SOUTH AFRICA – Clover Industries on Monday warned its shareholders that it was restructuring as it sought to limit its price exposure to the various cycles in supply and demand of raw milk.
Clover chief executive Johann Vorster said that the restructuring should have no effect on the supply of raw milk in the short term, however, this would allow its milk producers to pursue a volume growth strategy.
“It will provide Clover with the opportunity to give effect to its stated objective of developing higher margin, value-added products in dairy and other related food categories and to eliminate its exposure to the cyclicality of its low-margin business in future,” Vorster said.
According to Clover, the restructuring would allow its milk producers to pursue a volume growth strategy through a newly formed special purpose vehicle, Dairy Farmers of South Africa (DFSA).
Vorster said there should be no effect on the company’s operations as Clover would continue to provide the majority of support services to DFSA, including manufacturing, warehousing, distribution and merchandising for an extensive period of time in exchange for the payment of various service fees.
“DFSA will become the preferred supplier of all raw milk to Clover and Clover will purchase its raw milk directly from DFSA using a predetermined pricing formula.
“Clover will address the issue of raw milk price determination in this process so that it will, in future, limit its price exposure to the various cycles in supply and demand of raw milk,” he said.
Paul Makube, a senior agricultural economist at FNB, said in the milk industry big players such as Clover normally absorbed small businesses into their operations.
“It is common to see small commercial farmers exiting the industry or getting smaller. The restructuring that Clover has just announced does not mean that there is a change in the quota of milk supplied by the industry. We will still have the same supply volumes we had before the restructuring was announced.”
DFSA would become the preferred supplier of all raw milk requirements to Clover.
It is expected that DFSA will sell and administer all the low-margin fresh milk, ultra-high temperature milk, and ultra-pasteurised milk directly to the trade and consumers under the Clover brand and other selected brands in terms of a licence agreement concluded between Clover and DFSA.
“Clover has different products where it uses milk for multiple purposes like making cheese and yoghurt,” Makube said.
He said next year the price of milk might improve as cattle farmers grew their livestock again after experiencing a drought that forced some of them to slaughter their cattle.
Koos Coetzee, the chief economist at the Milk Producers’ Organisation, said there had been a slight decrease in South African milk supply from last year.
“Milk supply for the year to end-October is 1.7 percent down compared to the same period last year.” – BUSINESS REPORT