MILKED DRY: Drought in the Cape has affected milk sales, with South Africa's intake  in the first four months of 2017  0.1% less than in the same period last year Picture: GALLO IMAGES
MILKED DRY: Drought in the Cape has affected milk sales, with South Africa's intake in the first four months of 2017 0.1% less than in the same period last year Picture: GALLO IMAGES

BETTER summer rains have helped the dairy industry, but drought in the Western Cape, cost pressures and consumer resistance to price hikes remain a challenge.

Clover had lacklustre interims in March, and Dairybelle, a household name for decades, is being liquidated.

But according to Milk Producers Organisation economist Koos Coetzee, conditions this year are more favourable for farmers than a year ago.

International product growth has slowed and exporting countries such as Uruguay, New Zealand and Argentina experienced negative growth last year.

In South Africa, total milk production last year was 0.5% below the previous year's level. Lower grain prices have already resulted in higher margins for farmers.

Preliminary figures from industry body Milk South Africa show that total milk intake in the first four months of this year was 0.1% less than during the same period last year.

Lower grain prices will probably have a positive effect on total milk production but the impact of the drought is still unclear and may be negative.

"Farmers are probably in a better situation than last year this time, with the exception of the drought in southern, Eastern and Western Cape," Coetzee said.

Processors, however, said it was difficult to increase prices on the retail side. "It seems as if demand growth has slowed down quite a lot. I think the consumer is battling," he said.

Coetzee didn't expect any milk shortage, but saw a slight shortage on some shelves of butter, driven by the global trend of eating more full-fat foods. Internationally, the butter price is at record levels.

"In South Africa, shoppers are now buying more full-cream milk, so there's no cream left to make butter - but it's temporary."

Yoghurt was a fast-growing segment and there seemed to have been a move from fresh to long-life milk.

"It seems as if the cheese market is still growing. It's still cheap protein if compared to what you pay for mutton or lamb."

Dairybelle, which has a history that dates back to the late 1920s, has been closed and is being liquidated. In 2014, Clover bought its yoghurt and long-life milk business for R200 million.

Dairybelle had suffered two to three years of mismanagement, said an industry insider. "The fact that they're under liquidation - it was logical it would happen when they started messing around with prices in the winter."

 Clover is streamlining its operations to focus on high-margin products such as yoghurts. Clover executive Jacques van Heerden said certain input costs had started to decline and if drought conditions continued to ease, increases in milk prices would be less likely.

"The shortage of butter experienced in South Africa is partly because of the higher demand for butter from consumers, as well as a movement from low-fat drinking milk towards high-fat drinking milk, both as a result of the proven health benefits of animal fats. Because of this, there is less cream available to make butter."

Van Heerden said management remained optimistic about the company's future owing to the end of the drought in parts of the country, the anticipated recovery of milk production volumes and normalised fruit production.

"The stabilisation of the rand, which has hopefully curbed rising input cost inflation," was also a factor, he said, along with improved cost efficiencies and investments, new product launches and the restructuring of Clover's operations effective from the start of next month.

 "Clover has never truly been a food company," said Anthony Clark, a small- and medium-cap analyst at Vunani Securities. While the classic food sector was fairly defensive and non-cyclical, milk ran in four- to five-year cycles because of the variable costs associated with production, principally feed.

"Clover is already the largest buyer of milk in the country and buys over 600 million litres of milk a year," said Clark.

"So Clover's earnings are volatile, and there's a timing differential between what they pay farmers and get back from the retailers. They also have imported packaging costs, which are sensitive to rand volatility, so when the rand is weak they pay substantially more and this puts them at a disadvantage."

The company has spun out milk production, which will reduce the volatility in earnings, and now it will have only the risk of packaging cost and consumer pricing.

"Looking ahead, Clover is focusing on more value-added products like cheese, yoghurt and other products such as beverages, to capture more of the shopping basket.

"It's a good strategy, but it takes time as the dairy category has good long-term trends," said Clark.

Paul Verhaak, country manager for Parmalat South Africa, said there were some challenges last year, "but we expect for the future a more balanced market".

This, however, depended on the economy and developments in local and international markets, he said.

According to Euromonitor International, dairy sales in South Africa were 2.2 million tons in 2012 and 2.6 million tons last year, while cheese was up from 140000 tons in 2012 to 168000 tons last year, and yoghurt and sour milk products rose from 279000 tons to 362000 tons over that period.

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