Earnings dip for farmers as KCC cuts milk prices

Milk processor KCC has cut its producer prices by Sh2 per litre, dampening the earnings outlook for millions of farmers whose output got a lift from heavy rains in December last year.

Consumers however stand to gain from a Sh4 drop for ever half litre packed of processed milk or a Sh2 price cut for the 250 litres packet.

The new producer pricing structure means farmers will take home between Sh21-Sh22 for every litre of milk delivered down from the current Sh23 per litre.

The variation in price is linked to bulk or small scale production.

KCC said the adjustments are meant to tackle a heavy glut in the milk market and falling demand from export markets in the region.

“The price reviews should encourage consumption and help us manage daily intakes,” said Mr Matu Wamae, New KCC chairman.

The company said it had gone into a rationing mode because its installed processing capacity of over 700 000 litres/per day has been overstretched.

The firm is also struggling to regain its foothold in the lucrative export markets that it lost at the peak of last year’s drought, when it beat all odds to post an impressive Sh500 million profit before tax, helped by increased sales to export markets.

Industry regulator, the Kenya Dairy Board (KDB), says a surge in milk production following the onset of rains last December has overstretched the capacity of all the 33 registered processors.

The situation worsened last week after some of the processors temporarily closed their plants for servicing.

New KCC has been forced to close its plants, in turns, for up to two days each week.

Farmers fear that the pricing outlook for their product could become even more subdued with the onset of the March-May long rains season.

With 40 per cent share of the market, New KCC has been the processor of last resort that has been taking in all the milk its competitors are unable to handle.

The company has an installed capacity of 700,000 litres but on average collects up to 670,000 litres every day.

“Milk output has doubled in the past few weeks from a combined uptake of 700,000 litres per day to over 1.4 million litres for all the processors,” said KDB managing director, Machira Gichohi.

“To prepare for the rains, New KCC has increased the processing capacity by 140,000 litres per day. We have enhanced the processing capacity in Kiganjo factory by 20,000 litres. We are installing an instantiser at our Kiganjo and Eldoret factories to produce instant powder,” said Mr Wamae.

An acute drought prevalent in 2009 that saw reduced production and processed volumes by its plants was soon to be followed by heavy rains in the milk-rich areas.

On Tuesday, however, KDB stated that the producers were obligated to absorb all the milk that is currently being produced.

The directive will again be tested ahead of the expected over production in line with the long rainy season, boosting current production levels.

Brookside collects a slightly lower amount of milk than New KCC and together they account for up to 80 per cent of the market’s processing volumes.

Brookside’s intake has shot up to 600,000 litres per day but the firm had increased its supply of long shelf life products as well working round the clock to absorb the upsurge.

“We have contracts with farmers and we are now working 24 hours,” said Mr John Gethi, the firm’s manager in charge of milk procurement.

On Tuesday farmers who have been incurring huge losses due to lack of market protested at the limited processing capacity in the country.

Mr Joseph Ngera, a large scale farmer based in Nakuru accused the state firm of poor planning .

“New KCC is a farmers’ body and is leading others to reject farmers’ milk. Framers have done their part to produce enough but New KCC was not prepared for the surplus because of poor planning,” he said on phone.

A state-driven project to set up a Sh600 million strategic milk reserve of 2,000 tonnes of powdered milk is yet to begin four years after it was spelt out.

Under the programme, the Government was to buy the milk for strategic reserve, to counter deficits incase of drought.

The reserve was first to be set up in mid 2007 but has all along been constrained by low milk supply.

But Co operatives permanent secretary Seno Nyakenyanya said the current upsurge due to the rains had not been expected and that modalities for setting up the SMR were under way.

Currently, the New KCC—the only processor which dries milk into powder form — says its stocks up powder milk amounting to one million litres and another five million litres of long life shell products.

Officials say it takes up to seven months to build a powder scheme.

The revival and strengthening of the farmers’ cooperative as well as better pricing have influenced the growth of the dairy industry.

“The performance of the dairy sub sector has registered up to 179 per cent over the last four years,” said Mr Gichohi.

Milk production had risen from 2.8 billion litres in 2004 to 3.8 billion litres in 2006.

The price of milk has also shot up to between Sh18 and Sh22 this year from Sh8 and Sh12 in 2003.