Dairy Industry Doldrums

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South Africa's economy may be booming but one sector is bucking the trend, with the dairy products industry very much off its feed.

The past few years have seen a falling off in production of the basic ingredient of dairy foods - milk - culminating in escalating prices and recent shortages on supermarket shelves.

According to Etienne Terre'Blanche, managing director of South Africa's Milk Producers' Organisation (MPO), this year there will be a shortfall in milk production of 140m litres. This is a result of increasing demand and an 8% fall in output over the past 12 months.

A number of factors have brought about South Africa's shortage of dairy products, and in particular, fresh milk. The long-running drought has pushed up prices of maize and wheat by 50% and 43% respectively so far this year, a cost that has been passed on to dairy producers who grain feed their stock. This in turn has forced some farmers to move out of the uncompetitive dairy products market in search of more lucrative returns.

According to a study conducted by Professor Lourens Erasmus of the University of Pretoria's department of animal and wildlife sciences, there has been a sharp decline in the number of dairy producers in South Africa. Between December 1997 and October last year, the number of dairy producers fell from 7077 to 4039, meaning that the country's supply of fresh milk can no longer be guaranteed, Erasmus said in his survey of the industry, released on July 2.

Another issue has been the pricing policies of the processing companies in the sector. According to farmers' representatives, some of the major processors have been pushing down the rates paid to farmers and increasing the importation of cheap milk products from overseas. However, with the price of imports now on the rise, processors have turned to the local industry for raw material, only to find it is not there.

With many farmers having either reduced their dairy cow herds or left the sector completely, it will take 18 months or more before cattle stocks can be replenished, said the MPO, leaving a long-term shortfall in production.

The allegations that processing companies pushed down the rates paid to farmers led to South Africa's competition commission launching an investigation into the claims that milk processors had been fixing prices. The case has been referred to the Competition Tribunal, with industry leaders Clover, Parmalat, Ladismith Cheese, Woodlands Dairy, Lancewood, Nestlé SA and Milkwood Dairy among those whose pricing policies have been questioned.

Some relief may be at hand for the dairy industry, with a July 25 announcement that there would be an increase in the price of milk of between 4.5 and 12 cents per litre.

However, Terre'Blanche said the report, yet to be confirmed, had not made clear whether this increase would be passed on to farmers.

"The full meaning of the news is unclear as we do not know from which basis the price increase will be made," he said to local media.

On July 25, Statistics South Africa released the inflation figures for the previous month, with the consumer price index (CPIX), which does not take into account changes in mortgage rates, coming it at 6.4% year-on-year, the same as for May.

Though the Reserve Bank has targeted year-end inflation for 2007 in a range between 3% and 6%, this goal will be a real challenge, with steep rises in food prices, along with fuel, being the main culprits. Over the past two months, the price of milk in the shops has risen by around 63%, though according to the MPO, less than half of that has been passed on to farmers.

To help bridge the shortfall between demand and supply, a number of South Africa's dairy processors are looking to expand capacity, with Parmalat spending close to $28.5m to boost output, especially in value added production areas, such as cheese and milk powder.

Solva Burger, a spokesperson for Parmalat, said on July 24 that the company was gearing up for increased production or to expand output for certain product ranges to take advantage of demand.

"Market growth obviously offers Parmalat the opportunity to further grow its market share," Burger told the press.

However, this is dependant on having the milk to process. It will take time for herds to be restocked, the effects of South Africa's drought to abate and for a balance between supply and demand to be achieved. Till then, there will be sparsely filled shelves in the dairy section of many supermarkets.

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