MPO – Erratic producer price endangers dairy industry

A strong warning by the Milk Producers Organisation (MPO) that erratic producer prices for milk farmers over the past five years will all but wipe out dairy farm resilience and further increase the rate at which dairy farms close down.

According to MPO, a wide range of market factors is limiting the manoeuvring space of the dairy farmer to react to wide fluctuating price signals.

“The high degree of price volatility behind the scenes is also placing role player’s viability and market operations in jeopardy” said Bertus van Heerden, chief economist, Milk Producers’ Organisation (MPO).

There were concerns on the widening gap between what the consumer paid for versus what the dairy farmers received.

MPO said that the current measures of using the linear regression model as basis for determining dairy product trends was not adequate.

Using a linear regression model to determine the levels of erratic price behaviour trends was only fit for measuring dairy product prices and retail prices for milk, cheese, and eggs.

Bertus van Heerden said “producer prices are not only influenced by market factors but could also be influenced by the specific circumstances of a processor or retailer.”

MPO preferred the polynomial regression model used as it was fit to measure producer prices. “The trend was actually turning south from January 2018 due to producer prices dropping sharply from November 2017, never to fully recover. The time series used is short for a polynomial regression but served well to help understand the position of the dairy farmer.”

This outcome for MPO signalled concerns over producer prices behaviour for the past five years. Collectively, it affected business planning at primary level making it impossible dairy farmers to survive.

Bertus van Heerden said once a farming operation was faced with this situation, socio-economic actions subside, “regulation adherence gets paper thin, and optimisation comes second to cost-cutting activities. The primal challenge for survival kicks-in.”

From January 2016 to January 2020, MPO said it observed 3 indices (dairy products, unprocessed milk, retail – cheese, eggs, milk) on 5 occasions, producers were affected twice by negative price changes as compared to the other 2 indices only occurring once.

“Over the period January 2015 to March 2020, the highest level of negative price change for dairy processors on the basis of the same month the previous year was −2,6% (May 2019) and for retailers −1,9% (Feb 2015), while for dairy farmers it was −17,6% (Nov 2018). The highest level of price increase occurred also at dairy farmer level, merely underpinning the price swings farmers have to cope with.”

Under lockdown, the level of demand was uncertain due to drastic changes in the economy. MPO called for transparency between the 3 role players in the dairy industry suggesting for there to be a weekly flow of information between retailers, milk processors, and dairy farmers.

“The MPO undertakes to drive the principal of demand elasticity with retailers. The buy-in of retailers alone will not be enough, primary industry will need to monitor supply carefully to be transparent” said Bertus van Heerden.

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