Rikus Grobler | Oct 18, 2017 | 0
And the cow jumps over the moon
Milk prices on Namibian supermarket shelves are baffling local consumers. It used to be that there was a minor price difference between imported South African dairy products and the local brands, but this was usually in the order of one dollar or less.
Since earlier this year, however, the divergence has become far more noticeable with prices often spread across a range of as much as 40%. Furthermore, it has been noticed that this divergence not only happens between various brands, but that the same brand will move, within a matters of day, across an almost 40% price range. How is that logically possible?
Tracking local milk prices is more than just a fad by an irritated consumer. Milk, by the nature of the product, is one of those local commodities that reveals a lot about our competitiveness, and ultimately about our chances of reaching the industrialisation targets set by the fourth National Development Plan.
Milk is perishable. Unless it is put through specialised processes that changes it biologically, it has a very short shelf life, typically less than 12 hours. Fortunately, man has found out that by pasteurising it immediately after recruitment, the shelf life can be extended with perhaps another day, depending on a myriad of factors, chief of which are temperature and hygiene. Removing some or all of the cream, also helps increasing its shelf life. Then it can be homogenised, literally beating it with small hammers until the remaining cream takes up the intra-molecular spaces in the water. This also prevent the rancour of sour milk since cream goes off, first.
The technology that does all of this, is the same the world over, so there is no comparative advantage in conventional processing after recruitment. Whether you pay for this equipment in Renminbi or in Rand, the Dollar or Euro prices are fairly stable. But there are productivity advantages so a very large dairy in South Africa will certainly have economies of scale advantages over a local one. But everything produced in the Western and southern Cape, Kwazulu Natal and Mpumulanga, must be carted by truck to Namibia on journeys of anything between 1500 and 2000 kilometres taking between 20 and 30 hours to complete. Of course this milk is refrigerated, but the trip alone takes roughly two days off the local shelf life. The transport cost also adds a not insubstantial increase to the eventual retail price tag.
This holds true for all fresh milk products. Obviously the dynamics are different for so-called longlife dairy, but given the technological differences in the process, it can be regarded as a separate commodity. For the purpose of my analysis, I am focussing only on fresh milk.
Now it happens that local fresh milk can retail for as low as N$10 per litre, but I doubt it is profitable at such a low price. Let’s say the transport cost adds about 20% to the South African fresh milk price, and the import duty another 16.5%, then, at the absolute lowest price, a litre of South African fresh milk, must reach our shelves around N$14. That is a reasonable price level and a price that I often observe on imported milk.
I am not insensitive to the engineerings of marketers and the ever-present consumer psychology exploited by crafty sales people, but I fail to fathom the economic sense behind prices that jump more than 40% and then implode just as spectacularly at month end when the specials hit the gondolas.
Going by the universally standardised production processes, it tells me, from an analytical point of view, that there is much more to the jumping milk prices, than is revealed on the shelf. Part of it I understand as it is equally universal marketing principles that apply, but the major reason for the price fluctuations, is in my mind, a lack of the ability to fully appreciate the comparative advantages of local producers to capture a local market.
Price is perhaps the most important consideration for any household when buying fresh milk simply because it will most probably be consumed before it goes bad. Fresh milk can be frozen but that only adds to its eventual costs although very few households realise this. Fresh milk, in essence, must be recruited, processed and marketed as fresh milk, with all the limitations implied by the commodity.
I would suggest that a far more elegant strategy is to set a specific price for local fresh milk, that includes all the mark-ups at various points in the value chain; to ensure that this price is marginally lower imported milk, and to activate other trade measure to guard against dumping.
If we can not compete with a commodity that we produce 100% ourselves, how would we ever run large industrial export concerns where there is no comparative advantage, and everything we produce, must compete against all other producers the world over?
Hey diddle diddle, the cat and the fiddle, until next week.