Summary
Arla has announced a new partnership for the promotion of local milk production in Nigeria as part of its Milky Way Partnership Nigeria initiative. However the focus on the development of commercially viable local milk supply chains needs to be seen against the background of the serious local constraints on the development of efficient milk-to dairy supply chains in Nigeria and the expansion and changing structure of EU milk powder exports which is delivering low priced milk powders to Nigeria for reconstitution into value added dairy products. The competitive pressure from imported milk powders is only likely to be exacerbated if a no-deal Brexit occurs which would inevitably disrupt existing EU27/UK trade in dairy products. Against this background it is highly unlikely that in the foreseeable future local Nigerian milk production will make any dent in the Nigerian dairy sector’s overwhelming dependence on imported milk powders for its dairy processing activities.
In September 2019 Arla announced a new public-private partnership in Nigeria with the signing of a ‘new Memorandum of Understanding with Kaduna State and the Nigerian government’. Under this partnership ‘the State and the Government will offer 1,000 nomadic dairy farmers permanent farm lands with access to water, with Arla becoming the commercial partner that will purchase, collect, process and bring the local milk to market’. According to press reports ‘the project will primarily be funded by loans provided by the Central Bank of Nigeria and guaranteed by the local state. As the commercial partner, Arla will invest in establishing milk collection centers’ (1).
Population growth in Nigeria, which is one of the highest in the world, is seeing a rapid increase in demand for dairy and other affordable nutrition products. Against this background the new partnership dovetails well with Arla’s business strategy which aims to capitalize on rapidly expanding consumer demand for dairy products in Nigeria. It is argued that through such initiatives Arla is able to meet consumer demand while establishing a better ‘balance between development of the local dairy sector and imported milk and dairy products’ (1).
It is acknowledged that currently local production supplies less than 10% of demand, in a context where demand for dairy products is ‘increasing exponentially as the population grows’. According to Arla representatives ‘with demand for nutritional dairy products increasing amongst Nigeria’s fast-growing population, there is a clear opportunity and need to support the development of the local dairy industry to help meet this demand’ (1).
However it is acknowledged that most milk production in Nigeria is small scale with primitive milking technologies being used (open bowls or buckets) with milk distribution networks being limited due to the high risk of milk spoilage. While Arla’s executive vice president Tim Ørting Jørgensen, argued the new partnership ‘will make a real difference in many farmers’ businesses and lives’, it is acknowledged Arla will only be able to ‘succeed in growing local farmers’ incomes’ if dairy sector development initiatives are commercially viable (1).
It cites the case of the Amana Dairy Cooperative, on the outskirts of Kaduna, which has improved access to water and an installed milking parlor ‘to ensure that the milk is cooled down immediately after milking to preserve quality’. Arla believes that by bringing local milk into the companies’ product portfolio it will be able to ensure long term success for Arla’s business in Nigeria (1).
The new partnership aims to build on collaboration initiated in 2016 with Kaduna State, the Nigerian Government, the NGO Care, the Danish Agricultural and Food Council, the local cooperative MILCOPAL and the Nigerian pastoralist organization Coret. This collaboration focuses on a five year project called the Milky Way Partnership Nigeria (2), to develop a socially, environmentally and economically sustainable dairy value chain (1).
Overall this five year Arla partnership programme aims to support 3 farm pilot clusters and 3 dairies, with the expected impact benefiting 720 farmers in terms of increased income and providing training for 64 dairy professionals. Arla see’s technology transfer as an important part of its investment strategy for dairy sector development in Nigeria (2).
This Milky Way Partnership Nigeria programme needs to be seen alongside Arla’s primary objective of creating a ‘financially sustainable business to the benefit of our farmer owners’ (3). In this context in August 2019 Arla reported ‘a rare stability in an otherwise volatile global dairy market resulting in stable prepaid milk prices to farmer owners across Europe’. This has seen Arla deliver to its farmer owners ‘the highest performance price in three years’. The performance price measures ‘the value Arla creates per kilogram of owner milk’. In the first half of 2019 this reached €0.361/kg compared to €0.347 in the first half of 2018, a 4% increase. This was largely a result of an ongoing cost saving programme which aims to reduce costs by €400 million with 75% of these savings being returned to farmer owners and 25% invested.
While overall revenues grew 2% in the first half of 2018 compared to the corresponding period in 2019, volume growth for branded products in Arla’s International division was 10.2%, with the Middle East North Africa and China being major growth areas for branded product sales. Revenues from ingredients sales meanwhile increased 13.1%, driven by a move into the value added protein segment. Milk powder sales form an integral part of this high growth area of Arla’s sales (4).
| Comment and Analysis
While Arla see’s technology transfer as an important part of its dairy sector investment strategy in Africa, to date Arla’s technological innovation has tended to be concentrated on investment in repacking and reconstituting imported milk powders. This includes the design and deployment of mobile milk powder repackaging facilities complete with their own solar energy systems (‘see companion epamonitoring.net articles ‘Arla’s Senegalese milk powder repackaging plant begins operations’, 23 January 2017 and ‘Arla Plans Expanded Investment in Production of Milk Powder for Export to Africa’, 1 March 2018). Despite Arla’s engagement with a programme which seeks to support the development of 3 local dairy processing establishments, Arla has devoted far less attention to technological innovation to address the sanitary milking, cooling and collection challenges facing small scale milk producers in Nigeria and other West African countries. While Arla is undoubtedly supporting the mobilisation of investment in the development of local milk sourcing these efforts are dwarfed by the scale of milk powder imports from the EU, which since 2014 have been entering the Nigerian market at dramatically reduced prices. From a peak annual average price level in 2014 of €3,122.9/tonne average, annual Skimmed Milk Powder (SMP) prices in 2015, 2016, 2017 and 2018 were respectively 30%, 40%, 33% and 38% below the 2014 average price levels while annual average EU Whole Milk Powder (WMP) prices were 24.6% , 32.7%, 23.8% and 21.7% respectively below the 2014 peak level of €3,785.7 /tonne and Fat Filled Milk Powder (FFMP) average annual prices were 23.8%, 33.5%, 38.9% and 42.7% below the 2014 peak annual average price level of €2,840.6/tonne. EU Milk Powder Exports to Nigeria 2013-2018 (unit value €/t)
Source: EC market Access Data Base, https://madb.europa.eu/madb/statistical_form.htm While specific trends have varied between WMP, SMP and FFMP, taking the annual average of different three year period we find Nigerian imports from the EU rose steadily from the 2007-09 period to the 2013-15 period, before falling back slightly on average across the 2016-2018 period. By the 2016-18 period import volumes were up 52% compared to the 2007-09 period. EU exports of Milk Powders to Nigeria (average tonnes per annum)
Source: EC market Access Data Base, https://madb.europa.eu/madb/statistical_form.ht While across these periods annual average EU exports to Nigeria of WMP fell 41%, this was more than compensated for by the expansion of EU exports of SMP which increased 92% and the dramatic expansion of fat filled milk powder exports which increased 121%. Thus since the 2007-09 period EU exports of fat filled milk powders have come to dominate the EU export trade in milk powders accounting for 64% over the 2016-18 period compared to 44% over the 2007-09 period. This is significant since by 2018 the average price of EU exports of fat filled milk powders to Nigeria was 16% below the price of WMP in 2018 and fully 57% below the price of WMP in 2014 – double the price differential between WMP and FFMP in 2014. This expansion and the changing composition of EU exports of milk powders to Nigeria has greatly enhance the price competitiveness of dairy processing based on imported milk powders compared to local milk sourcing. This can be seen as exacerbating the challenge of ensuring local dairy sector development initiatives are commercially viable (1), a challenge which is already considerable given local patterns of production and existing, logistical and infrastructural challenges. This situation of import dependence is likely to be exacerbated if a no-deal Brexit were to disrupt the EU27/UK dairy trade, with this giving rise to the reintroduction of EU intervention buying and support to private storage programmes in response to the milk market effects of these trade disruptions. Trade disruptions which it is suggested could be three times as severe as those which occurred following the Russian import embargo in August 2014. The milk market crisis triggered by the August 2014 Russian import embargo saw EU SMP interventions stocks reach record level., with these stock level overhanging global milk powder markets for years, with consequent severe effects on global milk powder prices (see companion epamonitoring.net articles, ‘EU Skimmed Milk Powder Stocks Empty, But for How Long?’, 7 October 2019 and ‘Commissioner Hogan Highlights Agri-food Sector No Deal Brexit Preparations’, 12 August 2019) Against this background it looks likely that given the rapid growth in demand for dairy products in Nigeria, Arla will continue for the foreseeable future to increasingly serve this market through the reconstitution of imported milk powders and the progressive expansion of exports of branded products as urban middle class tastes in Nigeria develop. |
Sources:
(1) dairyreporter.com, ‘Arla commits to sustainable dairy sector in Nigeria’, 16 September 2019
https://www.dairyreporter.com/Article/2019/09/16/Arla-commits-to-sustainable-dairy-sector-in-Nigeria
(2) Arla, ‘Goodness comes from within: Arla Foods in Nigeria’, 16 May 2017
https://www.agribusiness-africa.de/fileadmin/user_upload/GAAF_17/Presentation_Arla_GAAF2017.pdf
(3) foodingredientsfirst.com, ‘Arla ramps up sustainable dairy commitment with the Nigeria partnership’, 16 September 2019
https://www.foodingredientsfirst.com/news/arla-ramps-up-sustainable-dairy-commitment-with-new-nigerian-partnership.html
(4) Dairyreporter.com, ‘Arla revenues up’, 29 August 2019
https://www.dairyreporter.com/Article/2019/08/29/Arla-revenues-up
(5) EC market Access Data Base
https://madb.europa.eu/madb/statistical_form.htm