Dairy processing and the East African regional market
07 May 2012
In March 2012 the New Kenya Co-operative Creameries (New KCC) announced the release of its stocks of milk powder to ease milk shortages. Available stocks are expected to be sold off by mid April 2012. There are currently milk shortages in parts of Kenya and a 30% increase in retail prices in affected areas. According to Kipkurui Langat, Managing Director of New KCC, ‘the milk shortage is expected to last until May due to the dry spell’. The dry weather has reportedly seen milk production fall by 50% in most of the areas affected, with a consequent decline in milk deliveries to dairies. Similar supply problems are being faced in Rwanda as a result of the dry weather.
It is not anticipated that imports of milk powder will be used to fill the current supply shortfall in Kenya, estimated at 6 million litres for January 2012 (13% of consumption) and 11 million litres in February (33% of consumption). The national shortfall has been compounded by rising regional demand. However, the domestic Kenyan milk shortages need to be seen in the light of the growth of Kenyan milk product exports since 2009: exports reached KSh766 million (€7.03m) in 2011, and ‘an aggressive marketing campaign’ was recently launched promoting exports to Middle Eastern and even West African markets. The current supply shortfall is therefore not discouraging investment in the Kenyan and wider EAC dairy sector, which continues to progress.
At the same time as the rise in Kenya’s export ambitions, import bans have been introduced in fellow COMESA members such as Zambia, although Zambia’s ban was recently relaxed. This has caused concern among Zambian dairy producers over the likely impact that any relaxation of import restrictions would have on the development of the sector. According to Jeremiah Kasalo, Executive Manager of the Dairy Association of Zambia, ‘the cost of milk production in Kenya is very low, such that its landing cost will still be cheaper than ours.’ He maintained that for local processors to stay in business, they would have to lower prices paid to Zambian milk producers by as much as a third. Concerns over Kenyan imports come on top of wider concerns over competitively priced imports from South Africa. In response to producer concerns, the Zambian Deputy Minister of Trade and industry said the government would do everything possible to ensure the dairy sector played a major role in economic development.
Editorial comment
In the past Zambia has refused entry to Kenyan milk on quality grounds. However, with pressure mounting to dismantle non-tariff barriers to trade within COMESA, the Zambian government is likely to face pressure to progressively open up its dairy sector to trade from within the region.
This leaves unresolved the issue of how to encourage the development of commercial milk production and dairy processing in a country with the agricultural potential of Zambia – which is in the shadow of two major regional dairy producers (South Africa and Kenya). The issues of lowering the cost of production and increasing productivity of smallholder farmers are critical to enhancing the competitiveness of the Zambian dairy sector. This calls, for example, for a review of cereals pricing policy. Currently the maize pricing policy of the Food Reserve Agency of Zambia has raised the price of maize, thereby increasing feed costs. A review of taxation policy on dairy sector inputs would also appear to be necessary, with a view to reducing investment costs.
In the short term, in terms of trade policy the experience in Namibia could be relevant. In the horticulture sector, import-licensing arrangements for retailers and traders have been linked to a progressive expansion of levels of local procurement. This is now being explored in Namibia as an alternative to infant industry protection in the dairy sector. Significantly, the very occasional use of this policy tool has brought about changes in how supply chains operate when they are integrated with South African multinational retail companies. These retailers now strongly support local procurement as part of wider corporate social responsibility programmes, highlighting their local purchasing policies as a means of attracting higher-income consumers.
The use of similar policy tools in a transparent and accountable manner may well find a place within the wider regional trade dispensation being discussed as part of the tripartite FTA process.
