fuel, fertiliser, machinery and equipment. While farmers have to pay dollar-based input prices, the weaker rand is not yet reflecting in producer prices.

Turner said it is now critical that processors show the necessary leadership and responsibility and take action to encourage adequate production in the short term. The future of the dairy industry is in the balance and depends on producer price increases to ensure sufficient raw milk supply to meet the growing demand."