The cost of producing milk in the KwaZulu-Natal Midlands of South Africa: a cost-curve approach

Abstract

The cost of producing a unit of output is a critical management aspect in the dairy industry, particularly in South Africa. The ability of minimise unit costs of producing milk, while not curtailing output levels, is often a determining factor of the long-term survival of dairy farms in South Africa. In this study, average cost curves showing the variation of unit cost with output are estimated for dairy production in the KwaZuluNatal Midlands of South Africa, using a panel of 37 farms for the period 1999 to 2007. The results show that economies of size exist, with larger farms able to produce any given level of output at lower costs compared to their smaller counterparts. The study found that the long-run average cost curve (LAC) for the sample of dairy farms is Lshaped rather than U-shaped. The best farmers, in terms of average costs of producing a litre of milk, are found between the 100 000 to about 170 000 litres of milk per year output range and these were found to spend less than R1 per litre.

Dairy Joint Ventures in South Africa’s Land and Agrarian Reform Programme: Who Benefits?

“…Mkhabela and Mndeme (2010) [37] (p. 122) note that for milk producers "economies of size exist, with larger farms able to produce any given level of output at lower costs compared to their smaller counterparts". The largest dairy farming company in South Africa, Grasslands Agriculture, owns 14 extensive dairy farms and also sharemilks 4 on a land reform farm, together milking 15,000 cows.…”

“…In spite of the fact that the numbers of dairy farmers have drastically reduced, between 2006 and 2016 the number of dairy cows in production increased by 28% and milk production increased by 23% (DAFF 2017) [33]. This indicates that the surviving enterprises are highly productive and clearly poses many barriers of entry for new farmers and to the viability of a smallholder sector (Mkhabela and Mndeme 2010) [37]. The few existing small and medium dairy farms mostly sell informally to consumers.…”