Farmers, milk processors bicker over price
Published:Friday | August 13, 2010 | 12:00 AM
Mark Titus, Business Reporter
John Sherman operates a nice spread at Spring Hill, St Elizabeth, on which he grazes 45 head of dairy cattle, whose milk he sells to the Jamaican subsidiary of the multinational food company, Nestlé - about 400 litres a day.
But this week Sherman was threatening to shut his farm and get out of the dairy business, unless he is able to convince Nestlé Jamaica to increase, at least by a fifth, the J$48.50 a litre it pays for his milk.
"We are at a disadvantage," he lamented in an interview with the Financial Gleaner. "The fact of the matter is if I cannot get J$60 to J$62 per litre for my product, I will have to get out of this business."
Assuming that were to happen, it would continue the trend of the past two decades, during which the number of registered dairy farmers dwindled by two thirds, to around 250. They operate a herd of around 8,000 milkers.
Ironically, though, threats like Sherman's, and the broader complaint by farmers over the price they are paid for milk by processors like Nestlé Jamaica, are reaching a new pitch in the midst of efforts to rebuild the island's dairy industry.
Last month, for instance, the government imposed a one per cent cess on domestically produced and imported milk and milk equivalent, based on a farm-gate price for the product of $48 per litre.
That levy will raise an estimated J$64 million in the first year, to be used by the Jamaica Dairy Development Board (JDDB) on schemes to develop the sector.
"We are trying to develop pro-jects to enhance efficiency," explains JDDB chief executive officer Dr Paul Jennings. "The focus is on capacity building."
Promise of a better future for the domestic sector is not joyful news to farmers like Sherman, however, who claim an inability to make ends meet now.
"The cost of production, or what are called input costs, such as feed, electricity, water and labour, continues to go up almost on a monthly basis," he said. "Yet it took the processor two years to agree to put a mere $4.00 on the farm gate price."
Upshot: Spring Hill Farms, by Sherman's estimate, spends over "J$40,000 per week on feeds to earn a little over J$30,000.
"We are only saved by the fact that we sell our older stock to the butchers," he said. "So, that makes up for the lost income."
Sherman's complaint is neither singular nor isolated.
Dr Richard Jones, a sugar and dairy farmer in eastern Jamaica, has similar concerns.
"Based on what the consumer is paying for milk (around J$176 a litre) (the farm-gate price) should be around $60," Jones said in a recent interview.
Ironically, Jones, who has herd of 55, and earns J$1.50 less a litre than Nestlé pays Sherman, sells his milk to Island Dairies, a company on whose board he sits.
At that price, Jones said, he loses money, but is hoping for a turnaround by nearly doubling his herd to 100. Nonetheless, he does not believe the milk pricing regime is fair.
But James Rawles, who heads Nestlé's Jamaica business, suggests that Jamaican dairy farmers, in their complaints, miss the larger picture - the economics from the time they sell the milk, to its processing until it reaches Jamaican consumers at around J$176 a litre.
"If farmers are calling for one third of the cost of milk as it appears on the shop shelf, it is a little difficult to understand," he told the Financial Gleaner, "because there are costs intervening, which is in addition to the farm-gate price."
For example, the price at which farmers see the product on the shelves, Rawles explained, included not only the farm-gate price, but the $3.58 per litre paid to transport the fresh milk to the Nestlé plants, plus the other inputs.
"We have to process it; (then) there is cost for packaging material, along with other input costs. And whether I distribute it in Bog Walk, which is next to the factory, or in Montego Bay, it is the same price to the retail trade, who then make their mark-ups on my price," said Rawles.
"That mark-up varies from 20 to 35 per cent."
Expensive milk
Moreover, Rawles noted, at the current exchange rate, the J$48 a litre farm-gate price set by the JDDB for fresh milk translates to "56 US cents per litre".
"That's a very high price for what should be an inexpensive commodity," Rawles said. "As a matter of fact, in US-dollar terms, it is one of the most, if not the most, expensive fresh milk in the world."
Significantly, Rawles finds some sympathy from the JDDB's Jennings.
"The farmer has to survive, but his first approach to survival is to seek a price increase," Jennings said.
"But the product is not infinitely elastic in terms of consumer demand. I think we are at a stage where we want to price ourselves out of the reach of consumers."
In fact, Jennings said, the price at which domestically produced milk reaches consumers is upward of 30 per cent higher than what American consumers pay. "This is what we have to bear in mind."
Indeed, it is the cheap cost of imported milk that has seriously hurt Jamaica's dairy industry. Up to the first half of the 1980s, the island produced 30 million litres of milk a year. Production is now around 14 million litres.
The decline was accelerated by American food aid subsidies in the 1980s and was accelerated by market liberalisation in the 1990s. Now, Jamaica imports 14,000 tonnes of milk and milk products, which translates to about 110 million litres of milk. In 2008, this import cost J$60 million, or over J$5.16 at the current exchange rate.
With the levy introduced last month, both producers and pro-cessors will share equally, at half a per cent apiece, the cess on domestically produced and imported milk, and milk equivalent. The levy, however, will be based on the declared Jamaican farm-gate price for milk.
The money from the cess, Jennings and his bosses hope, will fund the kinds of projects that drive efficiency in the sector.
"A large part of the problem with the price of milk to the consumer has to be with this huge amount of underutilised processing capacity," Jen-nings said. "So, somebody has to pay for the fixed cost because we just don't have enough milk passing through the system."
This means more than supplying fresh milk to consumers. The JDDB will try to stimulate value-added production and will, therefore, work with agencies like the Scientific Research Council "on product diversification".
But Jennings made it clear that in the current controversy and in going forward, it will require both dairy farmers and processors to fix problems.
"There is room for both sides to address some serious issues," he said.