Summary
Royal FrieslandCampina has announced a new €23 million investment in developing milk-to-dairy supply chains in Nigeria. However it is unclear how much of this €23 million is linked to factory improvements to process locally sourced milk and how much targets the processing of imported milk powders. A revival of SMP prices to the December 2013 highs would appear necessary to provide a commercially significant stimulus to local milk production in Nigeria. This is likely to require the removal of production distorting EU farm supports, which stimulate EU milk production despite the production costs of most EU milk producers exceeding the revenue gained from milk sales. Since such an EU policy shift is highly unlikely, the Nigerian government may need to consider the introduction of a carefully manged dairy sector trade policy which links import licences to investments in the gradual expansion of local milk production serving local milk-to-dairy supply chains. This would need to be designed and implemented in close consultation with dairy sector stakeholders. However it is unclear whether the implementation of such a carefully managed trade regime would be possible in a country as large and politically complex as Nigeria.
In September 2018 Royal FrieslandCampina (RFC) ‘announced it will invest €23m ($26.6m) in local milk production as part of its Dairy Development Programme (DDP) in Nigeria’. The investment expanded the companies ‘evaporated milk and ready-to-drink milk factory in order to provide fresh milk for the Nigerian consumer’ (1).
It is unclear how much of this investment is devoted to the expansion of FCW factory operations linked to creating a market for expanded local milk production and how much is linked to an expansion of production based on imported milk powders. Prior to the most recent announcement investments had focused on ‘improving operational efficiency by procuring two new sterilizers, a conveyer, two high speed sachet filling machines with improved technology and a dust extraction system to optimize safety in the powder plant’ (3).
The local subsidiary FrieslandCampinaWAMCO (FCW) plans to extend its existing Dairy Development Programme to other states in the Nigerian Federation. Currently FCW works with ‘3,500 dairy farmers in over 90 farming communities in Oyo State’ and plans to ‘transform additional 500 pastoralists to settled dairy farmers under the DDP model’ (1). Under the DDP ‘four model farms with crossbreed cows have been established to improve local milk collection across its five milk collection centres’ (2).
RFC’s DDP model is applied in a range of developing countries with a focus on ‘sharing knowledge and training with farmers in a way that improves the farming infrastructure for everybody’ (2).
These developments need to be seen against the background of the recent record levels of EU Skimmed Milk Powder (SMP) exports in 2017 (781,000 tonnes, +34.9% over 2016 levels) This expansion of EU exports occurred as part of a sustained effort to clear accumulated EU intervention stocks of SMP. This growth in EU SMP exports is however beginning to slow down, with SMP exports from January to August 2018 down 1% on the corresponding period in 2017 (4). Exports of EU Whole Milk Powder (WMP) are also slowing down (15% over the January to August period)
EU SMP and WMP exports to Nigeria however were down 13% and 27% respectively over the January to August 2018 period, following a 32.2% increase in SMP exports and a 26% increase in WMP exports in 2017.
In 2017 the main exporters of SMP to Nigeria were the Netherlands (28.4%), Belgium (25.5%) and Ireland (23.2%), with the Netherlands dominating the EU exports of WMP with 68.9% of total EU WMP exports (4). This needs to be seen against the backdrop of a serious fire at FCW’s facility which disrupted factory operations (5)
With regard to the global SMP market Ecolait has highlighted how a two tier market for fresh and intervention SMP had emerged. It noted ‘record SMP trade volumes and EU exports on the back of low prices’, but that ‘public stocks are decreasing and prices are almost back to the intervention level’. It felt that for the EU ‘maintaining current export volumes will be challenging’ (6).
According to EC sources SMP stocks would be down 19% in 2018 compared to 2017 from 451,000 tonnes to 366,000 tonnes, of which 211,000 tones would be in intervention and 155,000 in private stocks, with public stock being down 44% and private stocks being up 107% (6)
More specifically according to the EC Milk Market Observatory ‘a gradual decrease of total SMP stocks’ held in the EU is underway, ‘with some public stocks passing through private ones before finding their ultimate user’. Public intervention stocks of SMP had fallen to 282,000 tonnes by the end of August 2018 with an expectation stock levels would reach 245,000 tonnes by the end of September (6). While the first half of 2018 saw lower levels of EU SMP exports both ‘EU and world SMP exports recovered in July after 2 months of contraction’. Significantly since the end of 2017 EU SMP prices have been around 5% lower than Oceania prices (6), reflecting the discounted rates offered for intervention stocks whose shelf life is now limited. This has been a factor in encouraging the uptake of EU SMP exports.
This needs to be seen against the background of accusations from the US Dairy Export Council (USDEC) that the EU was the main source of surplus milk on the global market throughout 2017. The USDEC has been arguing ‘world dairy demand can only support milk production growth from the major exporters of about 1.5% a year’. However in the second half of 2017 ‘the growth rate from the EU28, United States, New Zealand, Australia and Argentina was about double that’, with ‘nearly all the surplus growth’ coming from the EU (7).
In early 2018 the USDEC was arguing the EU will need to find ‘creative measures’ if it is to dispose of its accumulated SMP stocks, without disrupting global markets. Ironically these remarks were made at a time when the US itself was ‘sitting on record powder inventories that continue to grow’ (150,000 tonnes in February 2018, with these being up 47% on the previous year) (7).
Prices of SMP on the Global Dairy Trade auction site on 3 January 2017 were $2,660/tonne with this falling 37% over the course of the year to $1,675/tonne at the 19th December 2017 auction. Some price recovery subsequently occurred over the course of 2018, with prices rising 16.4% from 2 January to 16th October (from $1,699/tonnes to $1,977/tonne). However this needs to set in the context of the five year high attained on 17 December 2013 of $4,868/tonne (8).
In less than 5 years, while there have been ups and down in price developments, SMP prices have lost almost 60% of their value. This has completely transformed the economics of local milk procurement for dairy manufacturing in Nigeria.
| Comment and Analysis
It is argued EU intervention policies have a played a unique role in depressing global SMP prices, as vast stocks of publicly held SMP have continued to overhang the global market. While these stocks are coming down they are still projected to be almost twice the level of the earlier pre-crisis EU SMP intervention buying ceiling. This decline in stocks has occurred against the background of record EU milk powder exports in 2017, with Nigerian imports of SMP having increased nearly a 1/3 in 2017. Accumulated EU stocks, which pass through private sector companies as part of the disposal process, are being sold at a discount on already depressed global SMP prices. In this context the commercial context if far from favourable to the development of local milk production in countries such as Nigeria. Global SMP prices would need to recover to the levels prevailing in December 2013 to make the kind of investment RFC is making in the development of milk supplies in Nigeria commercially viable. Such a price rise however is likely to require the resurrection of the EU ceiling on SMP purchases into intervention stocks, as a signal to EU milk producers of the need to exercise more discipline and restraint in the level of milk produced. This would appear to be a logical step for EU farmers given the consistent losses being made by EU milk producers in terms of production costs versus milk sales revenues. A recent survey presented to the EC Milk Market Observatory showed average production costs over the past five years in the six EU countries surveyed of 41 to 46 cents per litre, while milk prices averaged between 32 and a maximum of 35 cents per litre (9). In this context the continued expansion of EU milk production is only made possible by the high levels of coupled and decoupled financial support received by EU milk producers (see companion epamonitoring.net article, ‘The June 2018 CAP Reforms: Part 2 – Importance of CAP Instruments to EU Agriculture and Issues Arising for the ACP’, 13 September 2018). In this context the high profile announcement of investments by RFC in developing milk supply chains in Nigeria may well be more an effort to demonstrate good corporate citizenship rather than a sign of a serious intent to develop local milk-to-dairy supply chains in Nigeria. This being stated the RFC approach could be laying the foundations for the future expansion of local milk production given the emphasis on improving knowledge and training of farmers to enhance the efficiency of milk production. However for this expansion to take place in the medium term (within the next ten years) one of two thing would be necessary: a) the EU would need to review its system of both coupled and decoupled direct aid payments to EU milk producers so that EU milk production and prices better reflected the balance between production costs and sales revenues from milk – (a development which is highly unlikely to occur); b) the Nigerian government were to pursue a carefully managed trade regime for dairy products (particularly SMP WMP and FFMP), which linked import licences to the progressive expansion of fresh milk production in Nigeria and the development of local milk-to-dairy supply chains. This progressive expansion of local milk procurement requirements would need to start from a realistic base and would need to take place gradually. Such moves would need to be designed and implemented in close consultation with all dairy sector stakeholders in order to ensure the proper sequencing of production development and the application of trade measures, if unnecessary consumer shortages and price rises are to be avoided. While this measures carefully manged approach to using trade policy tools to promote local production expansion has been successfully deployed elsewhere in Africa in other sectors (see companion epamonitoring.net article ‘Namibia’s Retail Sector Charter and the Strengthening of Local Supply Chains’, 24 March 2017) it remains an open question as to whether such an approach could be successfully implemented in a country as large and politically complex as Nigeria. |
Source:
(1) Dairyreporter.com, ‘FrieslandCampina to invest €23m in Nigerian milk production’, 10 September 10-Sep-2018
https://www.dairyreporter.com/Article/2018/09/10/FrieslandCampina-to-invest-23m-in-Nigerian-milk-production
(2) foodbev.com, ‘FrieslandCampina set to invest 23m euros in Nigeria factory’ 10 September 2018
https://www.foodbev.com/news/frieslandcampina-set-to-invest-e23m-in-its-nigerian-business/
(3) Dairyreporter.com, ‘FrieslandCampina WAMCO increase turnover as profits drop 20.6%, 21 May 2018
https://www.dairyreporter.com/Article/2018/05/21/FrieslandCampina-WAMCO-increases-turnover-as-profits-drop-20.6
(4) EC, ‘EU Dairy Exports to Third countries (January-August)’ 11 October 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/eu-extra-trade_en.pdf
(5)nairametrics.com, ‘FrieslandCampina WAMCO attributes 2017 drop in profit to fire incident at its factory’, 19 May 2018
https://nairametrics.com/frieslandcampina-wamco-attributes-2017-drop-in-profit-to-fire-incident-at-its-facto/
(6) MMO, MMO Economic Board, Meeting of 25 September 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/reports/2018-09-25-report_en.pdf
(7) milkbusiness.com, ‘EU Surplus Driving Global Markets’, 16 February 2018
https://www.milkbusiness.com/article/eu-surplus-driving-global-markets
(8) Global Dairy Trade, Skimmed Milk Powder
https://www.globaldairytrade.info/en/product-results/skim-milk-powder/
(9) dairyreporter.com, ‘Milk cost study shows gap between production costs and milk prices’, 17 October 2018
https://www.dairyreporter.com/Article/2018/10/17/Milk-cost-study-shows-gap-between-production-costs-and-producer-prices