Low milk prices, higher energy and corn costs squeeze profitability.Feb. 1 (Bloomberg) — South African milk prices need to increase at least 14 percent to prevent more dairy farmers from leaving the industry because of a lack of profitability, the nationâ€™s Milk Producers Organisation said.
The industry is losing about 10 percent of farmers annually because of low prices, an increase in imports, above-inflation power-tariff advances and the cost of corn, known as maize, MPO Managing Director Bertus de Jongh said by phone on Jan. 30 from Pretoria, the capital. While farmers are paid about 3.50 rand ($0.39) a liter (0.3 gallon), they need 4.00 rand to make a profit, he said. The spot price of milk in the U.S. was $21.10 per 100 pounds on Jan. 28, according to the U.S. Department of Agriculture. Thatâ€™s equal to $0.46 a liter.
«With maize increases and electricity tariffs going up, it makes it difficult for the farmers to feed their cattle and that means low production,» De Jongh said. «If prices escalate, then farmers do not have enough to feed the cattle, that is why we donâ€™t produce.»
Power prices have climbed an average of 27 percent in each of the past four years in South Africa, and the electricity utility wants to raise tariffs by an average 16 percent annually for the next five years. Yellow corn, which is mainly used as animal feed in the continentâ€™s biggest economy, has increased 65 percent. South Africa had about 30,000 dairy farmers in the 1980s and has about 2,300 now, De Jongh said. The country is Africaâ€™s largest milk producer, according to Milk South Africa.
Clover Industries Ltd., the nationâ€™s biggest dairy processor, cut prices paid to producers by 20 cents a liter in August to avoid causing over-production, it said in a Sept. 11 statement. The company said it would consider adjustments subject to market conditions.
«We realize the cost squeeze on the producers,» Clover Deputy Chief Executive Officer Manie Roode said by phone from Johannesburg yesterday. «On the other hand, we find ourselves in a squeeze in that there is a consumer out there who has the limited ability to afford, and affordability is important.»
Prices for two liters of fresh full-cream milk in urban areas increased 9.2 percent in the year through July, according to the National Agricultural Marketing Councilâ€™s quarterly food- price monitor, released in August. Annual inflation was 5 percent in that month and 5.7 percent in December, according to the statistics agency.
Both Clover and the MPO want the government to provide more support.
«The problem is that our government policies need to change and be like that of overseas countries,» de Jongh said. «They subsidize their farmers while we donâ€™t get subsidized. Our government policies are neglecting dairyfarmers and that puts pressure on the industry.»