Why SA dairy farmers are failing to compete with imports

It is often argued that the ability of the local dairy industry to grow or even survive will depend on the extent to which it can compete with imported dairy products. But can South African dairy farmers succeed when the odds are so clearly stacked against them? Bertus van Heerden, chief economist of the Milk Producers’ Organisation, and Prof Johann Kirsten, director of the Bureau for Economic Research at Stellenbosch University, carried out a price analysis to get some answers.

In simple terms, one of the main reasons that so many producers have left dairy production in recent years, and why those who remain have to increase the scale of their operations to survive, is low farm-gate prices for milk. These low prices are a result of margin loss amongst dairy processors emanating from cheap (often subsidised) imported milk products that is then pushed back on milk producers.

For years, the Milk Producers’ Organisation has argued that the level of free on board (FOB) prices of imported dairy products from the EU, Ireland, Eastern European countries and the UK seems unrealistic and unfair. This is due largely to the substantial funds that subsidise farmers and dairy producers in Europe. There are five EU funds that support agricultural and rural development, on top of the many direct payments to farmers under the Common Agricultural Policy. These funds include the European Regional Development Fund (regional and urban development); the European Social Fund (social inclusion and good governance); the Cohesion Fund (economic convergence by less-developed regions); the European Agricultural Fund for Rural Development; and the European Maritime and Fisheries Fund. Recently, subsidies for sustainable energy projects were also introduced.

Programmes and applications of these funds reduce costs in the value chains and enable European countries to make products and commodities available on the international market at reduced (unfair) prices. Subsidies are paid to farmers in Europe, as outlined in the Common Agricultural Policy. In 2017, a total of €41 billion (about R730 billion) was paid to farmers and in 2020 this had risen to an estimated €59 billion (R1,1 trillion), an increase of nearly 15% per year.

MARKET-DISTORTING POLICIES