Introduction
Hypothesis: The cost of dairy products is not in line with producer costs
The cost of dairy products in the supermarkets vary considerably from shop to shop, and the price of these products can be up to 150% more than what the producer, the dairy farmer, is paid for the raw product.
The price that the dairy farmer is paid for one liter of fresh milk is less than double what the consumer is paying for one liter of milk in the supermarkets. Why is there such a jump in the price that the consumer has to pay?
What costs are involved for the farmer, the buyer and why is the cost that the consumer has to pay been increased drastically?
I will aim to research the following aspects:
– Farmers or production costs
– Processors costs
– Retail Costs
– Consumer costs
The difference between the producer and retail prices have increased from R5.44 per liter in January 2010 to a staggering current price of R8.95 per liter of milk.
Analysis
Producer Prices
Prices paid to dairy farmers across South Africa are affected by various factors. High production and slow demand growth are regular reasons for the decrease in producer prices in the summer. Recently, a price decrease of between 20c to 30c per liter from the 1st of April 2018 has been announced, with further reductions still to be expected in the near future.
The average production costs for one liter of fresh milk is included in figure 1 below.
Figure 1: A table to show the total profit that a farmer makes for one liter of milk (MPO 2018)
Expenses and Income Costs (R)
Total Concentrates – 1.32
Fertilizers or Silage – 0.85
Animal Health – 0.24
Leases – 0.12
Management – 0.14
Labour – 0.32
Repairs and Maintenance – 0.25
Fuel and Equipment products (oil, lube etc.) – 0.17
Electricity – 0.24
Admin – 0.17
Living Costs – 0.28
Debt Servicing – 0.48
Income from Milk + 4.30
Total Profit for 1 liter of milk – R0.06
Figure 8 sourced from: (MPO 2018)
As shown in the table and the graph above, with the farmers being paid R4.30 for one liter they will be making a loss of R0.06 per liter of milk. This is not a large amount looking at it from a none farmers point of view, but with farmers making an average of 20 000 liters of milk per day. Which means that they will be making a loose of R1200.
The Processors
At present, most farmers are selling their fresh milk for an average of ±R4.30 a liter, but this can vary depending on the butterfat, protein, somatic cell count and bacteria levels in each farmers milk. Distance from the farmers dairy to depots also results in a cost to the farmer. Therefore, the farmers who live further from the depots will lose even more money per liter of milk.
Then the buyer receives the milk at the depot, after transport at R4.30 per liter. Milk is transported from the farm to the factory below the temperature of 4⁰C, which inhabits the bacteria growth. (Food and Agriculture Organization 2017)
Before the milk tankers are offloaded at the factory, it is tested for: Trace of antibiotics, added water and pH levels.
After the milk is pasteurized, a process called Bactofugation is applied. It is a process by which the milk is spun, so that any further bacteria can be separated and removed from the milk. (Market Milk 2015)
A Simple diagram to show how milk is pasteurized (Woodford 2017)
Some factories apply Sanitary and Quality Standards tests on each liter of milk before it is packaged. Milk buyers, generally employ merchandisers who package the milk and dairy products in the store. They are also responsible for any promotional display.
Retail Costs
Retailers, have basically no direct costs, others than overhead related to selling the final one liter of milk. Shelves are stocked and cleaned by the processor’s staff, and they check that there is no expired stock off the shelves.
The retailers take their margin and this is included in the selling price that the consumer is paying.
In a rent study by Retail Price Watch, its’s findings regarding the average price of a two-liter fresh full cream milk bottle at three large retail chain stores are shown below.
Figure 2: The table below compares the price of three milk products in three retail stores with house brand being the fixed price being compared with. (Smith 2016)
Stores Pick n Pay Checkers Spar
Product Difference in prices shown with percentages
Clover +25.2% +17.8% +21.2%
House Brand 0 0 0
Smaller Processors +7.7% -1% +5.4%
Despite the constant pressure on the producer to produce their milk at a cheaper rate the prices continue to increase. More research was done seventeen months after the first and the results are shown below.
Figure 3: The table below shows the increase in milk product prices in three retail stores by the use of percentages. (Smith 2016)
Stores Pick n Pay Checkers Spar
Product Difference in prices shown with percentages
Clover +15.9% +14.3% +10%
House Brand +4.8% +24.5% +7%
Smaller Processors + less than 1% +4.8% +11.5%
Consumer Prices
In South Africa, nutritionists state that they must increase their increase their intake of dairy products. By doing this, it will ensure that they have a healthier diet than without dairy products.
However, there have been signs that the consumption and purchase of milk have been decreasing. This is due to inflation which causes products to become more expensive, therefore people who receive a lower income can only afford to buy the cheaper products like starches to sustain them.
Figure 4 and the graph below shows the difference in price of products that are bought in different stores as well as how the prices of milk products have changed over the years.
Figure 4: A table to show the price of two-liter full cream milk bottle at supermarkets and what the farmer is paid.
Bought from: Price (R)
Woolworths 27.95
Pick n Pay 22.79
Spar 25.99
Checkers 22.79
The Farmer 8.60
Figure 14 was Sourced from: (MPO 2018)
Conclusion
The amount of money that the dairy farmers are being paid for their milk has stayed in the same range and has only increased or decreased slightly, even though the price of milk sold in stores and the price of feed for the cattle still continue to increase.
Some people may ask where are most of the profit going if the dairy farmers are being paid much less then what is sold on the shelves in the stores? Large producers of milk products are responsible for setting a selling price for the finished products that go on the shelves of stores. While other supermarkets that purchase products from smaller dairy farms have full control over what price they are wanting to sell their products for on their own shelves. ((MPO) 2017)
By looking at the expenses involved in producing a single liter of milk, one can understand why the dairy farmers are fighting for higher milk prices. The production of the milk is negatively affected by many things that the farmer cannot control. And then to see the prices at which their product is being sold to the consumer, only makes things worse.
Maybe if the valve chain was more transparent, consumers would probably be more willing to accept the higher prices.
The cost of one liter of milk is R4.30 and if the cost in the store was R13, there has been a 300% increase. So, from the farmer to the consumers fridge there has been a huge increase in the price, who is pocketing the rest of the money? The processor or the retailer, because the farmer certainly doesn’t have anything to do with any of the extra money.
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