South African milk industry is at the crosswords, this is a warning coming out from the Milk Producers Organisation (MPO).
“From January 2018 to January 2021, approximately 20% of the milk farmers left the industry” said MPO chief economist Bertus van Heerden.
In 2020, the Competition Commission of South Africa released damning findings on the role of milk processors and retailers in inflating dairy products and milk prices.
“What the data also suggests is the historical increases in the spread between farmgate and retail prices must have been driven by processors as retailers were taking little margin in early 2016. Thus, industry concerns regarding the margin potentially being driven by processors seems to have some merit when considering the earlier years i.e., up until mid-2016” the Competition Commission previously said.
MPO boldly stated that the exit of dairy farmers in the market was caused by the thin growth margin of only 2% per year producers experienced for unprocessed milk.
“Achieving this growth over a year works out to an increase of 36 mℓ of milk per cow per day. The extreme downside is that if you miss the mark and grow by, for example, 4% for the year, the milk price tanks and only recovers in plus two years” added van Heerden.
Unsurprisingly, MPO also alleged that dairy farmers were taking a beating mainly caused by stagnation in unprocessed milk production over the past two years ‘despite high percentage price increases.’
Competition Commission also discovered that dairy farmers were subjected to margin squeeze of input and feed costs increase but with raw milk prices not being affected.
Van Heerden expressed the view that this was primarily the reason which necessitated the rate of farming disinvesting in primary diary due to thinner margins for dairy farmers.
Since 2018, processor and retail prices kept moving while farmer prices either remained constant or were falling. This continued market discrepancy is what seemed to rattle the Competition Commission into action.
“The volume drive in 2018 which was the result f the rapid reduction in the price of unprocessed milk and of the situation where the milk farmers were producing more milk with thinner margins to maintain income level” added van Heerden.
With the decline of dairy farmers, unprocessed milk shortage was high on the cards unless the milk industry, according to the MPO held a kaalkop workshop.