Family Farming

The Market in Kenya Dairy Farming
Supply The supply of milk and dairy products to the end consumer emanates from two main sources:  industrial dairies supplying pasteurised milk and milk products and farmers, traders and hawkers selling raw milk.   Processors sell pasteurised milk, in packages, to formal retailers for about Ksh 46-48/litre who then generally retail it for about Ksh 50-52/litre.   Meanwhile, milk bars and hawkers are retailing raw milk at between Ksh 30 and 35/litre to poorer clients.  As the hawker visits the home directly, the customer provides his own packaging and the raw milk retailer will sell him any quantity that he desires. Overall, as noted above, the supply of milk is increasingly coming from smallholders in the form of raw milk.  The collapse of the KCC, which had controlled the sector for so long broke down many of the systems used to control the supply of milk through the formal dairies. Demand Demand for milk is strong. There is a growing population, which should normally lead to growth in consumption.  However, dropping per capita GDP is reducing the purchasing power of many households.  Since the marginal propensity to consume milk is fairly high, it means that in times of dropping incomes they either consume less or change their purchasing habits to buy cheaper products.    Most milk is purchased for use in other beverages, such as tea, not for direct consumption.  Surveys have shown that 100% of households boil their milk.  In the poorer neighborhoods, where milk is being sold door to door by hawkers, the milk is often consumed immediately. The Actors Smallholder farmers The dairy subsector is comprised of a wide range of direct actors.  The 625,000 smallholder farmers dominate the scene and account for about 2.5 million dairy cows.  For almost half of them, dairy is their main source of income and they treat it as a business.  Only a minority of them do not treat milk production as a priority.  But the smallholder farmers are a diverse group.  They use different production techniques (some intensive, some extensive), mix dairy with other agricultural crops, and use different management practices (i.e. use of artificial insemination).   Many of them market their products very differently as well. Smallholder farmers will have on average four dairy cows.  They appear to only commercialise about 64 percent of their production, but many take a diversified strategy of self consumption, sale to neighbours, sale to local outlets, sale to traders, and sale to the cooperative.  They have a need to balance the return per litre, the certainty of purchase, the immediacy of payment, the risk of non-payment and the need to maintain transactions record with the cooperative for access to services during the peak production period. The price received by the farmer is a function of:  Distance from markets (prices increase closer to Nairobi and other urban centres) Whether the supplier is in a milk surplus or deficit area Channel selected – to traders, co-operatives, local retailers or processors Willingness to take on marketing functions (search out buyers, transport to buyers etc.) and incur the cost of transport to get to the market Amount and quality for sale (small amounts make it less worth pursuing active marketing strategies and large amounts may be difficult to dispose of, requiring securing a guaranteed market such as a processor but at a lower price)  It appears that significant amounts of milk are lost through poor roads (buyers cannot get in), especially in the rainy season, and that the poor roads add to the cost of transport.  Some milk is lost due to lack of cooling, especially evening milk that is for next day collection. Milk yields for the smallholder farmer tend to be low, averaging about 5 litres per day. But this will depend on the breed of cow, the veterinary services, the feed, and the milking techniques.  The average daily income generated through milk production by the farmers we interviewed was 1,356 ksh. (approximately US$173) (with the range being 40 to 4500 ksh.).   Expenses included the following:  Tick Solution – 1020 ksh/month AI Services – between 580 and 5,000 ksh when needed Bull Services – 500 ksh (when needed) Dairy Meal – average 745 ksh (70 kg. sack) (frequency of purchase depends on number of cows, and intensity of feeding regimen) Other Feed (bean residue) – 800 ksh/week   Napier Grass – 500 ksh (every 3 days) Water – Average 60 ksh/day Dehorning – 100 ksh when needed Veterinary Services – 1000 ksh when needed  The incomes presented would not have been possible without the original investment in the purchase of a grade cow, the use of AI and veterinary services, the purchase of feed for zero grazing, and related investments.  Without grade cattle, milk output is minimal if non-existent.  Hence, we can say that without accessing the technology and BDS available to dairy farmers, any income earned from milk production would be non-existent. Large scale farmers Medium to large scale farmers with substantial dairy herds primarily produce for the large dairies.  They pay for labour and for their feed, as well as all other services.  Yields average 17-19 litres per day during lactation, but can be as high as 30-35 litres.  So it is clear that they are more productive than the smallholders. Given their much larger quantities of production, they must have a reliable market, hence they sell primarily to the dairies.  If the demand from the dairies drops (as it has with the drop in production from the KCC), then the large farmers are more vulnerable.  They typically sell at prices of ksh 16-19/litre. Traders There are an estimated 4,000 traders buying and selling between 500 and 1000 litres per day.  Trading brings milk from a production surplus to production deficit areas, in particular the urban centers.  Many of the cooperatives and self help groups (see next section) also serve as traders.  Traders typically pick up from smallholder farmer collection points and drive to poorer areas of cities or other wholesale point for onward sale to hawkers, milk bars and other retailers.  They use pick-ups, small trucks, or bicycles, depending on their distance from the market.    Buying from the smallholder at xx, they will then wholesale at Ksh 22-26/litre to milkbars, hawkers or dukas, or perhaps even retail it themselves at Ksh 30-32/litre. Co-operatives/Self-Help Groups The number of dairy cooperatives appears to be growing, along with their membership.  However their sales value in real terms is dropping.   Initially developed to supply the KCC, many of the early cooperatives had high levels of mismanagement.  Though they did very well immediately after the liberalisation of the market in the early 1990’s, when they were the principal source of supply, many have suffered because of increasing competition from other private marketing channels, the traders, and processors.  This has siphoned off much of their intake.  Many cooperatives are now adapting, trading raw milk directly into the cities as well. The statistics on growing numbers of cooperatives might reflect the creation of new, privately run and focused cooperatives (reflecting the resurgence of the smallholder dairy farmer), while not recording the disappearance of the old-line coops.    There are many advantages to belonging to a cooperative, especially access to immediate credit for inputs and personal needs, as well as access to subsidised inputs from their wholesale store.  Cooperatives also provide a safety outlet for farmers who are already selling through other channels, especially during the peak production season when there is a surplus of output.  It appears that only about 38 percent of marketed milk goes through cooperatives.    For isolated dairy farmers, cooperatives serve the crucial function of bulking and marketing. In more accessible regions they compete for farmers’ milk against the other direct sale opportunities.  Cooperatives buy at Ksh 17/litre, compared to private traders who will pay Ksh 20-22/litre, because they have fewer overheads and are more efficiently organised.  As a result, many cooperatives are now acting like a trader, taking the pick up directly to the market, or else becoming processors.  The two largest cooperatives are not processing, but are suffering from low capacity utilisation rates.  Processors There are 29 licensed processors processing almost 600,000 litres/day.  The largest eight process over 80 percent of this. Large processors appear to be increasing their market share at the expense of the smaller ones.  Some of the better smaller ones are specialising in a limited range of high value products, such as yoghurts and fresh juices.  The key seems to be a combination of a ready supply of milk at good prices (stemming from regular payment of milk suppliers), combined with strong distribution and branding.  Top end processors don’t pay high prices (Ksh 16-19/litre delivered), but they pay regularly and on time.  This provides enough incentive for suppliers to provide them with at least some regular supply.  Bigger processors are investing in cooling facilities in selected surplus areas where there are low cost producers to ensure access to cheap milk.  They can then bulk transport their milk to the dairies.	The processors place a heavy emphasis on maintaining the cold chain. Most processors use the Tetra-Pak system of packaging.  There are some experiments with pasteurised milk in pouches.  These have not yet been successful in the retail market, but bulk packs are common in the catering and institutional supply market. Considering that the Tetra-Pak package adds about 15 percent to the cost of the end product, there is incentive to find cheaper packaging. Of the small processors interviewed, each one was producing yogurt, but not all were producing mala.   We can get some idea of their income and expenses from the individual processor write-up in Appendix 4 – Economic Analysis of Processor Income and Expenses.  The average amount of milk purchased by these five entrepreneurs is calculated at 487 litres/day, and the average amount of yogurt produced is 44.5 litres/day (plus one person processing 230 litres of mala/day).  The cost of the milk averaged 22.5 ksh (purchased either from a handler or a producer).  Prices charged for yogurt range from 40 ksh to 90 ksh/litre, although most is sold in 250 ml containers. Expenses incurred  by processors included the following: Initial capital investment for equipment:  8,000 – more than ½ million ksh. Bottles – between 5 and 30 ksh each Business License – 9,000 ksh/year KDB License – 3,500 ksh/year Cart License (Mobile Cart Sales License) – 2,640 ksh/year Health Inspection – 1,200 ksh. ½ year Electricity – Up to 4,500 ksh/month Salaries – Up to 46,000 ksh/month Woodfuel/Charcoal (for jua kali pasteurizers) – 300 ksh/day Other Ingredients for Yogurt (sugar, culture, flavor) – Labels -  A processor must make a significant investment in technology to carry out the processing business.  Although the simplest equipment – a jiko, several large sufurias, the culture, and packaging materials can cost as little as 700 ksh, a small scale processor can pay many thousands of shillings for imported pasteurizing and cooling equipment.  Without a “guaranteed” market for yogurt, a processor will think first before making ANY investment. Retailers There are several different types of retailers.  Data from 1990 calculated almost 2,000 small and large retailers in Nairobi, which is probably an underestimation of the number of kiosks alone and is likely to have increased considerably by 2001.  Large retailers deal only with the processors, selling only refrigerated packaged pasteurised milk in large urban centres.   The range and breadth of products is considerable with multiple brands of milk, cheese, yoghurts, butter etc.  Some of the longer life products are imported as are packaged infant milk powders. There are also many small retailers in urban areas, many of which are not licensed to sell/handle milk.  Those in Nairobi and other major cities sell packaged pasteurised milk and/or raw milk in poly-bags.  Some have refrigeration, but many do not to, requiring pasteurised and raw milk to be sold quickly and twice-daily stocking.  Those suppliers with good distribution would presumably be able to gain market share just through availability.  Additionally, there are specialist milk retailers (Milk Bars) in many urban areas, which KDB estimated to be selling an average of 200 litres/day.  These require specific licenses from KDB to operate, but it seems that many do not have them.  KDB have licensed about 300 Milk Bars nationally, but any trip to the slum areas of Nairobi would indicate much larger numbers of specialist milk retailers, let alone the many small duka/kiosks that also sell milk.  As well as the KDB license, licenses are required from the local councils, which are very costly for a small retailer.  The Milk Bars visited did have basic testing equipment such as a hydrometer and alcohol testing kits for water adulteration and bacterial development.  They also tried to use established and regular suppliers, in one case developing its own supplier quality assurance system.  Having a member of staff with a “good nose” to detect old milk, despite the use of hydrogen peroxide, was a more informal quality check.  Margins in Nairobi for milk retailers/milk bars were between Ksh.4-8/litre.  Sales of other products particularly Mala and drinking yoghurt were smaller but of much higher margins.  Competition from Hawkers in Nairobi is intense though many milk bars will sell at wholesale to Hawkers, making only Ksh.2/litre. Hawkers incur lower fixed and variable costs (KSh 0.20 per litre) and show higher returns to labour per litre (23% of sale price) than milk-bars (where fixed and variable costs = KSh1.00 per litre; returns = 10% of sale price).   Consumption is mainly of liquid milk.  29% of households in Nairobi bought raw fresh milk (5.5. litre average/month).  Shops and hawkers were the main purchase points for most buyers of raw milk in urban areas – Nairobi 63% of raw milk.  Raw milk was ranked “best” overall.  Ranking criteria were taste, price, shelf-life, butter-fat content and availability. The official estimate for the number of Hawkers in Nairobi alone is around 4,000, probably selling an average of 50-70 litres/day at Ksh.25-30/litre in Nairobi.  This is likely to be a major underestimate of the numbers, given the informal nature of this market.  The figure may be at least treble this amount, based on anecdotal sources There is a temptation for hawkers to adulterate or sell old milk and then move on.  However, given the number of hawkers, it would be reasonable to assume that many would work a particular area and seek to build up regular clients.  Any short-term gain from adulteration would soon be exposed and they would need to move on to a more uncertain area.