Thursday, November 02, 2017 

Milk prices drop by 250% in Ugnada action needed to curb Crisis

Rinus van Klinken SNV Dairy Project Manager

Dairy farmers in southwest Uganda have gone through turbulent times. From ticks developing resistance to acaricides to prolonged droughts, both of which have led to significant loss of cattle. Just when things were starting to stabilise the price of milk dropped from 1,250 UGX per litre in August to 600 UGX in October. Not surprisingly, the farmers are confused and angry. But who (or what) is to blame for the 250% drop in milk prices within a period of two months?

That is an important question for all parties in the dairy sector. It is worth noting that price fluctuations in dairy is not something new to farmers, especially for farmers in the South West where most of the marketable milk comes from.  In the dry season when milk production is low, prices are high, and in the wet season when production is high, prices are low. However, since the beginning of this year prices stayed uncharacteristically high during the March – May rainy season. This was in part due to the uneven distribution of rain which suppressed uniform production across the region. However a more significant factor for the high prices was right next door - the Kenyan market. Kenya experienced severe drought, which subsequently affected dairy production. Dairy processors in Uganda increased their exports to Kenya, sustaining (relatively) high prices for dairy farmers in southwest Uganda. During the July-August dry season, production plummeted but the demand in Kenya for milk remained high due to the prolonged drought. Prices reached unprecedented high levels, exceeding UGX 1,200 per litre. 

Then two things happened. Rains in Southwest Uganda led to increased production and demand from Kenya dropped completely. The obvious conclusion would be that with the coming of the rains in Uganda, Kenya received rainfall as well which led to a sudden increase in dairy production. While this is true, it was not the primary reason but a political one. The government of Kenya took the unprecedented step of unilaterally allowing the importation of milk powder from the world market. In a gazette notice, milk processors were exempted from paying duty on imported milk powder until 31 July, 2017 (which was later extended till the end of 2017). What is interesting to note is the contradiction of this seemingly unilateral decision by the Kenyan government.  against tThe East African Community has a common external tariff barrier of 60 % on all imported dairy products from the world market  that is members states are supposed to adhere to. Furthermore Yet, there seems to be no public record of any consultations between the Kenyan and Ugandan government prior to the lifting of this barrier. What is certain is that with the lifting of the tariff barrier by the Kenyan government the Uganda dairy sector lost a key market in Kenya and paving way for the world market as the main export outlet where dairy prices are suppressed and dairy farmers cannot compete favourably. Already dairy processors are pushing prices down to as low as UGX 600 per litre (and could even go lower) in order to maintain margins and to maximise profits during the season of plenty.

With the current market price of 600 UGX per litre, no dairy farmers will be able to proceed with the commercialisation drive that for the last 6 monthsrecently has been on the increase in southwestern Uganda. Processors in turn will not be able to reach their production targets, the economy will miss out at an important foreign currency earning opportunity and government will miss out on crucial tax earnings.

Farmers are now pressurising the government to intervene. The easiest target for the government are the processors. By simply raising their price, dairy processors could solve the problem. But whether it is as simple as that, is an open question.

One factor that cannot be overlooked is the fact that Uganda is no longer an island when it comes to milk. Whereas for years Ugandan exports of dairy products were negligible, in the last few years there has been an exponential growth in dairy exports, initially mainly to Kenya, but increasingly to other parts of the world. Any discussion on milk prices has to take this into account, especially in the southwest where farmers have felt the fluctuations most and where (not co-incidentally) most milk is being exported from. The milk price movements since the beginning of this year illustrates this point. 

An additional point that makes a discussion of milk prices difficult is that prices are not uniform across the country and the sector. The dairy sector is weakly organised, with relations between actors more often characterised by antagonism rather than collaboration. There is little loyalty between buyers and sellers, and accusations and suspicions abound. Dairy processors are accused of exploitation and collusion. Dairy cooperatives are seen as corrupt and regard traders as arch enemies. The regulator, Dairy Development Authority while , is respected in the industry , but is unable to create cohesion in such a contentious market. This makes developing the sector a difficult undertaking., but also has a direct impact on prices. With market relations characterised by opportunism, farmers exploit their position during the dry season (when production is low), while processors exploit their position during the wet season when milk supply is ith high supplies.  And most tTraders on the other hand try and maximise their middlemaen position throughout the seasons. So, farmers opt to adulterating their milk with water during periods of low supply (giving processors little chance to reject the milk, as they don’t have a choice) in order to maximise their income. by adulterating their milk with water during periods of low supply (giving processors little chance to reject the milk, as they don’t have a choice), while processors maximise their profits during the period of high supplies, when they can afford to be selective.

Both parties loose out in this arrangement, though farmers are worst off. Because not all farmers benefit equally from (high) prices. 

There are many hurdles between the price, as declared by the processor, and the price that the farmer receives at the farm gate. In addition to having to pay for transport and chilling, farmers also pay for the operational costs of the cooperative societies that are bulking the milk or the profit for the traders, if supplying to traders. These costs at the moment are extra high in the Ssouthwest, as many cooperative societies are paying off loans incurred in the purchase of milk coolers. For those farmers that are located far from a milk cooler, or where the relationship with the cooperative society is weak, vendors or transporters may levy additional costs. These steps and hurdles in the value chain create the situation that there are large differences between what farmers are earning from their milk. With a declared factory price of UGX 600 per litre, some farmers may be getting UGX 500 at the farm gate, while others at the end of the chain may be only earning UGX 300 per litre! 

The government needs to be concerned about the current dairy prices. The current prices are a disincentive for farmers to invest, which impedes development in the dairy sector.  Whether processors should really take the blame for the imperfections in the dairy value chain as well as the inaction of government with respect to the milk imports of Kenya is not really the main  issue. Action is required, but it needs to be more holistic than a simple blame game. There are plenty of studies worldwide, demonstrating convincingly that for a sector to develop, value chain actors need to cooperate, rather than see each other as enemies. The government can facilitate that process.


The writer is the SNV Dairy Project Manager 

By Rinus van Klinken , Thursday, November 02nd, 2017