Agro Dairy
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Dairy The Eastern Cape produces approximately 30% of the South African milk output, with the Cacadu District Municipality suppling 20% of this output. Dairy processing involves activities beginning from production of raw milk to finishing with the production of processed dairy products. Approximately 600,000 to 800,000 litres of fresh milk are transported daily by tanker from the Tsitsikamma and Alexandria areas within the Kou-Kamma and Ndlambe LM’s to processing plants in Gauteng, Durban and Cape Town at a cost of some R90 million per annum.
The table below provides an indication of the number of dairy producers in each province. It can be seen that over the last 10 years the number of producers per province has significantly decreased; this is as a result of incorporating only the professional milk producers in each province and eliminating the multipurpose producers who are no longer classified as milk producers. Furthermore, regions that were commonly associated with milk production have gradually moved away from dairy farming, this has resulted in a shift from inland to coastal areas, as a result of the climate and natural resources.
Table : Number of producers per province
Source: MPO, Lacto Data, 2009
Table 2 below illustrates the geographical distribution of milk production in South Africa. Form this table one can see that although the number of producers has decreased in the different provinces, the distribution percentage of the national total milk produced has increased; this is due to the majority of the dairy producers expanding the size of their production activities. The Eastern Cape dairy farmers mostly operate their dairies on the same principles as those of New Zealand’s dairy farmers, where the cows are on permanent pastures. The Cacadu District, most specifically the Tsitsikamma area is perfectly suited for the milking of cows direct from pastures. Because of the relatively inexpensive way of milking, the Eastern Cape has constantly increased its share of the national total milk production to 21.8% in 2008. Table : Geographical distribution of milk production
Source: MPO, Lacto Data, 2009
There are various forms of competition that exist in the industry, for example perfect competition exists at a farm level, since farmers are numerous and price-takers from their input suppliers and milk buyers. They are also sellers of a homogenous product and are consequently subject to a continuous cost-price squeeze situation. The competition that exists on the input/output aspect is that of oligopolistic competition, essentially farmers cannot easily transmit price increases to either input suppliers or milk buyers. Within the Eastern Cape there are six large companies that dominate the dairy processing industry. Who all obtain their milk from Cacadu dairy farmers. The biggest buyer is that of Woodlands, situated in Humansdorp, with Parmalat and Clover the second and third largest, and Nestle, Lancewood and Dairybelle constituting the rest.
Discussions with the local dairy industry indicated that there is a significant opportunity for the production of milk (i.e. farming) in the Province because there is a large demand for fresh milk in the Eastern Cape.
Value Chain The dairy value chain consists of two key activities: dairy farming and dairy processing. While the first results in the production of raw milk, the latter involves processing this milk into products like processed milk, butter, cheese, yoghurt, condensed milk, dried milk (milk powder) and ice cream. Figure 1: Dairy Value Chain
Global and National Market Trends The South African annual milk production shows a steady linear upward trend over time, with the total milk to market for 2008 estimated at 2, 59 billion litres, up 5% on the previous year (MPO, Lacto Data, 2009).The most significant global exporter of dairy products is that of New Zealand, however the United States, several European countries i.e. Denmark, France, Ireland, the United Kingdom, Switzerland and the Netherlands, are also known as centres of dairy production.
Subsidies are provided for dairy farmers in many northern hemisphere countries and therefore these farmers/processors are able to sell milk at a lower price than countries that do not receive government subsidies, e.g. South Africa. Therefore it is often cheaper for South Africa to import processed milk products, than processing it locally.
In 2008, South Africa imported approximately 37, 664 tons of dairy, and on a milk equivalent basis, South Africa has been a net importer of dairy products since 2005. Total exports for the country amounted to 43 000 tons, illustrating a positive growth within the exports market during 2008, which in turn resulted in a decrease in net imports of 73%.
Area Identified and Land availabitilty
The major dairy production areas in the Eastern Cape are Alexandria and Tsitsikamma. Farms in this area are generally large, with a minimum of 1,000 cows per farm. There is very limited dairy production and processing north of East London and there is limited freehold land in this area that is large enough for milk production. As can be seen from the map below the areas with the highest dairy production potential are mostly in the southern parts of the Kou-Kamma, Kouga and Sundays River Local Municipalities.
Figure 2: Potential Dairy Farming Areas in CDM
Source: Cacadu District Municipality
The high demand for dairy farms in Kou-Kamma Local Municipality especially in Tsitsikamma has realised significantly high prices for developed farm land. The price of the land is high and the size is small in comparison to other areas in Cacadu, which are however not as favoured as the Tsitsikamma area. The areas most suitable consist of many private owned farms that are already operating, however there is government owned land that would be appropriate for emerging dairy farmers.
Industry Associations
The most significant role players within the dairy industry in terms of the various dairy processors who dominate this market consist of Woodlands, Parmalat, Clover, Nestle, Lancewood and Dairybelle. The Milk Producers’ Organisation (MPO) is key to the performance and growth of this industry.
Land and Climatic Characteristics
Over time the milk production regions in South Africa gradually shifted from inland to coastal areas; based on climate and natural resources, the coastal regions of Kwa Zulu-Natal, Western and Eastern Cape are suitable for lower cost milk production systems on natural and irrigated pastures. The inland production areas are generally climatically less favourable for milk production because they suffer from harsh, dry winters. Dairy farming in these areas necessitates intensive and high cost feedlot production systems.
The Cacadu District Municipality provides the ideal climate for dairy farming as a result of the mild temperate climate and high rainfall which promotes high quality production.
Infrastructure
The dairy industry is a capital intensive operation which requires adequate infrastructure in the form of reliable electricity, reticulated water supplies and well maintained transport routes. It is essential to have accessible and well maintained roads and transport since the milk is transported daily to the exporting destinations and processors as well as regular transportation of animal feed. Dairy farms require extensive water for the daily operations of the farm, therefore sufficient irrigation systems need to be in place.
Human Resources
1,000 cows require a staff of 15. 5 of which must be semi-skilled agricultural workers with the rest consisting of unskilled labour. Four people are required to milk 800 cows twice a day, seven days a week.
Expected Return on Investment
The rate of return estimated is based on a farm size of 50 hectares of irrigatable land. The number of cows to suit this land size is 150 cows, where 125 are milk producing. The average milk production per cow per day is approximately 20 litres and the price of milk is R3.30 per/litre. The total annual profit received after costs is R2, 319,400, a detailed breakdown is provided in Annexure 2. It should be noted that the dairy industry is characterised by high capital costs, which can be seen in Annexure 1. The start-up costs are high which will result in a slow growth of profit. The returns experienced within the dairy industry are significant, however it is an industry that operates 365 days of the year, and should be entered into for the long term.
Key Constraints
§ The high capital requirements and the low profitability of milk production are the major barriers to entry for emerging farmers.
§ Milk production is sensitive to a number of external factors, such as weather conditions, international production levels, etc. These factors affect the price of milk, which fluctuates considerably and therefore impacts negatively on milk producers, especially small-scale farmers.
§ Highly skilled managers are required on dairy farms and there is a lack of suitably qualified / experienced dairy managers in the Eastern Cape.
§ South African producers and processors cannot compete with international processors for markets in most countries (excluding Africa) because the local dairy industries can produce products cheaper, due to the subsidies that many countries have in place to protect thier local dairy industry.
§ Milk processors and retailers operate in an oligopolistic market in South Africa (and the Eastern Cape), which means that there are few buyers and suppliers in the industry. They therefore influence (negotiate) price levels to a significant degree and the net effect of this situation is that, in general, farmers and small retailers have to accept the prices they are offered.
Opportunities:
§ A significant opportunity for the increased production of milk exists in the province due to the large demand for fresh milk in the Eastern Cape.
§ The Eastern Cape has a major comparative advantage in that it can produce milk cheaper than elsewhere in the country, because of its ideal climatic conditions.
§ Milk production may be linked to large irrigation schemes planned / implemented in the Eastern Cape.
§ Niche diary processing is an opportunity.
Useful Contacts:
References:
Cacadu District Municipality, State of the Environment Report, 2005
Milk Producers Organisation,Lacto Data. Vol 12, No 1, May 2009
James Greig. Value Chain Analysis Only Dairy Processing, 2006
ECSECC. Industrial Sector Study, 2005
South African Government Information, Agriculture and Land Affairs, 2008/09
Personal Communication with Milk Producers Organisation, 2010
Information Indemnity
§ All information contained within this profile was accurate at time of publishing.
§ The information contained within this report is intended only as an industry profile and does not assume to take the place of information contained within a business plan, pre-feasibility study or feasibility study.
§ The Cacadu District and service providers are not liable for any damages caused by the use of the information contained within this report.
§ The purpose of this profile is to both promote the area for investment and inform investors of relevant issues. It is advised that investors, who wish to pursue an investment within Cacadu DM, should use this profile as a basis to conduct further research.
Annexure 1
The following costs incurred and income received is based on a case example; which outlines the potential budget for a dairy enterprise. This functions to provide investors with broad categories of costs experienced, however further research in terms of feasibility studies and business plans will need to be carried out in order to determine the relevant costs and income according to the specific enterprise entered into.
Capital Costs
The capital requirements for the establishment of a dairy farm are listed below. It is to be noted that land situated in different local municipalities are susceptible to varying price ranges. The most popular area within the district for dairy farming is that of the Kou-Kamma LM, which fetches the highest price per hectare of developed land. The capital costs listed below based on prices pertaining to 2010, this case focuses on attaining 50 hectares of irrigatable land, which can accommodate 150 cows.
Table 3: Capital Costs
Source: MPO, 2010
Annexure 2
Enterprise Budget
The budget for the daily running of the dairy farm is listed below, where milk sales are based on 2010 prices.
Table 4: 2010 Data
Source: MPO, 2010
Enterprise budget based on the above data.
Table 5: Enterprise Budget
Source: MPO, 2010
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