Background

Consumer demand for dairy products is growing rapidly in sub-Saharan Africa (up 22% in 6 years). The response of local milk and dairy producers in different African regions, however, varies considerably. Many governments are looking to strengthen the supply of local milk to dairy chains to reduce dependence on imported raw materials and support rural development and employment creation.

The abolition of EU milk production quotas will lead to an increase in milk production in the more competitive milk producing regions of the EU, accounting for growing EU corporate interest in the African dairy sector. For example, the Danish-based European dairy company Arla estimates that after quota abolition, “Arla’s milk farmers will produce at least one billion kilos of milk more each year than today.” The Chair of Arla’s Board of Directors maintains that increasing sales of dairy products to new consumers in emerging markets “will help to maintain a viable dairy business in northern Europe”. It is against this background that in January 2013 Arla announced an increased focus on markets outside the EU, including in “Russia, China and the Middle East and Africa region”.¹

Great interest is being shown in West African and East African markets. In October 2012, the Danish Confederation of Industries (DCI) held a workshop to explore opportunities in the dairy sector in East Africa. According to DCI’s website, “East Africa… offers favourable conditions for Danish companies since the dairy sector… has increasing consumption of milk and is in the process of modernising its market channels.” DCI argued that “Danish dairy-related companies can offer products, services and solutions to the East African growth markets” and contribute to “developing the markets in a profitable way”. The workshop found that “in general, the dairy sector across the African continent has major investment potential.”²

In West Africa, in September 2013, Arla announced the establishment of a joint venture in Côte d’Ivoire for the packaging and sale of milk powder produced in Denmark. The joint venture partner, Mata Holdings, already packages single-portion sachets of soup, and will use the same sachets to repackage the Danish milk powder. The operation will be undertaken at a “new, mobile packaging station” which operates “out of three 40-foot containers”, using solar cells to deliver a 12-hour production cycle in temperature-controlled conditions. The facility has an annual capacity to process 2,000 tonnes of milk powder, repackaging it from 25-kg bags to 25-gram sachets which each deliver one glass of milk when reconstituted. The mobile packing facility is seen as a low-cost means of developing new markets.³

Projected EU skimmed-milk powder exports (’000 tonnes⁴)

Source: EC, ‘Prospects for agricultural markets…’, Table 6.27, December 2013.⁵

Arla’s investment needs to be seen against the background of the major expansion in EU exports of skimmed-milk powder (SMP) under way since 2009: exports since then had more than doubled by 2011⁶ and are projected to maintain sustained growth over the period 2014–2022 (+40%).⁷

The increasingly outward-looking strategy adopted by Arla mirrors those of European dairy rivals FrieslandCampina (Netherlands) and Danone (France). In 2012, FrieslandCampina’s CEO highlighted the scope for Nigeria to “become one of the world leaders in the production of dairy products”. The local Nigerian subsidiary FrieslandCampina WAMCO (FCW) already supplies the leading Nigeria milk brand Peak, using raw materials largely imported from the Netherlands. The company is working to develop local milk supplies, and Nigerian-produced raw milk is already being used to manufacture evaporated milk. Since 2011, FCW has been involved in setting up a pilot milk collection centre (MCC), with a short-term target of 10% for local milk procurement, rising to 50% within 10 years.⁸

In October 2013, Danone joined with the Abraaj Group to take over Fan Milk International (FMI) a dairy and fruit juice distribution company with a major distribution network across six West African countries and a reported 85% and 89% respectively of the Nigerian and Ghanaian markets. In January 2014, it was reported that Danone was to take over the Abraaj Group’s stake in Brookside Dairy, East Africa’s largest dairy company.⁹ 

Implications

Depending on how the EU trade in SMP with African countries is organised, it can support the development of local milk-to-dairy supply chains or it can disrupt and undermine them.  Distortions in the development of local milk-to-dairy supply chains can occur either by altering the balance of fresh milk and SMP used in processed dairy products, with imported milk powders being used to ‘benchmark’ local milk prices (i.e. prices of imported powders provide the basis for the prices that processors are willing to pay for fresh milk), or it can distort the development of local demand for milk by expanding the availability of sachets of milk powder, which potentially compete with fresh milk suppliers.

Experience in South Africa in the 1990s suggests that in the face of ‘surplus’ stocks of milk powder in the EU, two distinct patterns of EU investment can take place. On the one hand, joint ventures can be established that focus on developing markets for new value-added dairy products and strengthening local milk supply chains. On the other hand, acquisitions of local dairies may take place simply to access local distribution channels and integrate the local dairy processing sector into global sourcing chains for dairy ingredients. These different patterns of investment can have very different effects on local milk production and dairy farming.²

The earlier South African experience highlights the need for careful consideration to be given to the effective regulation of trade in milk powders and other dairy sector ingredients within any government efforts to promote local dairy sector development. More recently an important regional policy dimension has emerged as South African dairy companies integrate increased milk powder imports into their regional strategies for expanded dairy product exports. Milk power trade policy is thus a regional as well as a national dairy sector issue

Issues arising

Given growing EU corporate interest in African dairy sectors, a key issue faced is how to harness this corporate interest to the development of local milk supply chains to meet growing consumer demand for dairy products. The question arises:

• What policy measures can governments set in place to encourage forms of EU corporate investments which both structurally develop the local dairy sector and increasingly integrate local milk producers into local dairy supply chains? 

Clearly, government support to private sector initiatives to address production and infrastructure constraints along dairy supply chains would be helpful. However, a nuanced policy on the licensing of duty-free imports of milk powder could also play a role.

Notes

1. While China is the market of greatest potential interest, EU exporters face intense competition from competing exporters.

2. CTA Agritrade, ‘End of dairy quotas leads to greater external focus of EU dairy companies’, 4 March 2013

http://agritrade.cta.int/Agriculture/Commodities/Dairy/End-of-dairy-quot...

3. CTA Agritrade, ‘Arla launches turnkey milk powder packaging facility in Côte d’Ivoire’, 27 October 2013

http://agritrade.cta.int/en/Agriculture/Commodities/Dairy/Arla-launches-...

4. 3,480 litres of liquid skimmed milk is required to make 1 tonne of skimmed-milk powder.

5. EC, ‘Prospects for agricultural markets and income in the EU 2013–2023’, statistical tables, December 2013

http://ec.europa.eu/agriculture/markets-and-prices/medium-term-outlook/2...

6. CTA Agritrade, ‘EU dairy sector developments and prospects’, 15 April 2013

http://agritrade.cta.int/Agriculture/Commodities/Dairy/EU-dairy-sector-d...

7. CTA Agritrade ‘Good prospects for EU dairy exports but growing competition’, 3 March 2014

http://agritrade.cta.int/Agriculture/Commodities/Dairy/Good-prospects-fo...

8. CTA Agritrade, ‘Expanding Dutch corporate involvement in local milk procurement in Nigeria’, 15 April 2013

http://agritrade.cta.int/Agriculture/Commodities/Dairy/Expanding-Dutch-c...

9. Theafricareport.com, ‘Danone eyes Kenya’s Brookside Dairy’, 14 January 2014

http://www.theafricareport.com/North-Africa/danone-eyes-kenyas-brookside...