Milk processors get crafty to protect profit margins

By Njiraini Muchira

Faced with the prospect of declining profit due to price wars, milk processors have now resorted to cartel-like tendencies to contain a further drop in milk prices.

As the country continues to experience increasing milk production by farmers, milk processors have realised they are hurting each other by resorting to price wars to move their products.

To halt further reductions, the processors under the Kenya Dairy Processors Association (KDPA) have agreed to cap milk prices at an average of Sh70 per litre, in the process making a mockery of perceived intense competition in the lucrative sub-sector.

The scheme, which was hatched under the full knowledge of industry regulator Kenya Dairy Board, has been camouflaged by the show of unity of purpose demonstrated by the processors during the launch of a campaign to promote the consumption of milk and milk products. The Sh50 million campaign dubbed ‘Stay young, Do Milk’ is fronted by KDPA and is aimed at creating a milk drinking culture.

“The launch of the campaign was intended to show Kenyans the processors are committed to the overall development of the industry, but it was the culmination of a deal to stop the price wars,” said a senior manager in one of the leading processors.

In recent weeks, retail milk prices have been on a decline, after hitting a high of Sh90 per litre early in the year due to a prolonged dry spell. Currently, a litre of milk is averaging Sh70, although leading processors — Brookside Dairy and New KCC — have capped their prices at Sh80 per litre, representing a drop of only Sh10 per litre.

Speaking during the launch of the campaign, KDPA chairman and New KCC Managing Director, Kipkurui Arap Lang’at, said consumers should expect price stability due to supply normalcy following the long rains.  

Sufficient long rains over the March-May period has seen milk production double, from about 1.5 million litres per day to about 3 million litres.

Significant growth

The dairy sub-sector is perceived to be among the most competitive industry after witnessing significant growth in less than a decade with the number of processors currently standing at 45. However, it is dominated by about five leading processors who command about 90 per cent of the formal market.

The three leading processors, New KCC, Brookside Dairy and Githunguri Dairy, control about 75 per cent of the market, and have a combined capacity to process about 1.3 million litres of milk per day at full capacity. Most of the other processors are very small players with a capacity to process less than 10,000 litres per day.

Over the years, the leading processors have crafted strategies to rake in millions by capitalising on the huge disparities in spread between producer and retail prices for milk.

Currently the producer price range between Sh28 and Sh35 per a litre, with the retail price averaging Sh70 per litre. This huge gap has bred a growing number of disgruntled farmers who continue to fuel the growth of the informal market, which consumes 60 per cent of milk produced daily.