Dairy farmers face prize squeeze

2011-07-11 00:00

CONSUMERS are likely to have to pay more for dairy products because milk production costs have increased sharply in the last four months, agricultural consultants have said.

Allan Penderis of Tammac Consultants said that in the last four months the major production costs in the dairy farming business have increased significantly, particularly dairy feed, which constitutes 41% of the cost, fertiliser at 12%, wages at nine percent, and electricity and diesel, which each constitute about five percent of total costs of milk production.

The price of the major inputs — dairy feed and fertiliser — have increased sharply in the last four months, Penderis said. Dairy feed prices have increased by 19%, fertiliser by 16% and diesel by 18%.

“Over the last three years, because the major input costs have remained largely unchanged, it allowed for the retail price of milk to remain the same since the production cost of milk remained much the same. Over the last four months this situation has changed dramatically.”

Penderis said that while dairy farming remains profitable, the recent surge in the costs of major farming essentials will have a detrimental effect on farmers unless something is done quickly to address the situation.

“In fact the increases we have seen in just the last four months have resulted in a 36% decrease in the net farm income of milk producers.

“Of the three major role players in the milk chain — the producers, the processors and the retailers — it is only the retailers who set prices,” Penderis said.

“If the retailers set low prices so as to be competitive the processors will in turn set low milk prices for the farmer, who in turn only sees his profits decline because he has no other option,” he added.

He said the farmer is a price taker at both ends: the dairy processor tells him how much they will pay for his milk; on the supply side the producer of dairy inputs tells him how much he must pay for its products.

If the situation persists there were two kinds of farmers who were likely to drop out of the farming industry: “The inefficient farmer and the farmer with a large debt burden will be at risk.”

Penderis warned that retailers need to increase their prices, and therefore what the farmers receive for their milk, because the situation is fast becoming untenable for farmers and could lead to a shortage of milk.

Dr Koos Coetzee, an economist with the Milk Producers’ Organisation, said that because milk is a perishable product the farmers cannot fix their own prices but accept whatever price the processor is prepared to pay.

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