Milking dairy farmers dry

By John Njiraini

After years of neglect, the dairy sub-sector is on a fast lane of transformation and could soon join tea and horticulture as a critical pillar in the growth of the agricultural sector.

Whereas for years the country relied on tea and horticulture for empowerment of the rural economy, taking into account the coffee, cotton and pyrethrum sub-sectors had been run to their knees, today the dairy industry is rising as the cornerstone in rural development.

In less than a decade, the dairy industry has witnessed significant growth from a non-descript sub-sector characterised by small-scale farmers vending milk in an ad hoc manner to one that is promoting economic empowerment among the rural folks.

An agent takes delivery from farmers.

A farmer milks his dairy cow. While the increase in processors has helped in eliminating informal channels, hawkers still command a significant chunk of the market.

The transformation, which started with the revival of New Kenya Creameries Co-operative (New KCC) soon after the Narc Government assumed the reigns of power in 2003, has seen the mushrooming of many milk processors, thus providing farmers with a formal channel to sell their milk.

"This industry is giving farmers a new sense of hope and young people in rural areas have an opportunity to earn a decent living," said Co-operatives Minister Joe Nyagah.

But on the face of the substantial growth, new realities have started to confront the industry and observers contend that players need to readjust and realign their operations to ensure growth is sustainable.

Dairy products are having difficult time finding its true market price. It is easy to blame apparent price distortions on ‘speculators’. Indeed, non-fundamental investors have played a major role in moving the dairy markets in the past five years, but the industry is yet to realise its full potential.

A case in point is the current huge spread between producer and retail prices for milk. Here is where price distortion comes into play. While the producer price range between Sh20 and Sh23 per a litre to the disadvantage of the struggling farmer, the retail price per litre pocketed by the processors stand at a high Sh60.

Industry observers reckon that since a handful of processors control 90 per cent of the market, an artificially low price is introduced into the market, which further feeds the already injurious surfeit of providers — milk farmers. However, for the consumer, although receiving a product that has undergone value addition, he pays an average of Sh60 per litre and for those who can not afford the price, they turn to the informal milk hawker and in the process expose themselves to the unhygienic conditions of their products.

Before the dairy industry was liberalised in 1992, Kenya had only one processor in the name of KCC, a company that was then a cash cow for well-connected political operatives.

Milk production

Since then the number of milk processors has increase to more than 45 while milk production has doubled from 2.3 billion litres in 2000 to 4.1 billion litres by 2008, according to the Kenya Dairy Board. The revival of KCC also encouraged strategic mergers and consolidation among the processors to help contain the emerging force of KCC in the dairy industry.

This saw operations of Spin Knit Dairy fully merged with Brookside Dairy, two leading private processors in what was seen as strategic positioning in the recovering dairy sector.

Following the merger, the combined total installed capacity of the two now exceeds 600,000 litres per day, up from 450,000 litres previously handled by the Ruiru-based Brookside Dairy. Also eyeing the sector is Agricultural Development Corporation (ADC), which plans to venture into the business (see separate story).

Today, some two million farmers are directly earning a living from sale of milk while another 500,000 are directly employed by the industry.

Confidence that production will grow again comes from the entry of new players into the dairy sector since the revival of KCC.

The current vibrancy in the sector is thus associated with the development of farmer support services like feeds suppliers, providers of artificial insemination services and other services supporting the dairy industry. There has been an increase in those providing veterinary services like agrovet enterprises, whilst non-governmental organisations and microfinance institutions (MFIs) have seen dairy as a strategic activity for poverty reduction interventions.

But failure by the stakeholders to find the true pricing of the dairy products could work against the full recovery of the industry that has the potential to challenge horticulture, tea and coffee sectors that continue to be rated as Kenya’s leading foreign exchange earners.

"There is a feel good attitude in the dairy industry. This is making players ignore various technical, economic and institutional challenges facing the industry," indicated a report by the Kenya Institute of Public Policy and Research Analysis (Kippra).

According to Kippra researchers, the dairy industry is largely fragmented. Though there are 45 milk processors, majority of them are very small players that process less than 10,000 litres per day. The industry, thus, is in the hands of about five leading processors that command about 90 per cent of the formal market.

While the increase in processors has helped in eliminating informal channels of milk hawking, the informal market still commands a significant chunk considering that 60 per cent of milk produced daily is sold informally. This means that only 40 per cent of the 3.2 million litres produced daily is processed.

"The industry is currently not able to absorb all the milk produced. We are only doing 40 per cent," confirmed New KCC acting managing director Milcah Mugo.

Besides the challenge of composition, the industry is also suffering from capacity constraints. The three leading processors, New KCC, Brookside Dairy and Githunguri Dairy, have a combined capacity to process about 1.3 million litres of milk at full capacity.

This challenge was clearly projected early last year when the industry experienced a milk glut. At the height of over-production by farmers, the processors could not handle the increase leading to huge losses and exposing numerous shortcomings in the industry.

Indeed, one of the issues that came out clearly, apart from capacity constraints, was the fact that all processors basically rely on the domestic market and little efforts have been put to exploit regional and international markets.

"The industry is either less concerned or is not pro-active enough in sourcing for new markets for their products. Zimbabwe is a good case study. Before (Robert) Mugabe invasion the industry was basically export oriented," said the Kippra researcher.

Limited market

The over-reliance on domestic market has come at a huge cost for both the processors and consumers. While the scenario has been created that leading processors engage in price wars in setting the price of milk for consumers, the reality is that pricing cartels are the order in the industry with the full knowledge of industry regulator KDB.

"The perception created in the market is that of bitter rivals but the processors agree on the pricing to avoid hurting each other," said a senior manager at KDB.

Yet even as they agree on pricing for end products behind closed doors at the expense of the farmer, the industry is faced with rising competition from two fronts.

The first is stiff competition for farmers to deliver milk, something critical in guaranteeing a steady and predictable supply, and the second is competition not only among the existing processors, but also from informal vendors and new market entrants.

To safeguard milk supply, some processors have crafted schemes to lock in farmers but challenges still abound when rivals pay more to farmers.

In terms of informal vendors, the processors rely solely on efforts by the Government to crack down on vendors and the KDB to undertake campaigns promoting processed milk consumption.

It is, however, new market entrants that leading processors feel threatened by, particularly if the new entrant has the muscle to dismantle the status quo.

For instance, the planned entry of Agricultural Development Corporation into milk processing is already sending shockwaves among leading processors.

"There are always new players venturing in the industry. At Brookside we just focus on our strategies," said John Gethi, Brookside Dairy general manager in charge of milk procurement.

Despite the numerous challenges facing the dairy industry, processors have been trying to tackle them though at a disappointingly slow pace.

Two years ago, Brookside Dairy acquired Spin Knit Dairy to boost its capacity and increase market share.

And just recently Githunguri Dairy launched a UHT production unit while Sameer Agriculture and Livestock re-launched its ‘Daima’ brand of milk.

On its part, New KCC has announced plans to invest Sh700 million new facilities to increase capacity.