THE BOTTOM LINE
Clover was smelling pretty fresh until that loan went sour
Dairy producer hammered by impairment of loan made to its battling raw-milk subsidiary
The unexpected R439m impairment of a loan to subsidiary Dairy Farmers of SA (DFSA) rained on Clover’s parade in the year ended June.
The impairment, precipitated by the sudden resignation of DFSA CEO Jacques Botha and the resultant uncertainty about DFSA’s future direction, took the shine from what was a resilient performance by SA’s largest dairy producer.
Clover unbundled DFSA in 2017 in order to position itself away from low margin-high volume business. In fact, since its 2010 listing, Clover has been preoccupied with moving away from bulk, commoditised foodstuffs, to focus on value-added and branded products.
After the restructuring, DFSA is now responsible for the procurement of raw milk as well as the selling, marketing and distribution of the non-value-added drinking milk.
Clover, which has a 26% interest in DFSA, also wants to attract potential partners that can bring scale to Clover’s operations. But these potential investors are spooked by the cyclicality of the commodity side of the business.
The milk business is cyclical in nature. Hence in the year ended June 30, DFSA reported a R128.8m loss, mainly because of national milk surpluses as a result of higher milk prices paid to milk producers from July 2017 to December 2017, as well as good weather conditions over most of SA during the summer months. Add to that poor economic growth, rising unemployment and higher fuel costs.
Can Clover completely insulate itself from the cycles in the dairy market? Not until DFSA is completely independent and sustainable.