Uncertainty about water supply in Windhoek over the next year is the single biggest challenge for the already struggling Namibian dairy industry, and closed taps could have catastrophic consequences for both Namibia Dairies and other producers.
This crisis looms despite Namibia Dairies already cutting their water use by nearly 30 percent, whilst they are looking at various alternatives should the water supply for the Windhoek factory run dry.
The Namibian dairy industry – which was teetering on the brink of collapse at the end of 2015 – announced last week at its first meeting of the year that role players are gravely concerned about the drought conditions, which caused large-scale losses of maize harvests in South Africa and resulted in tremendous increases in feeding costs over the past 12 months.
Feeding costs are the biggest factor in the total production costs of dairy producers. According to the NAU’s dairy producers cost index, feeding costs increased with nearly 50 percent over the past year and total production costs increased with about 28 percent over the same period.
In proportion to the shrinking profit margin of the producers, there was a resulting increase in the milk price for both the producer and consumer, which came into force at the start of April.
South African competition is still a big risk for the local industry and thus the protection needed by the industry is still being enforced by the authority and the industry, apart from the coupled challenges.
Adding to its woes is the looming water crisis, which could have devastating consequences for the industry on top of the unstable South African Rand – and consequently the Namibian Dollar.
The drought and exchange rate created double trouble for water-intensive industries in Namibia. However, even with the short- to medium-term challenges the industry experiences, growth can still be brought about by good cooperation between producers and Namibia Dairies, as the biggest partner.
Internationally there is still a surplus of milk produced, especially in Europe, which has been using the African market as an outlet. This causes additional competition and increases the pressure on local producers and processors even further, last week’s meeting concluded.
The country’s only dairy producer, Namibia Dairies (ND), and the Dairy Producers Association (DPA) warned towards the end of last year that the total collapse of the industry is imminent if urgent intervention from government and consumers is not forthcoming within a few months.
ND and the DPA agreed if the sector collapses it would have dire consequences for about 1 000 people directly employed in the industry, as well as for those indirectly involved in the sector, such as transporters and suppliers, not to mention farmers and their employees.
Managing director of Namibia Dairies Gunther Ling explained that the quandary is a culmination of a number of factors that have caused a state of crisis in the global dairy sector and resulted in world dairy prices reaching a 13-year low.
Ling said contributing factors include an increase in dairy production by major producers like New Zealand, the United States of America and Europe. The increase in production resulted in a surplus that cannot be absorbed by existing markets. The overproduction automatically leads to a drop in prices, which is then exacerbated by an influx of cheap imports.
“Namibia’s own dairy industry is not able to compete with these cheap imports flooding the market and the fact that these imports are often sold in Namibia at the same prices or lower than in their market of origin is testimony to the underpricing of these dairy products,” said Ling.
Industry leaders have met with senior officials in the Ministry of Finance to recommend the exclusion of Value Added Tax (VAT) on certain dairy products, like UHT milk. This could provide some room for manoevre within the local industry if government agrees to this intervention.
Ling said there has been a drastic decline in demand for ND products as a result of underpricing of imported dairy products, which he notedmanifested in a 23 percent decline in sales of fresh and UHT milk last year.
With a capital debt of N$240 million, ND is hardly in a position to weather the storm.