Higher feed prices continue to cut dairy confidence

Feed costs account for the greatest portion of the variable costs of producing milk. Photo: Supplied/Food For Mzansi

Feed costs account for the greatest portion of the variable costs of producing milk. Photo: Supplied/Food For Mzansi

Despite the alarming decrease in farm numbers, South Africa’s dairy industry increased its milk exports last year. According to National Agricultural Marketing Council economists Thabile Nkunjana and Dr Ndumiso Mazibuko data shows the industry recorded its highest record exports to date in 2020. The economists believe the increase could be linked to the rise in production efficiency by farmers.  

Like many agricultural sub-sectors in South Africa, the dairy industry showed signs of growth in 2020. It even increased its milk exports despite a number of challenges.

However, according to the Milk Producers Organisation, the industry has contracted by a massive 20% between years 2018 and 2021. 

This can be attributed to a significant decrease in farm numbers to a large extent and increasing input costs. The Covid-19 pandemic added to the challenges faced by the industry since lockdown restrictions early in 2020.

Data shows that, in 2020, the industry recorded its highest record exports so far with 87 881 tons of milk, from 76 642 tons in 2019, representing an increase of 14.66% year-on-year. The Southern Africa region remains a key market for South Africa’s milk exports. 

On a year-on-year basis, exports to Botswana increased by 40.62% in 2020 (to 26 930 tons), when compared to 2019 (19 150 tons), followed by Namibia (37.85%), Eswatini (6.72%), and Mozambique 1.98%.

While Lesotho is amongst the top markets for South African milk, its imports from South Africa decreased by 15.53% in 2020. 

Pinpointing the growth

The increase in exports in 2020 could be linked to the rise in production efficiency by farmers. Also, the economic challenges presented by the Covid-19 pandemic negatively affected many domestic households’ incomes, thus some consumers were forced to prioritise certain foods over others as their budgets were squeezed.

These factors could’ve forced the industry to look for markets elsewhere, thus a rise in exports.

While the industry has marginally grown its exports, dairy producers are challenged by the rising input costs such as electricity – to a larger extent – and feed prices.

Dairy production is one of the industries which consume large feed quantities and feed prices have been rising over the years. 

A rise in feed prices means more cost of production per litre of milk and this results in low-profit margins for producers. Until the country finds ways to reduce the cost of feed, the milk industry will continue with its unique challenges. 

ALSO READ: Farmers must brace themselves for surging feed prices

A global perspective 

Other global leading dairy-producing countries such as the USA either subsidise producers by either feed or other methods. Early in 2021, feed prices continued to rise. While this was a global phenomenon. However, for South Africa, it has been a problem for some time. 

As of 26 February 2021, domestic spot prices remain relatively higher than average prices attributed to the global trend. A ton of yellow maize was selling at R3 320, up by 32.22% from the corresponding period in 2019 (R2 511).

For soybean, a spot price per ton was R8 820, up by 47.81% when compared to a corresponding period in 2019 (R5 967). This also reflects the current soybean shortage in the country. 

Tshilidzi Matshidzula, farmer and manager of Matshibele, a thriving dairy business based in Alexandria in the Eastern Cape. Photo: Supplied/Food For Mzansi

The increase in feed prices is putting pressure on the profitability of dairy farms. The milk to feed price ratio was estimated at 1,01:1 for January 2021. The ideal ratio should be at 1,4:1, for good economic conditions at a dairy farm. 

Using preliminary numbers for November and December 2020, the country’s milk production for 2020 was 3 303 billion litres, when compared to 3 327 billion litres recorded in 2019, representing a slight decrease of 0.7% year-on-year. The decline in farmers combined with feed costs and other costs related to production could be the reason for this decline.

The impact of rising feed cost

Given the current state of feed prices and looking at the short-to-medium term, producers are likely to pay relatively higher average feed prices when compared to prices observed from November 2020 to February 2021. 

Around this time feed prices reflected a global uptick in prices. However, this year we expect another bumper crop for maize and other major grains and oilseeds in South Africa, attributed to increased area planted, as well as favourable rains since the start of the 2020/21 production season last year. 

Small player in global market

Aspiring dairy farmer Kireshni Naiker is currently finishing her final year Future Farmers internship in Tasmania, an island state off Australia’s south coast. Photo: Supplied/Food For Mzansi

Nonetheless, this is an intuitive view, given that South Africa is a small player from the global market for grains and oilseeds. Market dynamics from larger producing countries such as Brazil, Argentina for soybean, and major consuming countries such as China influence the domestic price movements. 

Based on Agricultural Market Trends (AMT) data, in February 2021, a national average producer price for unprocessed milk was at about R5,34 per litre, representing an increase of 0.75% when compared to R5, 30 in January 2021.

To assist and keep the industry going, we need to address issues like efficiency across the board, administered prices, transport, and concentration to mention a few. 

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