The current wave of decreasing producer prices will to a certain extent curb production, as can be seen in the August 2018 figure compared to August 2017. But will it be enough? If a scenario is simulated where the production growth for the last four months of 2018 is reduced to 50% of the monthly growth rates that were achieved for the last four months of 2017, production for 2018 will still grow by 4%.
A point to highlight is that market demand is not covered in this analysis. The extent of the effect of reduced producer prices is not yet known; the possibility of a surge in exports did not enter the equation or a climatic disaster. One needs to point out that exports are on the rise while imports are reducing due to the weak rand but it is doubtful that this will be enough to offset the high growth in milk flow.
The demand growth for dairy products on a yearly basis is typically 2%, indicating that if supply expands by 2%, the market should be able to absorb the growth without depressing producer prices. Although we do not have recent dairy market demand statistics, economic growth in the first two quarters of 2018 was negative and increases in administered prices such as electricity, fuel and Value Added Tax (VAT) will influence consumer spending negatively. To bet on demand to take care of higher production would be silly.
We also need to mention that supply growth will differ between regions with some growing faster than others, resulting in different regional situations. The above-market comments are based on a national basis and do not differentiate on a regional basis.
From the above, one can conclude that many factors are unknown but even at a reduced growth of 50% of the 2017 growth rates over the remaining four months, supply will grow with 4%.
In an effort to reduce production, dairy farmers should focus on quality and not volume and limit the use of concentrates. The current scenario indicates that we will sit with a supply overhang that will depress producer prices into 2019.
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