Farmers want a controlling stake in the New KCC in order to protect their interests.
The story of the dairy industry in the country cannot be complete without the mention of the Kenya Cooperative Creameries (KCC). It was the major milk processing company in the country until the 1990s when it collapsed due to mismanagement. Equipment belonging to the company were vandalized and sold to private milk processing companies that had set up by well-connected individuals within the government to take its market share in milk processing.
By the year 2002, KCC was on its deathbed; but immediately the NARC government came into power, KCC was among the first institutions that the new government revived. The New KCC, as it was named, immediately started reviving factories that had closed down. Many farmers who had abandoned dairy farming revived their enterprises. However, the last few years has witnessed a new campaign to cripple New KCC through frustration in the market. Many supermarkets and retail outlets that used to sell its products have stopped.
There are plans by the government to privatize New KCC. According to the ownership structure proposed by the Privatization Committee, farmers have been allocated 42 per cent shareholding. A total of 34 per cent of the shares are to be listed at the Nairobi Stock Exchange. The government will retain a 20 per cent shareholding, while 4 per cent have been reserved for New KCC staff. Farmers fear that the privatization structure will allow private processing companies to buy the 34 per cent shares that will be floated at the stock exchange. Should the government decide to sell its 20 per cent shareholding at the stock exchange, then the same companies could buy these shares, effectively taking over the New KCC. – The farmers want to be given 51 per cent shareholding through which they can run the cooperative and ensure their interests are protected.
Below, the winners and losers in Kenya’s dairy industry….
Milk processing companies are milking dry in Kenya
Despite making huge profits from milk, dairy companies pay farmers low prices for their milk.
“Milk prices confound dairy farmers” – this was the title of a short article in our last issue (TOF August 2012). We got impressive feedback in form of SMS and calls; for most of them, it was clear that small-scale dairy farmers are not getting a fair price for their milk. To some extent, they were right. But the marketing situation is much more complex than that.
Before looking deeper into the mechanisms of milk processing and marketing, let us begin with two facts and some questions. Fact one: Farmers get very low prices for their milk. Fact two: The major milk processors make huge profits from the processed milk. The questions: How much money do the dairy farmers use to produce one litre of milk? Do they know the amount of money required to raise one dairy cow? Do they ask themselves, why do prices of milk go down at certain periods? Are they aware that small-scale dairy farming can only be practiced as an additional source of income and not the only source of income, since it cannot sustain them?
Milk market liberalized
Now, let us look at the two above-mentioned facts. Since the Kenyan milk market is liberalized, the existing processing companies have expanded their capacities, and a number of new processors have entered into the milk market. It is obvious that they have been attracted by the good profits in this sector.
TOF tried to find out how much it costs to process 1 litre of milk. In a milk processing factory, fresh milk undergoes only three stages before marketing: Pasteurization, homogenization and packaging. Processing fresh milk requires water, labour and electrical energy. According to experts, it costs an average of Ksh 5 to process 1 litre of milk, which caters for water, labour and power costs. An extra Ksh 7 is used to package it. This means that the milk processors spend about Ksh 12 to 15 to process the milk. Additionally, they make good money with milk by-products such as fermented milk, yoghurt, cheese, cream and butter. Milk with less fat for instance is sold at nearly the same price as whole milk, but the milk fat that remains is the raw material that the processors use to make cream and butter.
The processors claim that they incur extra costs in transporting the milk back to the market, and one also has to account for the retailers profit margin. Let us put these two costs at KSh 12 per litre. Research in Nairobi on 20th of August in various big shops showed quite different retail prices. Half litre of processed milk retails at between KSh 31 (Fresha from Githunguri Dairy Farmers Cooperative Society as the cheapest) and KSh 48 (Brookside as the most expensive). Our conservative estimates show that processors are making between KSh 13 to KSh 45 for 1 litre of milk, which they buy from farmers at between KSh 24 and KSh 34 a litre. In essence, they make quite a good profit for every litre of milk sold.
Farmers are underpaid
Farmers expected an increase in milk prices with the entry of more processors into the market, but the opposite is happening. “Even if the milk processors spent Ksh 18 a litre in milk processing and transport to the market, this cannot justify the price they are paying the farmers for raw milk,” says an expert in the milk industry. This is at least one reason why 75 percent of the milk produced in Kenya is sold locally, to neighbours and hawkers at between KSh 30 to KSh 50 a litre.
However, one reason farmers do not prefer the informal market is the unreliability of the buyers, some of whom take the milk on credit and later default or delay payments.
One of the most successful processing and marketing cooperatives in the country is the Githunguri Dairy Farmers Cooperative Society, which has a membership of 17,000 farmers. The cooperative processes more than 170,000 litres of milk in a day. Farmers selling their milk through the society currently get KSh 34 for 1 litre of milk sold. The Society operates consumer and agrovet stores where members can take various consumers goods such as flour, cooking fat, sugar and farm inputs including animal drugs and AI services; this is then deducted from their milk earnings at the end of the month. There is no statement of accounts available which show the actual income and expenses of the society. At least the budget for 2011-2012 can give some hint. It shows that the society expects an annual turnover of Ksh 4.1 billion and a pre-tax profit of KSh 66 million.
The costs of milk production
Many small-scale dairy farmers complain about the discrepancy between the profits made by milk processors and the prices they pay the farmers for one litre of milk. They feel cheated considering the high costs of milk production. Now, let us come to the questions posed at the beginning. Do small-scale farmers produce their milk efficiently? This is the problem. Michael Muriithi for instance, a member of the Githunguri Dairy Farmers Co-operative Society says that production cost can go up to KSh 30 for 1 litre of milk according to his own records and experience. He is an exemption: Only few farmers keep proper records in order to determine their production costs to know if they making a profit or loss.
Fred Ngatia is a farmer in Nakuru district. He has 4 dairy cows in his 3-acre farm. At any one time he milks 2 cows that give him an average of 28 litres of milk in a day at peak production season. He delivers his milk to Brookside dairies that pays him Ksh 24 a litre after deducting Ksh 1 for transport. Ngatia says almost half of his earnings from milk sales go into buying fodder, concentrates, including minerals licks, drugs and acaricides. The prices for all this inputs tend to go up by the day,“ he adds. He complains that the earnings from milk sales cannot sustain his family of 5, 2 of whom are in high school. “I sometimes have to depend on their elder sister who is a primary school teacher to assist me to pay fees especially when the milk production goes down,” Ngatia says.
These figures testify to the real dilemma of the zero grazing system, which has been sold as the ultimate solution for small-scale dairy farmers. For them, the lack of resources is the biggest problem. Zero grazing as practiced by most farmers is unsustainable unless the farmer has adequate land to grow fodder; one cow needs the fodder of one-acre land. It diminishes the farmer’s profit when they have to buy even Napier grass or hay.
A very interesting study done by the Tegemeo Institute of Agricultural Policy and Development, named “Productivity trends and performance of dairy farming in Kenya comes to the following conclusion: “Smallholder dairy farming is an economically viable enterprise in Kenya, in the short term. However, dairy farm performance measures showed that pasture-based enterprises were somewhat more profitable than zero-grazing enterprises, when compared on a per cow or as per litre of milk basis”. This could be changed if the milk processors would pay fair prices for the milk.