Dairy farmers squeezed as Lactalis cuts milk prices by 10%

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JEREMY MAGGS: South Africa’s dairy farmers are warning that they’re being squeezed to breaking point. One of the country’s biggest milk buyers, Lactalis, is cutting the price it pays farmers by a total of 70 cents a litre.

That is roughly 10% at a time when fuel, energy and other production costs are soaring.

Now, the dairy co-operative Samilco says farmers simply cannot continue absorbing these pressures and is now considering legal action under competition legislation. It’s also taken its concerns to the Competition Commission.

The chief executive of the co-operative is André van Heerden, who joins me on the programme now. André, just explain it to us from your perspective then.

If I understand this correctly, is Lactalis using its buying power to force farmers to accept prices that you would contend are simply unsustainable?

ANDRÉ VAN HEERDEN: Yes, Jeremy. With dealing with milk buyers, the bargaining power is obviously on the side of the milk buyer.

So although we’ve got committees, where we should negotiate and convey certain information, you’re still the price taker to a large extent. Lactalis is one of the biggest buyers with a lot of buying power, obviously.

JEREMY MAGGS: You talk about a 70% reduction per litre. Could you give me a sense of how many of your farmers are now producing milk at a loss?

ANDRÉ VAN HEERDEN: Jeremy, I would estimate, our main footprint of our farmers are Southern Cape farmers, I’m talking about from Caledon all the way to George. Those are primarily smaller to medium-sized farmers, and these guys are mixed enterprise farmers, so I think there’s a lot of cross-subsidising.

I presume most of these guys are running at a loss, especially when it’s a 70 cents reduction, which is, as you refer to, a 10% reduction that you just can’t afford anymore.

JEREMY MAGGS: Isn’t the uncomfortable truth though, André, that South Africa may simply be producing more milk than the market can absorb, and farmers are having to pay that price?

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ANDRÉ VAN HEERDEN: Jeremy, the only way to survive is that you have to expand to have the advantage of the economy of scale.

We’ve got an export market to (…) and the SADC (Southern African Development Community) countries, but we’ve lost some of our contracts to the Middle East, especially Saudi Arabia.

I think that is probably one of the main contributors to what I call a fake surplus, or not a normal surplus in the sense of the word.

JEREMY MAGGS: What responsibility, André, I wonder, must farmers themselves take, though, for improving efficiency and reducing production costs? Is the hard reality of this argument that some operations are simply no longer commercially competitive?

ANDRÉ VAN HEERDEN: Jeremy, to my mind, I think there’s no inefficient farmer left with all the squeeze. If we look at the last 10 years, we had in excess of more than 200 parlours, because some farmers do have more than one parlour, and we’re down to about 144 parlours on a national level.

To my mind, there is nothing like an inefficient dairy farmer left, and you must bear in mind that we are job creators.

Say, for instance, a southern Cape producer would decide to shut down their dairy, the loss labour there, and just go to another enterprise. At this stage, there are not a lot of farming enterprises left that are very profitable.

JEREMY MAGGS: André, milk buyers themselves, and I’m talking about Lactalis, are obviously facing their own cost pressures in this very difficult operating environment. Why shouldn’t they be entitled to negotiate lower prices?

ANDRÉ VAN HEERDEN: Do you mean with the retail?

JEREMY MAGGS: With the retail sector and also with the suppliers.

ANDRÉ VAN HEERDEN: Yes, Jeremy, that is what we hope to see. With information to our availability, we refer to it as information asymmetry. In other words, the milk buyers know exactly what our cost of production is.

We don’t know what their production cost is and whether they’re profitable, the milk buyers or the milk processors.

But we would love to see if our price was reduced by 70 cents, and say it is to remove surplus, that at least you would see it on the shelves with the retailers, and that those products start moving.

That one would like to see. So it’s very hard to estimate and obviously, things like diesel prices and the cost of energy would affect everybody in the supply chain.

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JEREMY MAGGS: André, if other major buyers follow Lactalis, how quickly could we see dairy farms just shutting down?

ANDRÉ VAN HEERDEN: Jeremy, I’ve spoken to somebody from Swellendam and they basically said, I’m changing this, I’m trying this, well, I’ve got no other options, we’re basically subsidising our milk buyers.

I think if this is going to continue and there are a lot of milk buyers that are buying in the Southern Cape, you will definitely see that either they shut down their dairy enterprise, if they’re a mixed farmer, or they would consider something else.

So we would definitely see an effect, they just can’t absorb these costs anymore.

JEREMY MAGGS: And conceivably down the line that could have an impact on the price of milk on the shelf.

ANDRÉ VAN HEERDEN: I believe so. If you’re going to see a lot of dairy farmers shut down, and if we start talking about imports, we always take into our calculations what is the import parity of the skim milk powder and some of the commodities that are tradable.

But with cost of shipping and those import costs and transport, obviously it’s going to be getting more expensive for the consumer.

JEREMY MAGGS: Just finally, as I referenced, you’ve approached the Competition Commission. André, what exactly are you asking it to investigate or intervene in?

ANDRÉ VAN HEERDEN: Jeremy, what we are trying to submit or apply for is a similar situation that we had with Covid-19, under the protection of the Buyer Power Guidelines, that you almost freeze the supply chain and say, nobody is going to profiteer here and nobody is going to [abuse] anybody else.

Because we’ve got a unique situation in terms of exports, we had this foot-and-mouth disease pandemic and obviously some of the exports to the Middle East due to our own doing, the Residue Programme, as they referred to it, which wasn’t maintained.

That’s one of the reasons why we lost our export market to the Middle East and that is probably one of the main reasons why.

JEREMY MAGGS: All right. We will endeavour, obviously, to reach out to Lactalis. But in the meantime, André van Heerden, thank you very much indeed. You are the chief executive officer of the dairy co-operative Samilco.

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