Tuesday, March 02, 2010

Why SA Creams Kenya

With a dairy cattle population estimated at nearly 7million, the largest such herd in Africa and more than the rest of the countries in East and Southern Africa combined, Kenya is the third-largest milk producer in Africa, behind Sudan and Egypt. The dairy industry is the single largest agricultural sub-sector, larger even than tea; it contributes some 14% of agricultural GDP and 3.5% of total GDP. And Kenyans love milk; they consume more of it than almost anyone else in the developing world. In terms of milk consumption per unit of average income, Kenya ranks only behind Mauritania and Mongolia globally among developing countries. On average, each Kenyan drinks, according to the International Livestock Research Institute (ILRI), about 145 litres of milk a year, triple his Ugandan counterpart and four times the average for Sub-Saharan Africa. A 1999 survey found that urban households spent an average of 18 percent of their income on dairy products, second only to their expenditure on cereals such as maize.

As milk is a bulky and perishable product, across the world the dairy sector tends to be highly localised, and dairy products are mostly consumed in the country or region where they are produced. If intra-EU trade is excluded, only 7 percent of the milk produced is traded internationally. However, Kenya manages to export substantial quantities of milk and milk products to the East African region and Asia. In 2007, the main dairy export destination was the Middle East, which received some 14 million litres, more than double the figure for 2006.

So it may come as a surprise to learn that though Kenya produces nearly 1.5 times more milk than its major competitor in the region, South Africa, it still earns 5 times less from that production. In 2006, according to the EA Report On Manufacturers & Commercial News, Kenya earned Kshs 64 billion from 3.5 billion litres of milk compared with SA's Kshs 220 billion from 2.6 billion litres which translates to revenue per litre of just Kshs 29 for Kenya and a whopping Kshs 96 for SA. With a dairy herd six times as small, the average SA dairy farmer produces ten times as much milk as his Kenyan counterpart.


Marketing of milk in Kenya is done through the formal and informal sectors. The formal sector in Kenya comprises of the following licensed milk dealers; 27 milk processors, 64 mini dairies, 78 cottage industries, 1138 milk bars and 757 primary milk producers. The numbers may sound impressive but they are deceptive. While the amount of milk marketed through the formal sector has been increasing over the last few years, only 70% of the country’s total milk production makes it to market and most of that is sold raw, through informal channels. Milk processors only collect 14% of the total production in any given year and only 1% of this converted into value-added, long-life products like cheese and butter, margarine, condensed milk, and powdered milk. Almost all dairy product consumption is in the form of liquid milk. The sad fact is, while they may be among the greatest consumers of dairy products in the developing world, Kenyans still fall woefully short of the 200 litres recommended by the Food and Agricultural Organization (FAO). By comparison, 90% of South African production is traded in formal markets and only 3% informally. The country converts 40% of all its milk into yoghurt, cheese and curdled milk.

Thus in SA payment for fresh milk is based on volume and quality of milk since processors need milk containing higher fat and protein percentages to reduce the production cost of dairy products. Globally, the market for higher value-added milk ingredients was estimated to be $ 19 billion in 2008. However, in Kenya, as noted in a 2008 report for the East Africa Dairy Development Program prepared by TechnoServe Kenya, milk purchases are currently driven only by volume and not quality. Processors are not willing to pay the premium for quality, discouraging investment in value added quality milk production and handling, and investment in cold chain technology needed to preserve the quality of milk.

Consequently, we have the strange paradox of milk being poured down the drain in a glut while at the same time imported dairy products are stocked in supermarkets. Though the Kenya Dairy Board asserts that dairy imports have gone down over time as the country becomes increasingly more self- sufficient in milk and milk products, it still admits that over Kshs. 400 million worth of “specialized milk products” are still imported mainly from New Zealand and the E.U.

A 2003 study by Andrew Karanja, a Research Fellow at Tegemeo Institute, Egerton University, showed that while the country could produce milk competitively, this advantage was lost due to inefficiencies in milk collection, marketing and processing. The study also indicated that though large-scale farms are the most competitive in milk production, in Kenya the industry is dominated by 600,000 small-scale producers located mainly in the Rift Valley, Central and Eastern provinces. They account for 80% of production and some 70% of marketed milk. By comparison, South Africa's market is dominated by only 4 000 large-scale milk producers.

Of course, small-scale dairy does have its compensations. While the South Africa industry employs about 60,000 farm workers and indirectly creates another 40,000 jobs, Kenya’s dairy sector supports 1 million households and generates 365,000 salaried jobs as well as over half million jobs in service sectors.

Other woes afflicting the dairy sector include a limited processing capacity which has not substantially increased in 2 decades; and a reliance on rain-fed agriculture which leaves the industry vulnerable to chronic cycles of underproduction in drought and overproduction when the rain comes, compounded by farmers’ lack of capital and knowledge.

In 2008, none of the farmers interviewed by TechnoServe knew their cost of production, or what increase in production resulted from adding an additional kilogram of food, or from altering the food regime. Because the benefits of additional feed or animal care are rarely examined in the context of increasing yields, most cows produce well below their potential. Additionally, even though dairy is an important source of income, for many producers keeping cattle is a cultural function which happens to meet domestic consumption needs while providing some cash flow. It is not seen as a business where the aim is to maximize income and minimize costs. As opposed to the trend towards intensification of milk production in developed countries, production growth in Kenya, as in most developing countries, is to a large part due to increasing numbers of milk animals (and dairy farms) and not productivity gains. The result is broke farmers, often dependent on open grazing to feed their animals and susceptible to the effects of seasonal weather patterns.

Add regulatory incompetence to this emphasis on quantity over quality and one gets the basic ingredients for the current milk crisis. The overseers’ reaction to the crisis is very illuminating in this regard. As the spectre of corruption is never far away from such tragedies, the Minister for Cooperatives Development, Joseph Nyaga, is fingering the NKCC management alleging “sabotage and deliberate incompetence.” He also cites the illicit dumping of subsidized milk powder from the EU. He is promising a crackdown on smugglers and the sacking of the entire NKCC team, including the chief engineer for the procurement of a Sh73 million milk-processing machine which has only been working for six hours a day.

The Kenya Dairy Board, finally waking up to its duties, is insisting that milk processors are obligated to absorb all the current production while in the same breath admitting that their capacity is overstretched. It is abundantly clear that this is not going to happen. New KCC (NKCC) and Brookside Dairies, which together account for 80% of the total processing volumes are already turning away farmers, and the situation is expected to worsen with the onset of the long rains.

But there is a more fundamental problem for the Ministry and the KDB. If, as the Export Processing Zones Authority asserts, the total inbuilt processing capacity is 2.5 million litres a day, why are milk processors struggling to cope with a surge of just over half of that? To blame the entire crisis on a single machine, on milk powder whose consumption is a tiny fraction local production, or on overstretched dairies reluctance to absorb more milk simply smacks of scape-goating. The truth is the crisis is largely as a result of long-term inefficiencies and weaknesses in the sector. It was entirely foreseeable, and therefore preventable, or at the very least, its worst effects could have been prevented. To find the real culprits, the Minister, like his minions at the KDB and NKCC, just has to take a long hard look in the mirror.

1 comment:

HOOVER said...

1. I always assumed it was impossible to get quality data on most aspects of Kenyan life/commerce. But this blog proves that assumption wrong with every new post
2. I see why you are a featured blogger at GlobalPost, you are really good. I have the same quiet when reading your articles as i get at the Economist never the same at DNation.
3. It all comes to basic structural inefficiencies. Just like everything else in Kenya our priorities are all over the place. When not using badly copied /outdated models we opt to focus on individuals and personalities while ignoring the matter at hand.

Now i get why most 8/4/4's wont shut up about Maziwa ya Nyayo which in my opinion was as important as Nyayo monument and as successful as Nyayo One.{Baba yangu ni headmaster so nilikunywa several times my share]. Moi was catching them young.