View
217
Download
1
Category
Preview:
Citation preview
1
Dairy outlook – Interim report Ernst Janovsky
Ernst.janovsky@absa.co.za June 2015
International trends
Milk production in major dairy exporting countries is
forecast to increase. This increase is mainly due to the
result of higher yields, lower feed costs and the
abandonment of the Europe quota system. On the other
hand world demand for milk is also expected to continue
to grow as world economies recover. Demand growth
will possibly outstrip milk supply leaving the world in
short supply. This will lead to a strengthening of world
milk prices.
There has been mixed signals coming from Europe and
with the abandoning of their quota system some argue
that production will not increase as there is a tax on the
production of effluent mainly in Germany, France and
Holland. Others argue that we can expect production to
increase in Ireland and England. However in general
production increases will be taken up by an expected
increase in demand.
Exports and imports are expected to increase in order to
equalize the mismatch between production growth areas
and demand growth areas. This will also create some
export opportunities for South Africa as we are a net
exporter. This export opportunity will also supported by
an expected further weakening in the Rand which should
improve South Africa’s competitiveness internationally
and into Africa as the bulk of African states tend to trade
in US dollars.
In the past, dairy trade was mainly limited to products
with a shelf life like butter, cheese and milk powder,
however due to new technology and the development of
a new market for long life milk (UHT), long life milk has
now been exported for the first time and competes
directly with fresh milk. This has also caught regulators
off guard as UHT milk does not carry an import duty
which implies that imports of long life milk are zero-rated.
Although Europe traditionally is the bigger producer of
milk, New Zeeland is the bigger exporter of milk and milk
products. One’s competitiveness is therefore measured
against how well you can compete with New Zeeland.
2
Domestic Trends
In a bid to remain competitive due to a constant eroding
of margins as costs increased faster than milk prices,
farmers consolidated their farming operations in a bid to
gain economies of scale. At the peak of the
consolidating phase we almost lost one dairy farmer per
day. In spite of this the South African dairy herd only
declined slightly while production actually increased. It
is expected that production increases will slow down
due to an oversupply which has already lead to a
decline in the producer price of 30c/l in the first half of
2015. This creates the opportunity to stimulate exports,
as South Africa remains highly competitive in terms of
its producer prices. The development of exports into
Africa is where the main opportunity lies. Currently the
failure of one of the biggest processor and distributors
of milk in South Africa has caused less completion in
the milk market thereby causing the producers share in
the consumer’s rand to decline substantially. This failure
has created opportunity for new entrances into the
market as the gap between retail and producer prices
has widened. This implies that profit margins for
processors have improved substantially on the back of
local producers. This provides an opportunity for the
more entrepreneurial farmers to vertically integrate into
the production and distribution of dairy products.
Producer margins have declined substantially due to lower producer prices as well as an increase in
feed prices. This will trigger a reduction in production as threshold values have been bridged. If one
liter of milk buys less than 1.68 kg of maize, farmers
will cut back on feed in a bid to manage costs with a
resulting decline in production. To manage these
negative terms of trade, producers will have to up their
productivity. This will drive producers to implement
new technology, better genetics and improved
economies of scale. We therefore expect further
consolidation within the industry and more farmers to
leave the industry. Given current assumptions on feed
prices as well as potential milk price increases in the future it is expected that margins will return to
normal towards the end of 2016.
Outlook
International demand for dairy products is expected to grow due to improved economic
conditions in almost all key economies.
International demand is expected to exceed expected increases in production.
International prices for dairy products are expected to increase in the short to medium term
before consolidation in the longer term.
3
International profit margins are expected to improve given a decline in feed prices in general,
hence the expected increase in production.
Domestic
Domestic demand is expected to remain depressed; this is mainly the result of slow economic
growth due Eskom, low labour productivity and political uncertainty hampering investments.
Production on the other hand has increased and is expected to continue to exceed demand
placing pressure on especially producer prices
Retail prices remained fairly stable in spite of a decline producer prices hence improved
production and distribution margins This opens the door for new entrance in to the market
which will normal come from bigger producers distributors (PD’s).
Lower producer prices also creates the opportunity to build new export markets especially in
to Africa.
Production margins are expected to improve towards the end of 2016 bringing some relief to
the industry. In the short to medium term further consolidation within the industry can be
expected with more farmers leaving the industry.
Disclaimer: Although everything has been done to ensure the accuracy of the information, Absa
Bank takes no responsibility for actions or losses that might occur due to the usage of this
information.
Recommended