Global dairy price volatility could exacerbate challenges faced by Eastern and Southern Africa dairy sectors
11 October 2014
In August 2014, the Dairy Association of Zambia (DAZ) called on the Zambian government to “consider zero-rating milk products for value added tax in the 2015 National Budget”. DAZ’s executive manager Jeremiah Kasalo maintained that the VAT levied was “making it difficult for processors to sell products at competitive prices”. DAZ also called for VAT to be removed on ingredients used in feed manufacture. This echoed calls made by the Zambian National Farmers’ Union (ZNFU) in their 2014 submission to the Ministry of Finance. In 2013, ZNFU estimated that keeping VAT on milk increased prices by 16%.
ZNFU, in their submission, reiterated their calls for the removal of a 21% minimum tax value levy on UHT products. Similarly, DAZ called for these levies to be removed in order to encourage increased throughput and reduce unit costs, and also asked the government to raise the import duty on full-cream powdered milk from 5% to 15%. ZNFU, however, called for a 15% duty on all powdered milk, from all sources, including SADC and COMESA countries where preferences are extended. ZNFU’s 2013 submission claimed that this move would “increase the costs of reconstituted milk… thereby making the locally produced milk competitive and [creating] jobs”.
It appears from online commodity analysis websites that concerns over the competitiveness of reconstituted milk and dairy products have been exacerbated by recent movements in global dairy prices. In 2013 global dairy prices were generally high, but analysts at Rabobank have noted that “in the first quarter of 2014 high farm gate prices and lowering feed costs have brought a surplus of milk onto the international markets, and prices have fallen.” Indeed, GlobalDairyTrade auction prices have reached their lowest in 21 months, with whole-milk powder (WMP) prices down 38% in the 5 months to July 2014, reaching levels below the long-term average.
This has been attributed to a weakening of Chinese import demand, but USDA figures published in their July 2014 report on dairy world markets and trade show that Chinese imports of skimmed-milk powder (SMP), WMP, cheese and butterfat to May 2014 increased by 89%, 70%, 67% and 121% respectively, compared to the corresponding period in 2013. Production growth in New Zealand and the EU therefore appears to have been a major driving force behind price declines.
EU28 milk production rose by 6% from January to March 2014 compared to the corresponding period in 2013, as EU producers responded to the high global dairy prices in 2013 and geared up for the abolition of EU milk production quotas. The EU projects a 12.6% increase in EU exports of SMP in 2014 to 535,000 tonnes, following the opening of new drying facilities in Germany. Indeed, by April 2014 EU SMP exports were up 66% compared to the same period in 2013.
The Russian ban on imports of certain products from the EU (including dairy products) is however leading to severe milk price declines in some EU member states. This has resulted in the EU reintroducing emergency measures to assist EU milk producers and an intensified quest for new export markets.
Editorial comment
With lower milk powder prices making imports and reconstitution more commercially attractive, the competitive position of Zambian milk producers is likely to be made more difficult. Questions arise over the consistency of the level of protection afforded by ad valorem tariffs in the context of such volatile price movements (WMP prices have fallen by 38% in 5 months). In East Africa, in the rice sector, ad valorem duties have been supplemented by minimum import duty specifications, which effectively stabilise the level of tariff protection accorded to sensitive sectors (see Agritrade article ‘Debate intensifies around EAC rice tariff’, forthcoming 2014).
Global dairy market price volatility and surging milk powder exports from traditional trade partners add a further complicating factor to the equation of fiscal management in the interests of agro-food sector development in Zambia.
In terms of regional trade, the South African dairy industry has very effectively integrated milk powder imports into its Africa-focused export strategy (see Agritrade ‘ Executive Brief Update 2013: Dairy sector’, 18 December 2013). In this context, lower global milk powder prices can serve to further boost the competitiveness of South African dairy export to the Zambian market. This however potentially raises rules of origin issues in the application of regionally agreed tariff preferences.
The issue of managing global dairy sector price volatility is an issue not only in Zambia, but also in any African country seeking to develop its commercial milk production to feed growing consumer demand. Given the differing strategies adopted by different regional partners with regard to dairy sector development, this is likely to raise increasingly complex issues related to national tax policy and regional trade arrangements, not only in regard to tariffs, but also rules of origin, product standards and production process issues (e.g. use of growth hormones).
