The Dairy Boat

Managing milk supply in a seasonal industry

In the last 10 years, the milk production in South Africa has shifted from predominantly inland systems (Total Mixed Ration or ‘TMR’) to pasture based systems. Pasture systems have undergone their own adjustment from coastal dry land farms being dominant players to large irrigated farms starting to dominate the dairy industry. The emphasis has shifted from maximising production to maximising efficiency – from litres produced to litres produced off grass (as opposed to feed).

This fundamental Key Performance Indicator (KPI) shift has resulted in the industry’s production becoming seasonal. In order to maximise milk off grass, farmers need to co-ordinate their peak milking periods with peak grass growth, being the Spring (September – November). This has resulted in a nightmare for milk processors who are flooded with milk in the Spring and Summer months and short of milk in the Winter, while the consumers demand for milk products (and therefore retailers demand) remains fairly constant throughout the year. In an attempt to incentivise year-round calving (non-seasonal milking), processors offer premiums for milk produced in the winter months, typically 30-50 cents per litre. However, these premiums have not been able to discourage seasonal milking as effectively as it has in countries like New Zealand, who offer significantly higher winter premiums that make it financially viable to milk year-round or even run herds that peak production in Winter. Milk processors need to go back to the drawing board on this one and offer long term price guarantees to incentivise specific herds to shift their calving patterns and therefore production peaks as short term premiums decided one or two months in advance will never cause a fundamental shift in industry practice.

The only alternative to flattening the milk supply curve for processors is to make massive investments in processing equipment to diversify their product ranges, to process products with long shelf lives like UHT, milk powder or cheese. This does not solve the entire problem as processing capacity has to match peak milk inputs (Spring) and sit with idle capacity for the rest of the year, resulting in factory inefficiencies and unnecessarily large capital outlays – factors that have left a number of processor casualties in its wake.  The imbalance between milk supply (seasonal) and consumer demand (flat) and processor attempts to remedy this imbalance through short-term pricing adjustments has created instability in the industry. It has also necessitated retailers to import products to flatten the supply curve and has effectively shifted all the pricing power into the hands of the retailers. Farmers and processors in South Africa are now at a stage where they are forced to dance to the tune of the country’s massive retailers who use discounted Spring prices as the basis for negotiation for Winter prices.   In my opinion, it is up to producers to manage the surplus and ensure a consistent supply to the market. The only feasible way to do this is to build an export market in a milk-balancing product such as milk powder. The export market should not be supplied as an afterthought, but rather a commitment should be made by all farmers to commit the first 10% of their annual production to this facility. This guaranteed supply will allow the facility to be efficiently capitalised and to build a solid market based on consistent supply. The facility would serve the purpose of removing the surplus as opposed to making significant profits as milk powder is a competitive, commoditised market that would require low milk prices and payment terms linked to sale and not supply to get off the ground. The financial benefits will flow from the increased pricing power resulting from surplus removal and applying to the remainder of the national milk production. The power balance will shift and farmers will have their futures in their own hands rather than in the hands of retailers squeezing margins to keep shareholders happy.

In my opinion, it is up to producers to manage the surplus and ensure a consistent supply to the market. The only feasible way to do this is to build an export market in a milk-balancing product such as milk powder. The export market should not be supplied as an afterthought, but rather a commitment should be made by all farmers to commit the first 10% of their annual production to this facility. This guaranteed supply will allow the facility to be efficiently capitalised and to build a solid market based on consistent supply. The facility would serve the purpose of removing the surplus as opposed to making significant profits as milk powder is a competitive, commoditised market that would require low milk prices and payment terms linked to sale and not supply to get off the ground. The financial benefits will flow from the increased pricing power resulting from surplus removal and applying to the remainder of the national milk production. The power balance will shift and farmers will have their futures in their own hands rather than in the hands of retailers squeezing margins to keep shareholders happy.

I believe that, as farmers, we are our own biggest challenge. Our short-sightedness and eternal chase of the next Rand has resulted in these types of ideas being cast aside. We are all happy to invest millions into our farming operations but very reluctant to invest into processing. An understandable reason for this reluctance is that our history in co-operatives has a very poor track record. Farmers have always opted for cash payouts rather than ownership in processing facilities – think Clover (NCD), Cape Dairies, Towerkop, Lancewood and others. Understanding that in many cases financial necessity has resulted in a need to sell and a common theme being farmers who should have stuck to their proverbial knitting failing to make the grade as leaders of dairy processing companies. We are good at producing low cost, high quality milk. We need to find a way that we can continue to do this without having to deal with fluctuating milk prices set at the whims of retailers.

Dairy producers and processors are ultimately in the same boat. There are holes in the boat and we need to start rowing in the same direction otherwise throwing the small guys overboard will not be enough to stop the boat from sinking.  

Author: Edgar Brotherton