If the consumer pays between R5 and R6 for a litre of milk in the shops, how much should the farmer get? The milk industry is currently under investigation by the competition authorities, who are focusing on the price build-up between farmer and consumer.
In particular, they are paying close attention to a set of apparently cosy interventions that the large milk processors are able to make in the market to dispose of milk surpluses, keeping prices high.
A range of measures is apparently used to reduce surpluses, such as competitors taking turns to dispose of excess milk. Surpluses may be exported or turned into milk powder or cheese.
The result is that the processors, who act as middlemen between producer and consumer, appear to take the largest gulp of the milk price, about R2 a litre, according to industry sources. This compares with about R2,10 a litre paid to the farmer — whose costs amount to R1,70 — while about R1,20 is taken by the retailer.
Processors pump milk into milk tankers and take it to their processing plant where it is pasteurised and homogenised before being bottled.
Milk Producers Organisation chief executive Alwyn Kraamwinkel said about 50 processors account for the bulk of milk processing, while another 250 account for about 20% of the market. A Marketing Council study reported that the four largest dairy companies processed between 74% and 78% of the total delivered to dairies.
The fact that there are many farmers and few processors has caused several commentators to observe that milk buyers operate in an oligopolistic market.
In February 2005 the Competition Commission began to investigate whether the dominant milk processors abused their position in the market to keep dairy farmers’ prices down.
The investigation was prompted by the fact that farmers had not seen an increase in the milk price in five years, despite increases in the retail price of milk.
The recent milk shortage has been attributed to factors such as seasonal differences, high world prices and rising meat and maize prices. Retailers have been quick to assure consumers that the milk shortage means certain brands and container sizes are not always available bwut that milk will always be on the shelves.
But some industry observers say that the shortage may also reflect the anti-competitive behaviour fingered by the Competition Commission last year.
The commission said that several milk processors would share information on prices and volumes, for example, by sending out emails to alert competitors about their procurement decisions. The processors also collected information about the industry which was circulated for their mutual benefit.
Several processors also worked together to prevent surplus milk from entering the market and pushing down prices. They got farmers to sell their surplus to them at lower prices and they also agreed to sell their own surplus volumes to each other. Some processors turned the surplus milk into products such as cheese or milk powder for export.
Clover applied for leniency under the commission’s Corporate Leniency Programme and will not be prosecuted if it cooperates with the Tribunal on the matter of surplus removal.
Dairy processors Woodlands and Milkwood have been accused of carving up the long-life milk market in geographic terms so that they do not compete against each other.
The tribunal confirmed that it is in the process of arranging a date for the hearing. Speaking off the record, an official said that all the responding affidavits had been received except Clover’s. The commission has set the matter down for a default judgement in respect of Clover and must see this process through before it can begin to address the main matters in the case.
The milky way
A litre of milk begins its life on one of the roughly 3 900 dairy farms around the country.
Milk Producers Organisation (MPO) economist Dr Koos Coetzee said that the cost of producing the milk is between R1,70 and R1,80 a litre, but he added this would vary depending on factors such as whether farmers bought feed or grazed their cattle.
The number of producers has dropped from about 7 000 in 1997 to 4 100 last year, according to Lactodata, an MPO publication. Nearly a third of producers are located in the Western Cape, a fifth in the Eastern Cape and another fifth in KwaZulu-Natal.
The average dairy farm has between 110 and 120 cows and typically produces 1 200 litres of milk a day, said Coetzee. This average is skewed because there are a few large dairy farms, some of which have between 1Â 000 and 2Â 000 cows.
Lactodata reported that the total production of milk in South Africa was close to 2,4-million litres in 2006.
Coetzee said processors paid farmers between R2 and R2,10 for each litre of milk.
From the processing plants, milk is taken to retailers. MPO chief executive Alwyn Kraamwinkel said that of 100 litres of milk, only 30 litres makes its way into retail stores as pasteurised milk. The other 70% is used in other dairy products, such as long-life milk, cheese and butter.
Not all dairy is produced locally. About 31 400 tonnes of dairy products were imported last year. This compares with around 25 000 tonnes exported in that year. Kraamwinkel reported on statistics that put the import price of milk and cream at a R2,71 average for 2006 and R3,51 for early this year. This figure was predominantly for milk and not cream.
There has been a concern in the past that South African dairy products cannot compete against heavily subsidised European Union products. However, Kraamwinkel said the industry faced competition from several regions including Europe. — Tumi Makgetla