SA milk glut triggers biggest price cuts in 10 years

Stephen Grootes (0:00)

Dairy farmers in the Eastern Cape and the Western Cape say their industry is going to be thrown into a crisis by a decision by Lactilus, which owns Denone, to cut the price it will pay them for milk. There have been several dynamics that have led to this, the end of the foot and mouth outbreak. Essentially, Lactilus wants to cut the price of milk by more than 10% over the year. Fanie Ferreira is the Chief Executive Officer at the Milk Producers' Organisation. Fanie, good evening.

If the price of milk that your members are paid is cut by this amount, I mean, the impact surely will be dramatic.

Fanie Ferreira (0:35)

Good evening, Stephen, and good evening to your listeners, and thank you for the opportunity. Yes, definitely, it is of great concern for us, and just to put this in perspective, an average dairy farm in South Africa currently mokes about 700 cows, and could produce up to 30,000 liters of milk per day.

So I've just in this afternoon spoke to one of our members in the Titicama area, who is one of our biggest farmers, and with this price cut, if this continues for one year, he's in for a loss of 12 million rand, just on the amount of the current cut of the price.

Stephen Grootes (1:19)

Sure, there are various reasons why milk processes, so the people that use cellular milk too are under pressure, but I mean, are there any other options here for them?

Fanie Ferreira (1:29)

Stephen, no, our dairy farmers are usually under contractual agreements with our milk buyers, and these contracts are written in such a way that neither party can come out of it within three months. So you are actually tied quite down, and that you will not be able to come out of it quickly.

And these agreements, unfortunately, are usually written in such a way that if our milk buyers would come into a situation, that lactellus is, for instance, now that they can reduce the price and they can do it on a very, very short notice. And that puts us under huge pressure.

Stephen Grootes (2:14)

So those contracts then don't actually have any issue to do with the price. I mean, could lactellus pay what it wants to pay? I mean, presumably, you can't, as farmers, increase the price you charge.

Fanie Ferreira (2:29)

Yeah, Stephen, unfortunately, it's not so easy.

The contracts are usually made, you know, a price could be determined, a price could be negotiated between a farmer and his buyer. But yes, as I said, that could change and it can change dramatically on a very short basis, you know. We just don't know exactly the current crisis, what the issue is regarding lactellus. We are trying to get behind it and to understand exactly why this is happening and why it's happening in such a dramatic way. You know, we could just also mention and it's, you know, to put the whole picture into perspective, we are very fortunate at this stage that it was only lactellus that dropped their price and no one else, not one of the other buyers. We were very scared, you know, usually in such an instance, you see one buyer drops a price and many of the others could follow. We tried to act with all the role-plays as quick as possible, to get in contact with the people, you know, and try to negotiate that it should not happen. And we are fortunate at this stage it was only lactellus that announced the price drops.

Stephen Grootes (3:38)

Sure. Is this happening to other dairy farmers around the world? I mean, milk is not the easiest thing to transport, but there is a sort of international market for it. I mean, is this a major problem for various reasons? Or is it really a South African issue, perhaps because of foot and mouth?

Fanie Ferreira (3:56)

No, I don't think foot and mouth has got much to do with this.

It is something that can happen to national markets as well. It's not uncommon to happen even overseas in those markets. We are constantly in contact with other dairy farmers around the world, and you do see that things like this happen.

Unfortunately, this one is just coming at a very bad time. Most of our producers or a lot of our producers are just coming out of the foot and mouth crisis and are starting to recover. We've seen tremendous losses amongst a lot of dairy farmers that has really suffered tremendously. This is really a bad time for our producers. But as I say, fortunately, at this stage, it's only the one buyer, and most of his milk he's buying in the Eastern and Western Cape.