Figure 4-9 – Prices and margins and the role of the VC - BDDC

Capacity and processing

The processing facility would have a capacity of 20,000 litres per day, producing UHT milk in consumer packs. This level of production has been identified as it:

> Provides good economies of scale; > Can be supported by existing supplies, representing less than 10% of current production; > Provides a substantial secure local offtake for farmers (equal to around half of the marketed milk volumes); > Will find a ready market: this volume is equal to only 10% of current UHT imports from Uganda.

The milk processing plant would focus on the production of UHT milk in consumer packs with the basic processing steps being:

> Milk reception; > Filtering and chilling; > Testing; > Processing:

> Heat treatment: 135oC for up to 2 seconds > Cooling > Packing

> Storage; and > Distribution.

The key equipment in the milk processing facility will include:

> Filtering and heat treatment with a capacity of 5,000 litres per hour; > Cold storage for 50 tonnes of milk; and > Packaging line for milk (into 0.5 and 1 litre Tetra Pak cartons or similar). Prices and margins

Margins in the dairy sector are generally tight. This reflects the competing pressures between processors and retailers selling a competitive staple product, and small-scale farmers with relatively high cost-base once transport costs are included.

The large milk processing and packaging companies generally set the price paid for raw milk. The current purchase price (delivered to the processors) is around KES 45 per litre, up from KES 33 per litre in 2020.

The cost of milk production has been estimated at between KES 23 and KES 28 per litre for an average smallholder either using zero grazing or semi-zero grazing set up46 .

Milk delivery costs (farm to cooling station) vary by location, averaging KES 4 per litre in Bungoma47 . Gross margins to farmers are then around KES 13 to KES 18 per litre. A key role of the BDDC and this VC is to support improvements in livestock and management (feed and supplements), as well as improve collection services, to improve these margins (see Figure 4-9).

Processing costs for UHT are around KES 18 per litre, with a further KES 10 per litre for packaging. With a target sales prices of KES 80 per litre, the processing margin is around KES 7 per litre.

Figure 4-9 - Prices and margins and the role of the VC - BDDC

Source: SUED Atkins Team

46 Tegemeo Institute of Agricultural Policy and Development, Egerton University, Report on a study on cost of milk production in Kenya (2021). Available at: https://www.kdb.go.ke/wpcontent/uploads/2021/06/Cost-of-milk-production-report..pdf, (Accessed: 18/02/2022). 47 Stakeholder Workshop 24/01/2022.

Demand Outlook

The main market for this VC would be Bungoma County and wider Kenyan market, which is reportedly the largest market for milk on the continent. Kenya’s annual milk production is around 5.2 billion litres and growing, though it does not meet national demand, and there is an annual deficit around several hundred million litres which is met by imports48. The outlook is for domestic demand to continue to grow by 5% or more per year in the medium term49 .

The key output from this VC would be UHT milk in consumer packs, and demand growth for UHT milk products is similar to the overall market, with 4.8% annual growth forecast to 202650 .

The shortfall in milk supplies in Kenya is met mainly through imports of UHT milk from Uganda. Imports from Uganda have risen sharply in recent years from 15.7 million litres in 2016 to nearly 150 million litres in 201951. Imports dropped in 2020 (to 72 million litres) due to COVID-19, but they are expected to bounce back to their pre-pandemic level.

The processing facility in this VC would then be seeking to replace some of those imports from Uganda. Supply chain and markets

The processing facility would source milk from the existing collection centres and coolers operated by the milk cooperatives. The VC would also seek to upgrade the collection networks between farmers and milk collection centres and increase overall efficiency, through improved scheduling and monitoring of collections, correct handling operations along the supply chain (e.g. use of coolers, training, use of milk churns), fair pricing and timely payments to all stakeholders (farmers, boda boda riders and other collectors, etc.), and investment in additional transport, coolers, filters, etc., where required.

Location-specific Analysis

Bungoma County Government have completed the construction of a factory shell for milk processing in Webuye. The site has good road access for bringing in milk from the cooling centres in the County.

The facility now needs to be kitted out, and some adjustments may be required to process the target volumes and support the activities of the BDDC. 4.2.4.2 Indicative Costs and Revenues Investment

The total investment required (Capex) is estimated at around KES 200 million. This estimate is based on using the Webuye factory shell, with some allowance for modifications if required.

Around half of this total is for machinery and vehicles, and around a third is for working capital. The remainder covers marketing and initial training for the processing facility, plus the activities of the BDDC.

Operating costs

Total operating costs are expected to approach KES 500 million per year at full capacity, with a large share of this (around KES 350 million) being spent on milk purchases.

A conservative approach to estimating Opex has been taken, leaving scope for reductions:

> Transport costs (estimated at KES 20 million per year) are based on dispatch of finished product to Nairobi by road.

There is potential to reduce these costs through targeting nearer markets (Kisumu) or using rail freight services. > Packaging costs are based on Tetra Pak or similar cartons, costed at KES 10 per litre. This could be reduced to KES 1 to 2 per litre with polyethylene bags.

48 FAO, Primary Livestock Dataset (2020). Available at: http://www.fao. org/faostat/en/#data/QL/metadata, (Accessed: 18/02/2022). 49 Food Business Africa, The dairy industry in Kenya: production capabilities, investment, innovations and trends (2020). Available at: https://www. foodbusinessafrica.com/the-dairy-industry-in-kenya-production-capabilitiesinvestments-innovations-and-trends/, (Accessed: 18/02/2022). 50 Mordor Intelligence, Middle East and Africa UHT milk market-growth, trends, COVID-19 impact, and forecasts (2022 – 2027) (2022). Available at: https://www.mordorintelligence. com/industry-reports/middle-east-and-africa-uht-milk-market, (Accessed: 18/02/2022). 51 UN Comtrade Database (2022), Available at: https:// comtrade.un.org/data/, (Accessed: 18/02/2022).