State buying milk is not a viable solution

Over the last few months, Kenya seems to have opened an unnecessary trade hostility with its biggest trading partner in the region, Uganda, over an issue that appears to be smoke and mirrors. Kenya began confiscating a Uganda-made milk product known as “Lato Milk”, with the Directorate of Criminal Investigations branding the products as counterfeit.

But according to the Ugandan government, the seizure is illegal because the products being branded as counterfeit had passed all the relevant clearance to enter the Kenyan market.

The product secured clearance from the Kenya Dairy Board, Kenya Revenue Authority, Kenya Bureau of Standards, Port Health Services to even the Ministry of Agriculture. So, what exactly is going on?

What makes this trade hostilities more curious - there is more than meets the eye, is the Kenyan government confiscating this product out of the market by branding it as counterfeit.

Counterfeit generally means that the product is an imitation of an original one. But the company exporting the product to Kenya is the registered owner of the milk product and is distributing it to warehouses owned by authorised dealers.

So how can the owner of a product distribute counterfeit goods, which means an imitation of the original product. It is clear that the Kenyan government simply wanted to erect non-tarrif trade barriers to the Uganda product but came up with the wrong excuse.

The government should not forget that erecting non-tariff barriers will lead to an equal response by the other trading partner, so chances are that Uganda will retaliate by blocking some Kenyan products and trade hostilities is a zero-sum game that no one wins.

So, who’s bidding is the Kenya government doing because its not for the dairy farmers.

Still sticking to the dairy industry, last week the President gave a directive that Sh500 million be immediately be released to New KCC so it can start buying milk from farmers at Sh33 per litre.

The economic question is does this intervention address the main problem in the dairy sector? Does it mean farmers will be enjoying favourable prices?

First, its estimated that 80 percent of the milk in Kenya is produced by small holder dairy farmers.

Now from the farm moving to the markets, 70 percent of total milk marketed in Kenya is controlled by the informal milk market by mobile milk traders, bar vendors and milk transporters.

Therefore, this policy intervention will benefit the middlemen more than farmers because it comes at the end of the supply-chain of marketed milk.

Second, New KCC buying milk at Sh33 with a budget of Sh550 million means it will be buying around 16 million litres. Now, Kenya uses 50 million litres of milk every month but there has been a glut leading to 65 million, this means the intervention of buying 16 million litres is a month response.

So, there will still be a milk glut affecting prices even after New KCC buys Sh550 million worth of milk in the market.

What would have been the most favourable policy intervention if the government was targeting improving margins of farmers to target cost of production where high cost of feeds accounts for more than 40 percent of direct variable costs to farmers.

The government would have responded better, which it can still do, by incentivising manufacturing of high quality feeds that have higher nutrients which would mean high returns at a low cost for farmers through or tax exempts to raw materials used in manufacturing feeds, and also VAT exemption to the final product.