Another 20th century innovation that made dairy more widely accessible was ultra-high temperature (UHT) processing. Pioneered in the 1960s, the UHT process exposes milk to temperatures of at least 280°F (138°C) for two to four seconds, killing all potential bacteria. Milk that has undergone UHT processing has a shelf-life of six to nine months and does not require refrigeration. This is compared to pasteurized milk, which expires within two weeks of processing, even when refrigerated. The high temperatures of the UHT process caramelize the milk sugars, leading to a final product that is slightly sweeter. This difference in taste has deterred some, while the lack of refrigeration necessary for the product made some consumers, particularly in the United States, suspicious of UHT milk. However, UHT milk is hugely popular in Europe, as well as in developing countries where refrigeration may be limited.
Even with these technological advances, almost all fluid milk is consumed or processed within the country of production. Outside of the European Union (EU) and countries involved in NAFTA—where markets are integrated and logistics are highly advanced—only 0.1 percent of fluid milk, UHT or otherwise, ever crosses a national border. Dairy products can therefore be classified into two main categories: nontradable fluid (e.g. liquid milk), and tradable manufactured products (e.g. butter/ghee, cheese, and milk powder).
In 2013, about $84.5 billion worth of dairy products were traded around the world. The most significant of these were cheese and concentrated milk with trade values of $32 billion and $24 billion, respectively. New Zealand and Germany currently dominate the global milk production market. However, growing demand in many parts of the world means that more and more countries are hoping to start or ramp up their own dairy export capacities. If these nascent export industries are going to earn a place on the global stage, they will have to improve a number of aspects of their dairy value chains.
In the dairy industry, the largest producers are not necessarily the largest traders. For example, India produces 140 million tonnes annually—more than any other country—yet only exports 170,500 tonnes of dairy product. Exports are valued around $540 million, ranking the country 23rd in the world for export value. The US is the second largest producer, ranking fifth in trade value; while New Zealand, which produces less than 15 percent of the milk of India and about 20 percent of that of the US, is the world’s largest dairy exporter.
By weight, New Zealand trades 31 times the dairy product of India, and 2.8 times that of the US. In terms of the milk solids contained in traded dairy products, New Zealand accounts for over 25 percent of all international dairy trade. Germany, however, is and has historically been the top dairy export earner in the world, earning $11.2 billion in 2014. Most German dairy exports are cheese, which is of higher value than New Zealand’s top dairy export, whole milk powder. This is the smallest gap that has ever existed between German and New Zealand exports. If current production and export trends continue, New Zealand will take the top spot soon.
The large contrasts between production and trade can mainly be attributed to the difference in local demand versus production, and to varying levels of development and commercialization within each country’s dairy industry. India, for example, has on average 1.5 milking cows per farm, versus 160 in the US and 393 in New Zealand.
In addition to the equipment needed to process milk into tradable goods, smart, strategic investment is essential at every stage of the value chain in order to optimize production. The first investment decision is often one of the most important: choosing the type of dairy animal. Different breeds of cattle can have varying abilities to produce milk. India, for example, is unusual in that 55 percent of its milk is produced from buffalo; globally, less than 20 percent of milk comes from non-cow sources. India is responsible for 63 percent of global buffalo milk production.
Indian milk production
Although Indian milk production is not yet optimal, the country’s dairy industry has seen a notable renaissance over the past 45 years. This revitalization has been led and inspired by Amul, the Gujarat-based dairy cooperative. Amul was founded in 1946 in protest against milk cartels, offering efficient, direct linkages between milk producers and consumers by eliminating middlemen. The cooperative offers producers control over the procurement, processing, and marketing of their milk, while also offering farmers support and access to transport.
The results of this concerted effort to revolutionize Indian milk production have been staggering. Production grew from 20.8 million tonnes in 1970 to 140 million tonnes by 2014. Consumption of the nutritious drink has also increased substantially, from an average of 23.2 kilograms per capita per year in 1970 to 49.6 in 2011.
New Zealand milk production
New Zealand is well positioned to meet the growing global demand for dairy. The world’s top dairy exporter has been exporting milk products since 1846, and has developed a highly efficient industry.
Roughly 40,000 people are employed in the dairy industry that harvests from 4 million head of cows. The cows graze on 1.7 million hectares of the country’s total 12 million hectares of pasture land. From these animals New Zealand produces 21.7 million tonnes of fluid milk, a figure which is expected to increase to 22.1 million in 2015.
New Zealand’s dairy industry is structured for maximum export potential. About 95 percent of its milk is processed for export, and dairy exports account for 30 percent of New Zealand’s total merchandise earnings. Approximately 49 percent of New Zealand’s milk is processed into whole milk powder (WMP). The country is the top trader of this product, accounting for 54 percent of all international trade. WMP is milk that has been dehydrated into powder, making it ideal for transport. Once WMP has reached its destination it can be reconstituted into whole milk and then further processed into UHT milk or other products.
New Zealand dairy farmers have benefited hugely from focusing on exporting products. Regional demand for milk products is relatively stagnant, but demand from the developing world is growing quickly. Returns from exporting dairy goods is high, especially over long distances, making exporting very enticing.
Dairy farming has become three times more profitable per hectare than other domestic livestock industries, and New Zealand farmers receive some of the highest prices for their goods anywhere in the world. The average producer milk price in 2013 for New Zealand was $60.41/100 kilograms compared to $38.21 in India, or $44.09 in the US.
New Zealand’s dairy industry success is not without risks. Reliance on foreign markets may be profitable, but it can also be volatile. The price for dairy products, particularly WMP, on international markets fell by nearly half through 2014, and New Zealand farmers are feeling the pain. In the season ending May 2014, farmers received an average of NZ$8.40/kilogram of milk solids compared to expected 2015 earnings of NZ$5.30/kilogram. At these rates, close to 25 percent of farmers will be unable to cover their operational and financial costs.
The Ugandan story
Most countries are not as fortunate as New Zealand to have the ability to export 95 percent of their total milk produced, usually due to greater domestic demand or inefficient industries. Most countries in Africa, for example, run significant dairy production deficits. Algeria is the world’s second largest importer of concentrated milk, spending over $1 billion annually. In fact, only two countries on the continent consistently see net positive dairy income: Uganda and South Africa. In 2013, Uganda earned a positive dairy trade balance of $21 million, and South Africa $128 million. Uganda has overcome significant obstacles to achieve its current status as a dairy exporter. In the 1980s, much of Uganda was struggling with severe instability due to a guerilla war. As a result the milk collected by the country’s parastatal Dairy Corporation, which served as the country’s central processor, fell from 19 million liters per year in the 1970s to just 200,000 liters in 1986. By 1991, the Dairy Corporation was able to revive collections back to 18 million liters. However, these collections still represented a small fraction of total national production.
Uganda’s transformation into a net dairy exporter began in the early 1990s when the milk sector was selected for inclusion in the government’s broad plan for market liberalization. Slowly, the government’s exclusive role in the formal milk industry was reduced, and private investment was encouraged in the processing and marketing of dairy products. The major event in the liberalization process came in 2001 when the market was completely privatized and the national Dairy Corporation was transferred to Sameer Agricultural Livestock Limited (SALL).
Since liberalization policies came into effect, Uganda has seen tremendous milk production growth. In 1990, the country produced 460 million liters compared to current figures of 1.4 billion liters. Per capita consumption also grew over the same period, from 16 liters in 1986 to 58 liters in 2010. Uganda began earning a positive dairy trade balance starting in 2009, and has increased this balance every year since, rising from $3.1 million that year to $21 million in 2013. Almost all of Uganda’s exports, which are mostly of UHT milk, are concentrated with its immediate neighbors Kenya, Rwanda, Tanzania, Democratic Republic of the Congo (DRC), and Sudan.
Private companies, cooperatives, and non-governmental organizations (NGOs) are all now significant players in the flow of inputs to farmers. The introduction of higher-milk-producing, exotic cattle breeds such as Holstein-Friesians has been a significant driver of growth. Between 1990-2000, the increase in milk production was in line with the increase in the number of cattle. After 2001, milk production far outpaced the increase in the number of cattle, as better cow breeds became more common. In 2006, exotic cows or cows crossbred with exotic cows accounted for 14 percent of Uganda’s eight million dairy cattle. By 2010, this share had risen to 21 percent of 8.18 million head of cattle.
While investment from the private sector has increased, it is still far below the needs of the industry. Farmers constantly complain about the low prices they are receiving, which prevent them from obtaining quality inputs or adopting improved farming methods. Some attribute these low prices to SALL’s virtual monopoly over the dairy industry. When SALL acquired the Dairy Corporation in 2001, it gained control of nearly the entire formal dairy industry, and it still dominates 78 percent of the formal raw milk marketing channel. Farmers claim that SALL pays them what the company chooses, whereas SALL argues its prices reflect market realities. Meanwhile other processors see SALL’s dominance as a disincentive or deterrent to further investment in industry infrastructure.
Although SALL might be the dominant force in the formal market, it is small in the wider context of Ugandan milk. The formal sector only accounts for 20 percent of all dairy production. The remaining 80 percent of production is split evenly between milk that is consumed on farm and that which enters the informal market, representing massive untapped potential. Currently, only 8 percent of dairy farmers are able to receive loans from commercial banks, and the transport of warm milk to processors causes huge post-milking losses.
The variance in farm gate prices around the country highlights the depth and significance that infrastructural challenges pose to Ugandan farmers. There are 700,000 dairy farming households across Uganda, but production is highly regionalized. The Western Region is responsible for 51 percent of milk production, with Central, Northern, and Eastern Regions covering 34, eight, and seven percent, respectively. Due to poor integration, prices in Western Ugandan markets can be less than a quarter of what milk fetches in Northern market towns.
While Uganda’s formal dairy sector may be monopolized like that of New Zealand, it is far from reaching the efficiency levels of the latter’s dairy powerhouse. The majority of milk production is ripe for incorporation into the formal sector. Both farmers and processors alike would benefit from a partnership that would bring financing and infrastructure to producers.
To truly expand upon its successes and become a major dairy exporter, Uganda will need to diversify its selection of processed products. Unlike most exporting countries, Uganda’s most significant export products are milk and creams that have not been concentrated or sweetened. These products have the shortest shelf-lives, are the most cumbersome to transport, and offer lower margins than items such as butter, ghee, and cheese. Uganda must aggressively invest in processed products more conducive to international trade.
The Ugandan example is a particularly interesting one compared to neighboring big dairy player Kenya because it is being set up and expanded mainly as an export industry. Ugandan domestic milk demand is limited, unlike that of Kenya. Domestic milk demand in Kenya is largely driven by its urban population, implying that if rural incomes increase, or urban populations grow—both of which are likely—milk demand should grow as well. The Kenyan dairy industry must satiate significant and likely growing domestic demand before considering exports. Uganda, on the other hand, is already well poised to be a global exporter.
Across the border from Uganda lies Kenya, one of the top milk producers in Africa. The country boasts one of the highest per capita milk consumption rates in the developing world. Kenyans consume on average 100 kilograms of milk each year from an annual production of 4.7 billion liters. These figures dwarf those of Uganda, which are only 58 liters per person per year. This consumption difference helps to explain why Kenya’s dairy industry has not been able to consistently log a positive dairy trade balance for several decades. In 2013, Kenya had a dairy trade deficit of $12.1 million. Despite these differences between the two neighboring countries, the status of their dairy industries is otherwise quite similar.
Until 1992 the Kenya Creameries Corporation (KCC) monopolized the Kenyan milk processing industry. But that year, the government began liberalizing the industry in the hopes of repairing it. Under the KCC, Kenya lost its status as a dairy exporter, a position which the country had held throughout the 1970s. KCC couldn’t survive the newly competitive environment, and was dissolved by the mid-1990s.
Since liberalization, milk production has increased from roughly 1.99 million tonnes in 1992 to 2.89 million in 2002, and 3.73 million in 2012. Like the growth in Uganda, much of Kenya’s growth has been driven by the informal sector. According to 2011 estimates, only nine to 14 percent of total milk produced ever reaches a processor; 85 percent of all marketed milk is sold in its raw, unpasteurized state. The formal market is made up primarily of 30 processors and milk marketers who process 500 million of the nearly 5 billion liters produced nationwide.
Kenya’s dairy industry generates roughly $2 billion annually, contributing 4 percent to the country’s total gross domestic product (GDP). With so much money being generated in the dairy industry—especially one that is still largely informal—a growing number of foreign and domestic investors have shown interest in getting a piece of the action.
There are currently between 4.2 million and 6.7 million dairy cattle in Kenya, and about half of these cows are either purebred high producing varieties (mainly Friesian, followed by Ayrshire, Jersey, and Guernsey) or cross-breeds with such varieties. Despite the presence of such high milk-producing cows, overall milk productivity remains limited and far below that of producers in other regions like Europe. Recognizing this gap in production potential, some players in the market are developing innovative methods to boost milk yields. Indicus East Africa, for example, will start Africa’s first embryo transport laboratory, which will fertilize low milk producing cattle with the embryos of high-yielding Ayrshire cows which have been fertilized with imported semen. Indicus plans to fertilize 1,000 cows within the first year of operation.
Kenyan dairy producers still face challenges beyond access to the highest-producing cattle breeds, especially challenges associated with small-scale production. Producers do not take advantage of economies of scale. They experience seasonal fluctuations in production, a lack of access to quality feed and veterinary services, inadequate infrastructure, and the failure of farmers to form powerful or effective cooperative organizations.
Although it may take some time before New Zealand’s dairy farmers are able to achieve the profits they enjoyed in 2013, their position in the international market is strong, and global market conditions are set to improve moderately this year.
While the world’s largest dairy exporter waits for its market to improve, Uganda has the opportunity to develop a bigger name for itself globally. The country has been able to earn a trade surplus of $21 million from dairy products, and yet it has only tapped into 20 percent of national milk production. Uganda has been able to take advantage of the rising demand coming from its immediate neighbors for dairy products, largely by exporting fluid milk to them.
Any new entrants to international dairy trade will be facing significant competition starting at the end of this month, as the EU is abandoning its 30-year-old milk quota system on March 31, 2015. In early-1980s Europe there was a dairy glut, placing the EU in a difficult position, as it had pledged to buy dairy at fixed prices. They introduced a cap on production in 1984, which is now being lifted so that EU farmers will have the opportunity to take advantage of growing dairy demand, particularly from Asia.
If Uganda’s milk processors were to diversify the products they made, then lucrative markets further away would become available to them. Egypt, for example, imports over $325 million of concentrated milk each year. Since both countries are members of the Common Market for Eastern and Southern Africa (COMESA), Egypt would be an ideal destination for Ugandan dairy. But the country will likely be facing stiff competition from Kenya, and increasingly the EU. Uganda will have to act quickly to compete successfully.