Tough Times Ahead For Farmers

When Jan Coetzee sells his last heifers in the next year or so, his Durbanville farm in Western Cape will be added to the statistics of former dairy farms. Unlike the others, though, Bon Mella Estate will remain in agriculture as a dairy processor, continuing as one of the oldest farms in the area that has remained in the hands of the same family.

In 1954, Jan’s father (a Namibian beef cattle farmer) bought 70 hectares of picturesque views of rolling fields located on the northern outskirts of Cape Town. He brought his herd across the border for a new start in South Africa. The Coetzee’s new property had an established dairy, which continued to rear some 300 cows for milk.They sold raw milk to the then two big processors – Bonnita (now Parmalat) and Dairy Belle. This year, the third generation of the Coetzee’s still living on the farm is taking a bold step to ensure the farm remains as a working family business for generations to come.

After 60 years, the Coetzee farm is stopping rearing dairy cows to focus on the processing factory, which produces branded yogurt, fresh milk, cream, health quenches and sour milk. Jan is discussing a joint venture with Oakland Milk, another Cape Town milk processor who is keen on entering the yogurt play, which is one of Bon Mella’s specialties.

“The perception that farmers make a lot of money is not true,” says Jan, talking of the need for farmers to take the next step and think value addition and beneficiation. Jan reckons many of the remaining small family-owned farming businesses are at risk of collapsing due to various challenges, from low milk prices and skyrocketing input costs to drought and imports.

To remain profitable, dairy farms must produce large volumes while keeping operational costs low. For Jan to expand, he would need more land to hold additional milking cows and to upgrade the existing processing plant.

“The problem is, the land is expensive around here and I simply can’t afford. I would have to build new milking parlours and sheds for the cows. Added to that would be the now unavoidable cost of replacing our 23-years-old factory equipment. My neighbour spent about R17 million to build housing for 1000 cows. For me to spend close to R30 million now… it is not worth it,” says Jan.

Five years ago, Bon Mella lost close to 50% of its 500 herd due to a bad feed problem and a bout of brucellosis. “You can’t be profitable if your cows become less and less every year. Luckily our sick cows all recovered and we sold the ones in milk. Shortly we will be selling the remaining lot and stop rearing completely.”

Impact of deregulation

The first time a farmer made a living from selling milk in the country was in 1656. In 1930, legislation No. 35 was enacted paving way for the establishment of the Dairy Industry Control Board. The Board was re-established in 1939 under the terms of the Marketing Act of 1937, with the exclusive mandate of selling milk. Under the Marketing Act, the minister of agriculture fixed prices paid to milk farmers.

From 1979, market deregulation of the dairy industry gathered momentum until its completion with the promulgation of the Marketing of Agricultural Products Act, No 47 of 1996 that spelt out a new set of rules. The Act states: “Producers can now produce milk on their own responsibility and sell to milk buyers of their choice at a mutually agreed price.”

For milk farmers, the impact of deregulation was profound: removal of subsidies and levies, price manipulation, loss of market share for fresh milk and other dairy products, increased imports, entry of foreign firms, lowered health and sanitation standards, farm closures and job losses. Today the community of dairy farmers is a little over 1,800 farms, from 20,000 in 1994. Consolidation of farms in the last decade or so brought bigger and more efficient, but capital-intensive operations.

The primary dairy sector has seen some difficult years. Since mid-2009, milk prices declined sharply, lagging behind the cost of farm inputs and sending even more small farmers packing. Who gets what slice of the about R10 billion revenue per year remains a major bone of contention between farmers, processors and retailers. Processors decide how much they will pay for the milk collected from dairies while the retailers set the consumer price.

Writing on the milk parlour

In the early 1990s, reeling from the impact of free market policies, Jan realised change for the business was inevitable.

“The question for many dairy farmers was: ‘How am I going to survive?’ I cannot possibly survive milking 30 cows, competing with over 1000-cow herd out in my backyard. So I either give up or I try something different,” says Jan.

The ‘something different’ that would get the Coetzee’s out of the rut came in form of processing and marketing branded value added products. Jan decided there was an untapped opportunity in branded yogurts and health drinks and that the business would ride the coming wave. He set out to expand the farm, finding suitable technology and expertise. By the end of 1992, the factory was up and running.

Within a short span of time, Bon Mella Estate had joined the traditionally oligopsonistic milk processing field.

 “Being a small family-owned business, I needed to quickly find customers. I started supplying small establishments – schools, restaurants and hotels, but ultimately I knew my success rested on a market that would order big volumes,” says Jan.

Around the time Jan was mulling the idea of processing and selling his own range of products, brothers Brian and Mike Coppin were planning the launch of Fruit & Veg City, a family business that hoped to ride on the vibrant growth in South Africa’s retail sector. Fruit & Veg City’s vision was to create a store where farmers brought their fresh produce to be sold to the public. The grocery outlet was a perfect fit for Bon Mella Estate.

The company’s decision to add value and build its own brand has paid off in spades. Bon Mella has a lock on an institutional client and the consumption of yogurt, which is the company’s star performer, has soared over the years.

Up to 30 people are directly employed by the company, and the R30 million turnover per year places it in the medium enterprise bracket, but in terms of revenue - Jan is quick to add Bon Mella’s production capacity and size is still small, compared to big players who produce upwards of 100,000 litres a day. Bon Mella trucks in 10-15,000 litres per day from other farms and the focus is on value added products.

“Doing business with Fruit and Veg City has been rewarding, and we hope to get our products into some of the grocer’s Food Lover’s Market branded stores now in 12 countries,” says Jan.

Venturing into the export market and roping in more big customers carries significant implications for Bon Mella. Jan would have to increase the amount of milk that he buys. The breakthrough may come from the impeding joint venture with Oakland Milk, which churns some 100,000 litres per day and uses an outsourced, sophisticated distribution chain to get milk to the lower market segment.

Increasingly, dairy farmers are seeking extra revenue streams such as venue offering, farm stalls and farm restaurants.

Jan is currently growing hay for horses and offering a venue site. In future, he plans to re-introduce an educational project for school children, where they would learn how milk products such as butter and yogurt are made. Jan is clearly uncomfortable incorporating these activities, yet he must find sustainable ways of utilising the freed-up land. How is this farming, he asks pensively, “To me farming is working the land. I grew up on a farm and I would like to continue doing what I love, to see my footprints on the land.”

The big question is, how has Bon Mella continued to thrive despite the problems plaguing the dairy industry? And, more importantly, in South Africa’s R10 billion dairy industry, is Bon Mella’s dream to become a heavyweight processor sustainable?

The pillars of his success, Jan says, are an intimate grasp of the industry, mastery of relevant business skills and partnering with knowledge and technology companies. “I have a great passion for my work, the ability to foster strong relationships with customers and to get employees working as a team. I strongly believe in being humble and giving back to the community.

“These are exciting times for the dairy industry despite the tough times now exacerbated by drought. It’s interesting to observe the market share wars and resulting aggressive strategies, the unfortunate result of runaway milk imports.”

Jan’s son, Jan Coetzee Jr, works in the business managing the farm. Who knows what the market will look like by the time Jan’s little grandson who is already showing a keen interest in the business, finally takes the reins at Bon Mella Estate? One thing is clear: if Clover has become Way Better, Bon Mella and other fast-rising processors are positioning themselves to take a bite.

Read: Dairy Processors in Market Mayhem