High prices hurt earnings of local milk processors

• The quantity of milk consumed reduced from 259 million tonnes in the first half of 2011 to 212 million tonnes in 2012 as prices scaled up, industry data from the Kenya Dairy Board shows.
• The drop came in the wake of the tight milk supply occasioned by a cold season that reduced output while simultaneously increasing the cost of feeds.
• The shortage forced processors to cut their export sales to supply local market, which further reduced total sales.
• Processors every year find themselves in a tight spot when consumption drops due to high prices while during high supply and low rates, use of the product does not rise in tandem
• Processors link the high cost of transport to fuel prices that in the six months increased to a record high of more than Sh120 a litre of petrol.

Milk processors are warning of a drop in earnings this year after consumption fell by 18 per cent in the first half of the year due to short supply amid a sharp rise in transport costs.

The quantity of milk consumed reduced from 259 million tonnes in the first half of 2011 to 212 million tonnes in 2012 as prices scaled up, industry data from the Kenya Dairy Board shows.

Producers raised prices from an average of Sh35 early in the year to more than Sh45 for the 500ml packet, putting off many consumers.

Chairman of New KCC Matu Wamae said that earnings of most milk processors will be affected, revealing that the parastatal’s sales went down significantly this year.

“It is very unlikely that the price increases implemented by milk producers could have cushioned them since volumes dropped by large margins,” said Mr Wamae.

The drop came in the wake of the tight milk supply occasioned by a cold season that reduced output while simultaneously increasing the cost of feeds.

“We increased the price we pay to our farmers from Sh30 a litre to Sh40 to ensure that they get back the cost of production,” said John Gethi, the marketing manager of Brookside Dairy Ltd.

The shortage forced processors to cut their export sales to supply local market, which further reduced total sales.

Most of the milk producers did not cut other costs despite the long duration of wet spell, said Mr Wamae.

KCC and Brookside were paying farmers up to Sh35 a litre in June compared to Sh30 early in the year to retain suppliers.

The volatile milk prices have been wreaking havoc on the bottom lines of the dairies as the cost of producing a litre at the farm level is estimated to be Sh20.

New KCC saw its profits drop by 85 per cent in 2010 after prices plunged following a milk glut occasioned by limited capacity to store powder milk.

The State firm is the only one with the capacity in East Africa to keep milk in powder form.

Processors every year find themselves in a tight spot when consumption drops due to high prices while during high supply and low rates, use of the product does not rise in tandem.

Every year, the industry grapples with milk shortage during the dry season and a glut that leads to losses when rains resume.