In December 2012, the Chair of the South African Milk Producers’ Organisation (MPO) described 2012 as a “tough year” in which “input costs grew well ahead of the milk price”. According to MPO, “many dairy farmers in this country are entangled in a tough fight to maintain a sustained, profitable dairy farming operation”. Developments in 2012 compounded the overall trend towards a decline in the South African farmers’ share in the retail price of milk from 45% in 1998 to 30% in 2011. Over this period the number of milk producers has fallen from 7,077 in 1998 to 2,474 in 2012, reflecting the growing capital- and knowledge-intensive nature of milk production in South Africa. On the positive side, it was noted that there is growing demand for dairy products in South Africa, in view of rising incomes and growing urbanisation.
According to speakers from the SA Milk Processors’ Organisation (Sampro), the “South African dairy industry operates as a free market system” with “relatively low import tariffs” and a range of preferential trade agreements covering dairy product imports. Competition on the South African dairy market was described as “fierce”, with the South African dairy processing industry “significantly exposed to foreign competition”.
However, in terms of imports, it is unclear whether this is in fact the case. According to analysis in the MPO Newsletter in April 2012, “dairy imports decreased from 12% of local production in 1997 to 4% in 2008 and remained below 5% until 2010”, after which they rose to 5.7% in 2011. This increase continued into 2012, but was slowed down by a depreciation in the value of the rand.
According to MPO, the overall long-term decrease in imports “can be ascribed to the continued actions of the MPO and its forensic investigation company, Agri Inspec, who together keep a close watch on both legal and illegal imports”. “The MPO monitors all dairy product imports on a consignment basis and identifies risks on, amongst others, the value of imported products”, while Agri Inspec, in collaboration with the relevant government authorities, undertakes follow up investigations.
In contrast to the import situation, MPO reported in April 2012 that South African dairy exports had shown substantial growth, up 74% in the first quarter compared to the same period in 2011. This growth continued throughout the year, reportedly reaching a total of 143,000 tonnes by October 2012. This is substantially higher than the 43,600 tonnes of exports recorded for the whole of 2011.
Dairy imports are largely concentrated milk powders, while exports are largely milk products. (This gives a far higher milk-equivalent level of imports than exports, while in tonnage terms exports are far higher than imports.)
The expansion of exports led to complaints in late 2012 from Namibian milk producers that South African dairy products were flooding the Namibian market following the ending of infant industry protection arrangements in 2010 (see Agritrade article ‘ Addressing dairy product predatory pricing practices within customs unions’, 9 September 2012). Namibian dairy producers have called for milk to be declared “a protected product” in order to save the country’s dairy industry.
A process of capital intensification of milk production is under way in South Africa within a differentiated tariff structure, with low tariffs for liquid milk (including UHT) and higher tariffs for milk powders and butter and cheese (although with some tariff preferences for EU exports under the Trade, Development and Cooperation Agreement between South Africa and the EU). Strict quality and labelling requirements are also applied to dairy products. The implementation of this sophisticated dairy trade regime is facilitated by close collaboration between MPO/Agri Inspec and the South African authorities. These institutional arrangements involving close public and private sector cooperation potentially hold important lessons for other ACP governments seeking to establish more nuanced and sophisticated dairy sector import arrangements.
Despite the higher tariffs on milk powders, the South African industry integrates milk powder imports into its export-oriented strategy, aimed at capitalising on growing consumer demand for dairy products on African markets. This potentially complicates regional trade arrangements, as it gives rise to complex rules of origin issues.
Indeed, the South African dairy sector experience highlights the difficulties faced in building regional markets, when producers in one country overshadow other regional producers. This often gives rise to considerable protectionist pressures, on the grounds of national food security. Ways need to be found to manage these pressures in a transparent and accountable manner, particularly within customs unions. Regional policies for strengthening the functioning of dairy supply chains potentially have a role to play in this regard.