Clover to Pass on Surging South African Milk Costs to Consumers

March 17, 2014 04:51 AM

March 17 (Bloomberg) -- Clover Industries Ltd., South Africa’s biggest dairy processor, will pass on higher costs to consumers after paying farmers increases of almost 15 percent for milk deliveries in the past two months.

Clover raised the farm-gate prices it paid for milk by 5.3 percent in February and a further 8.9 percent on March 1, the Johannesburg-based company said in a statement today.

"We’re not absorbing anything," Chief Executive Officer Johann Vorster said by phone. "Those are sent on directly to consumers."

Farmers in South Africa have had their profit margins squeezed as prices for yellow maize, used as an animal feed, climbed by almost 50 percent. The inflation rate in the country, a net exporter of dairy products, was 5.8 percent in January, according to Statistics South Africa.

Prices for the most active yellow corn contract traded on the Johannesburg Futures Exchange reached a record of 2,958 rand ($277) a metric ton in January, a 44 percent increase from the low during the last 12 months of 2,058 rand.

Dairy processors have lifted farm-gate prices from as low as 3.90 rand a liter to as much as 5 rand since the start of the year, Koos Coetzee, chief economist at the Milk Producers’ Organisation, said by phone.

"Prices haven’t risen enough to stimulate new supply, but things are looking better for farmers," Coetzee said.

Strained Consumers

Sales volumes to consumers will be strained by higher prices for the rest of the year, Clover CEO Vorster said. Earnings excluding one-time items increased by 94 percent to 141 million rand in the six months ended December, even as sales volumes rose just 1.2 percent, the company said in its statement.

"South African consumers are confronted with a weak rand, high fuel prices, rising interest rates and high food inflation," Clover said. "This environment does not bode well for sales volumes during the remainder of the year."

The rand has declined 21 percent against the dollar since the beginning of last year, making it the worst performer of 16 major currencies tracked by Bloomberg. The South Africa Reserve Bank increased interest rates by 50 basis points in January as consumer-price growth threatened to breach the 6 percent upper- end of the central bank’s target.

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