The real cost of cheap milk

The drop in milk production as a result of low prices again highlights the dangers of taking away farmers’ incentives and illustrates how, paradoxically, lower prices can hurt consumers in the long run.

On the face of it, cheap food seems an obvious boon. But when farmers are paid too little to keep them at their ploughs or in their milking sheds, they stop producing and the resultant shortages quickly push up prices. It happened in the 2008 “global food crisis”, when prices shot up and food riots broke out in many countries. Analysts have identified the relatively low food prices in the decades before 2008 as one of the reasons for the crisis.

Farmers often describe themselves as “price takers, not price makers”. It means they have two options: take the prices offered, or get out.SA dairy farmers have complained for years about low prices paid by processors. And they are getting out. Their numbers continue to dwindle steadily, at the rate of about “one farmer a day”, says the Milk Producers’ Organisation.

And it is not easy to get in again. Organisation chairman Tom Turner says an economically viable dairy farming unit consists of 600 milk cows and requires about R60m in capital to set up. “The proceeds from operating the business are insufficient to cover the debt redemption and interest repayments.”

But it is not simply processors giving farmers a raw deal. Between the processors and the consumer there is another link: retailers. From 2180 farmers the raw milk goes to 305 processors and most of the product then makes its way to the four major retailers – Pick n Pay, Shoprite/Checkers, Spar and Woolworths.

Turner says the dominance of SA’s supermarket retailers makes it difficult for processors to negotiate the best deal for themselves, and thus for dairy farmers. He says retailers have hiked margins on dairy products and have been “unwilling to address their inefficiencies such as … wastage due to poor demand estimating”.

Says Turner: “Retailer dominance is the biggest single challenge facing the entire industry in SA.”

It is not the first time the big four retailers have been accused of pushing suppliers into unsustainable pricing – and thereby pushing up prices. In 2009 the National Agricultural Marketing Council recommended that they be investigated by the competition commission for abusing their dominance as buyers. In 2011 the commission cleared them because it said there was insufficient evidence, but it expressed concern about the undermining of competition in the long run.

Source: Financial Mail