Farmgate Dairies: Investing in a Long Life Venture

One of the biggest challenges in the food and drinks market is preservation. When produce is being transported over long distances, reliance on the right kind of transportation can be essential. In recent years, one product that has become increasingly popular both with consumers and farmers is UHT milk. It was for those reasons that Farmgate Dairies came into being some twelve months ago, when a collective group of dairy farmers sought ways to improve business opportunities.

IMG_0013Farmgate is the creation of Creighton Dairies, owned by a group of southern KwaZulu Natal farmers, who for 28 years have delivered raw milk to manufacturers around the Durban area. One of the former Creighton farmers was Norman Pattinson, Financial Director, who has seen great changes in South Africa’s dairy industry over the ensuing years:

I joined the group in the early Nineties, but Creighton was formed by a group of farmers who got together and purchased their own transport system so that they could deliver their own produce back in 1984. I was one of the farmers but over time I got increasingly involved in the administrative side of the business and eventually this took over as we grew.

Farmgate came about because over the years we had problems with seasonality of milk supply: the milk production had some irregularities (in terms of availability) and with climatic issues, sometimes we had too much milk while at other times there was not enough.

The solution was UHT milk; a product that has shelf life of up to nine months, meaning it can be stock piled, providing a more regular flow of income. At the same time, it is a product that is becoming increasingly popular amongst South Africa’s growing middle class, as Pattinson explains:

About two and a half years ago we decided to have our own plant to manufacture UHT milk and we joined forces with a partner to build the plant,” he recalls. “Our partner owns 40 per cent of the business and the farmers own 60 per cent. There is a growing middle class in South Africa and UHT milk works well for people without refrigeration and is a rapidly growing section of the milk market.

Over the last twelve years reports have indicated that UHT milk has grown from less than 10 per cent of the liquid milk market to almost 40 per cent, but lots of that increase has occurred in the last five years because of this growing middle class,” he continues.

With a R20 million investment, Farmgate Dairy officially opened in November 2011 and after an initial three month “bedding-in” period, Pattinson says that production ramped up, reaching break even volume last March.

np iphone 0712 045Creighton Dairies supplies the raw milk, whilst continuing to supply its traditional customer base of cheese, yoghurt and fresh pasteurised milk producers; it is an arrangement that works well at present, although demand may dictate the need for Farmgate to explore additional milk sources in the future:

We are diverting a portion of milk from Creighton and we may take on more milk in the future, but for the time being we have sufficient volumes,” Pattinson affirms. “The plant is located in KwaZulu Natal which is a large dairy producing area but is located quite a distance from the major cities. Farmgate is one of the first UHT plants in the province and of course the product can be transported further given its shelf life.”

The investment in Farmgate required a change not only in focus but an understanding of the processes required to manufacture UHT. Whilst the country’s biggest milk producers are already in the UHT market, Farmgate was able to keep costs down by virtue of Creighton’s already well-established infrastructure:

We have been able to establish the business with less capital than starting from scratch and Creighton had in place lots of infrastructure for milk collection and the handling of milk,” says Pattinson.

UHT in essence goes through a pasteurisation process which takes place at a much higher temperature (140 degrees for two seconds) than normal fresh milk (72 degrees for fifteen seconds).

It is a simple process but technically complicated as we have to ensure there is no contamination. Dairy production is regulated quite strictly in South Africa and we have to adhere to Health Department regulations, while our farms, herds and milk are all regularly tested. The facility itself is monitored by the Dairy Standards Authority. We invested in refurbished machinery that was supplied from Europe by Tetra Pak. They provide all of the packaging. We also invested in a steriliser and homogeniser to ensure the even distribution of fat in the milk.

IMG_0046Pattinson suggests that one of the biggest challenges Farmgate has faced to date has been electricity; both in regards to supply and also escalating costs: “Our biggest source of energy is steam and we currently use a diesel boiler which is efficient enough at the moment, but we may require a cheaper source if we expand,” he explains.

Such costs, when combined with milk price fluctuations, can seriously affect profit margins, but Farmgate has spotted a growing niche market and Pattinson says that as long as the company can operate efficiently, it has terrific prospects:

Because the bigger dairies are already involved with the major supermarkets, we have focussed more on independent wholesalers. There is a traditional drink here called Maas, which is a cultured, sour milk product which is very popular in rural areas. We have chosen to target the bottom end of the market which of course means cheaper prices, but as a new player in the UHT business, this will help to establish our name,” he states.

At present we are not producing by-products but in time we may look at separating cream as a process. It is true that milk price fluctuations can affect margins and we have found over time that there is often a lag between production costs increases and milk price increases. The use of very basic packaging has helped us to keep our packaging costs down, while Farmgate sources milk from 25 farms located within a 50 kilometre area, which again keeps our transport costs down,” he continues.

Because consumer demand does not match the seasonal element of milk production, Pattinson hopes that UHT will help to better meet customer requirement and provide a more even spread of revenue across the year. The autumn months tend to be less productive and Farmgate is offering its farmers financial incentives to carry on producing milk during these months, when prices are often much better.

According to Pattinson, the next phase is to increase production volumes from the present volumes at which the plant is operating at about 60 percent of its capacity. However, this will be conditional on the introduction of suitable electrical stand-by facilities, to counter the fluctuations that result from the variability of electrical supplies in rural areas.

np iphone 0712 057It remains a future full of promise for the fledgling business, as Pattinson looks ahead: “At present we are in consolidation mode but going forwards there are great opportunities for expansion and there is the scope for us to produce additional products like cream or butter, and with UHT we could also produce a line of custards and juices.

There is lots of talk of us expanding but I would envisage any changes would be at least 18 months down the line. We are working towards obtaining an export licence in the early part of next year and we have had lots of enquiries from the north, in neighbouring countries. The major supermarket chains may be another area of possibility further down the line, but firstly we have to establish the brand in our chosen sector of the market” he concludes.