JSE-listed Clover has unbundled its raw milk supplier operations into a special purpose vehicle, Dairy Farmers of South Africa (DFSA), through a restructure programme aimed at reducing its exposure to the cyclicality of its low-margin business and developing higher-margin, value-added products in its dairy and related food categories.

This move will support Clover’s embedded strategy, as well as the ambitions of its milk producers, to pursue a volume growth strategy, with DFSA selected as Clover’s preferred raw milk supplier using a predetermined pricing formula and eliminating the JSE-listed group’s raw milk volume risk.

“Clover will [also] address the issue of raw milk price determination in this process so that it will, in future, limit its price exposure to the various cycles in [the] supply and demand of raw milk,” the company said in an update to shareholders on Monday.

DFSA, initially a wholly owned subsidiary of Clover, is also expected to sell and administer all nonvalue-added liquid milk, including the low-margin fresh milk, ultrahigh temperature milk and ultrapasteurised milk, directly to traders and consumers, either under the Clover brand or under other selected brands within a licence agreement concluded between the parties.

Clover will, for an extensive, undisclosed period, continue to provide DFSA with most of the necessary support services, including raw milk collection, warehousing, distribution and merchandising. DFSA will initially operate on a break-even basis.

However, as the raw milk supplier grows, Clover expects to benefit from its revenue gains on the back of additional volumes distributed through the group's supply chain network.

A further transaction by the end of June will leave Clover with a strategic shareholding in DFSA.

“This carve-out of DFSA from the group will commence from January 1, 2017, and will be implemented on or before June 30, 2017, during which period a number of important decisions and implementation steps will be actioned,” the company added.

These include an extensive consultation with all Clover producers to secure a commitment to the new structure; the appointment of a DFSA board and new management team; the definition of growth opportunities for Clover and DFSA; the finalisation of all legal and statutory requirements and agreements; and the implementation of the various operational and licensing agreements.