High grain prices cause concern amongst milk producers

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In South Africa the recent increases in grain prices have caused serious concern amongst milk producers. Maize prices increased with 25% from June 2012 to September 2012 and soy bean prices with 30%. This, as well as the decrease in producer prices, has resulted in the milk-feed price ratio, which is an important indicator of dairy-farm profitability, to decrease to the lowest level in ten years.

Price reductions are untimely

Chances of lower grain prices this season are very slim, especially in the light of the drought in the USA. Untimely price reductions by a few milk processors had a negative effect on farmers' future plans and chances are that farmers will reduce production in the coming months. Current grain and other input prices do not provide farmers with sustainable incomes.

The higher export growth of the first quarter continued. In spite of higher imports, cumulative exports still exceed cumulative imports, resulting in net exports of 39 million litre at the end of August 2012. The SADC and SACU countries remain the main destination for South African exports.

Milk production during August 2012 is 2.8% higher than during August 2011. The total milk production during the first eight months of 2012 exceeds the total production during the same period in 2011 by 3.9%. Recently released demand figures show that for the year to June 2012 all categories of dairy products showed high growth in sales. Retail prices were also higher than in the previous period.

Outlook for remainder of 2012

Various factors may impact negatively on production growth during the remainder of 2012. The price of farm requisites continues to increase. Fuel, fertiliser and machinery prices increased substantially. The Milk Producers' Organisation's weighted dairy-farm production cost index increased with 15% from April 2011 to April 2012. Since then there was a further sharp increase in feed prices.

Demand in developing countries is still strong and imports higher than last year. Further growth in exports is expected. The improved global supply/demand situation, as well as expected lower production growth, already resulted in higher international prices and may result in further price increases in coming months. Global long-term expectations remain positive, albeit with some downside uncertainty.

In South Africa high input and lower producer prices will result in a slowdown in production growth in coming months. Higher international prices will make imports less profitable and will put pressure on processors to increase producer prices to supply the growing demand.