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Kenya's Dairy Sector: No Crisis, No Cash Cow Print E-mail
Tuesday, 23 March 2010
Streams of milk being poured away made for shocking media images, but this is, in fact, not unusual. Rachel Keeler and Paul Agonda analyse why Kenya has limited capacity to absorb the surplus in milk production.

In February 2010, international private equity firm Aureos Capital announced it would invest an undisclosed amount in Kenya’s Brookside Dairy, to fund the acquisition of local competitor Spin Knit Dairy. The deal came amidst a milk glut crisis in Kenya, with media reports on farmers being forced to pour away hundreds of thousands of litres of surplus milk – television images that caused public outrage at a time when many Kenyans grapple with hunger. As another agricultural scandal, the crisis also served as a reminder of the massive maize scandal that plagued the country’s farmers and consumers in 2008 and 2009.

The milk crisis may have less to do with corruption and so have fewer financial implications than the maize debacle, which cost Kenya KES23.4bn (USD300m) in direct loss of public funds alone. But it does highlight some of the difficulties many African countries like Kenya are facing as they attempt to liberalise their agrarian economies and commercialise agricultural production.

Key Producer
Kenya is one of Africa’s leading dairy producers, and the largest consumer of milk on the continent. The dairy industry accounted for 3.5% of Kenya’s GDP in 2007. The industry has been built up since colonial settlers such as the Delamere family dominated it a century ago, with significant leaps in production achieved in the 1970s and 80s through advances in breeding techniques. One reason for the current glut is that over the years, Kenyan dairy farmers have simply gotten very good at producing a lot of milk.  

There are a number of other proximate causes: a combination of drought and post-election violence in 2008 forced many Kenyan maize farmers to convert their land to dairy cow pasture, which is cheaper to maintain. At the same time, however, much of the country’s milk production was disrupted by cattle rustling and violence in the Rift Valley. Many commercial producers were thus unable to fulfill their export contracts in 2008 and 2009. When the rains finally hit this year, grass grew, cows had more to eat, and milk output from all of those new dairy farmers soared, with nowhere to go following soured export relations.

However, the first thing many experts here say when asked about the crisis is: “There is no crisis.” Dr. Nathaniel Makoni, managing director of the American Breeders Society, continues: “What people are reacting to now is nothing out of the ordinary. The crisis has been there, we are just not aware because we haven’t been keeping records.” Milk production levels and prices have always fluctuated greatly along with the annual rains.

Structural Adjustment

This chronic crisis points to deeper problems with the way governance of Kenya’s milk sector has evolved over the past three decades. Kenya’s milk industry was liberalised in the early 1990s, as part of the World Bank’s structural adjustment programmes that were shutting down marketing boards and pushing for the privatisation of agricultural production across Africa. The Bank wanted to cut out as much state influence as possible, to lessen political meddling and reduce market distortions.

Despite what the many critics of structural adjustment might say, the Bank was at least partially on the right track. Parastatals in many sub-Saharan African countries are very much a flashpoint for corruption, and government interference has crippled numerous industries through inefficiency and graft – the maize scandal was a heavy reminder of this. Milk could have easily gone the same way: In the late 90s, then President Daniel arap Moi sold off the Kenya Co-operative Creameries (KCC), the sole processor of milk in the country before liberalisation, for less than a tenth of what it was worth to a group of his cronies. By that time, KCC was also flagging under bad management and financial problems.  

Regulatory Shortcomings and Limited Market
When the new Kibaki government arrived in 2003, it bought KCC back from Moi’s investors, and restored it to parastatal status. But by that time, the liberalised market was experiencing more serious problems. The Bank’s effort to promote efficient privatisation had not also provided for the necessary regulation and planning that the sector would need to flourish. Liberalisation inspired many private processors to enter the market. But they were unable to compete with the huge informal market that cropped up as well.

Before 1992, no one was allowed to sell raw milk in Kenya – everything had to be processed through KCC. But after liberalisation, more farmers began sending their unpasteurized produce straight to consumers at a highly reduced cost. The average Kenyan, who still does not make much money, was happy to pay less. As a result, only 30% of Kenya’s milk is now processed. The government has been attempting for years to bring more farmers back into the formal market. But in the meantime, private processors are finding it hard to invest in the additional processing capacity necessary to produce products like long-life UHT milk or butter and cheese. There simply is not enough domestic demand for these. But without further investment in less perishable products, it will be very hard to counteract glut-scarcity cycles.  

High local costs of electricity and other production and transport costs also make it difficult for Kenyan processors to command many export markets. Regrettably so, given the ability Kenya’s farmers have developed over time to produce – milk should be, pun intended, a cash cow. But only two major processors remain now in the market: the revived KCC and Brookside Dairy.

Brookside: Growth, Expansion – and Elimination of the Competition?
As the Aureos investment attests, Brookside is not doing too badly for itself. It does export to and operate in various countries, including Tanzania, Uganda and Egypt. But some observers question the company’s mode of expansion: Brookside has systematically bought out every one of its major competitors in Kenya over the last several years. Spin Knit was the last to go, with now only KCC remaining as the state-owned buyer of last resort. Unfortunately, capacity has not expanded apace. When KCC had a monopoly on the market in the 1980s, it was processing 3m litres a day. Now, KCC and Brookside together are only processing a little over 1m litres a day.

Francis Karin, senior research assistant at the Tegemeo Institute in Nairobi, says: “As Brookside expanded, the processing capacity has declined.” Karin blames Brookside for closing down competitors’ factories and building an unhealthy and unproductive monopoly in the market. He also blames the Kenya Dairy Board (KDB) for failing to steer the market since liberalisation: “We want to know what KDB is doing as a regulator. Why has capacity shrunk rather than risen on their watch?”

This question becomes even more pertinent when considering the moral hazard presented by the Kenyatta family’s ownership of Brookside. As the Finance Minister, Uhuru Kenyatta is responsible for working with the Co-operatives Ministry and the Ministry of Agriculture to bail the industry out of its current mess, through emergency measures such as releasing - effectively to his family’s firm - funds to buy up excess milk.

Perspectives

Insiders say they do not see any signs yet of another maize-sized corruption scandal. But that does not mean the government is not to blame. A big problem is that there are so many ministries charged with overseeing the milk industry, a legacy of the cabinet expansion forced by the Grand Coalition. And ministers tend to view the parastatals that they lord over as their personal property – a little fiefdom to govern and suck benefits out of. Kenya’s Co-operatives Minister, Joseph Nyaga, seems if anything a bit bored as he has egged on dramatic infighting over the management of KCC. That has made it even more difficult for the co-op to attempt to recover from past managerial problems and expand to offer the production capacity Kenya’s market sorely needs.

At the same time, in a liberalised industry, private producers are the ones who should be driving growth. Makoni says the KDB has been attempting to do its regulatory job and shut down the informal market so that commercial processors can invest and expand. But progress has been stymied as the problem became a social question, of affordability for poor Kenyans and food security. Ultimately, Kenya is now facing both market distortions and failures. Makoni believes that things are getting better, and that with extensive donor support and local technical knowledge, coordination and planning will rise to allow farmers and processors to more effectively tackle the demand-supply mismatch.

But two things are clear: agricultural markets in Africa need a lot of guidance to develop and formalise productively. However, many African governments remain incapable of providing that direction, whether due to a lack of technical capacity or outright corruption. It will take some time yet before coordination and capacity come together to allow countries like Kenya to properly exploit some of their greatest resources.



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