Price incentives to milk producers: a case of Uganda

Annuciate Nakiganda, Ahmed Mohamed³, Stephen Ojangole¹ and Robert Kaukha²

National Livestock Resources Research Institute (NaLIRRI), P O Box 96 Tororo, Uganda
aknakiganda@yahoo.co.uk
¹ National Agricultural Research Organization (NARO)
² Ministry of Agriculture Animal Industry and Fisheries (MAAIF)
³ Food and Agriculture Organization (FAO)

Abstract

Milk is an important source of nutrition and the dairy sub sector is an important driver of food security for Uganda. Driven largely by the dairy, the livestock sector has maintained a positive growth rates averaging 3% per annum. Most of the sector is informal with 90% of the milk marketed through this channel. Uganda’s annual average consumption per capita is 58 litres, far below the 200litres per capita consumption recommended by the World Health Organization. Despite the dramatic increase in the quantity and value of milk and dairy products exported by Uganda, trade intensity was still very small (less than 1 percent). The study aimed to measure, analyze and interpret price incentives for milk in Uganda over the period 2005-2013. Yearly averages of domestic farm gate and wholesale prices were compared with reference prices calculated on the basis of the price of the commodity in the international market. The price gaps between reference prices and domestic prices along the commodity’s value chain indicated the extent to which incentives (positive gaps) or disincentives (negative gaps) were present at the farm gate and wholesale level. The price gaps were expressed in relative terms as a percentage of the reference price, referred to as the Nominal Rate of Protection (NRP). These key indicators were used to assess the effects of policy and market performance on prices. It was revealed that the dairy processors often sold processed milk at wholesale price below the reference prices resulting in negative price and negative nominal rate of protection. The farm gate indicators suggested that milk producers received substantial price disincentives over the period analysed. For instance, producer price of fresh milk was below the adjusted reference price for the entire period of 2005-2013 and above the observed reference price for only 2007. This was mainly due to the inefficient value chain, the competition for consumers between formal and informal markets and the monopsony tendencies by large processors. It was recommended that government provide an enabling policy framework to formalize the informal sector, reduce the size of the informal sector and ensure reasonable and stable farm gate prices to sustain milk production, and consumer prices that ensure affordable consumption of quality milk.

Key words: dairy value chain, farm gate, marketing, processing, wholesale

Introduction

Uganda has a cattle population of 11.4 million and of these 17.3% are exotic or crosses (UBOS 2009). The number of milking cattle is 7.5 million of which 6.3 are indigenous and 1.2 million are exotic and cross breeds (UBOS 2009). Dairy is a very important sector which contributes 9% of total agriculture GDP and 3% to the total GDP (DDA 2008). The dairy industry contributes more than 50% of the total output from the livestock sub-sector. Due to its contribution to daily income of the farm household, milk is regarded as the most economic and beneficial commodity for small scale producers (Mbowa, Shinyekwa and Lwanga 2012). As such, dairy was one of the 10 commodity areas identified within the Development Strategy and Investment Plan 2010-2015 (DSIP) - government’s strategic blue print for accelerated development of the Agricultural sector.

Currently, Uganda produces 1.9 billion litres of milk (Tugume and Nakawesi 2013). The dairy sector has continued to grow at an average rate of 8-10% per annum over the last 10 years (DDA 2008). The steady growth is attributed to the favourable macroeconomic environment, policy and institutional reforms as well as specific interventions by government to promote development of the sector.

Despite the perceived importance of the dairy sector, accurate data on dairy in Uganda is difficult to obtain. Most of the sector is informal and 90% of the sold milk goes through informal channel while only 10% milk goes through the formal milk marketing channel. Milk price at farm gate in Uganda is very sensitive to both seasonality (dry/wet season) and geographical area. For example, in Kampala during the dry season farm gate milk price can go up to USh2000 (US$ 0.571) per litre, while in Rushere in the wet season a litre of milk costs about USh250 (US$ 0.0714). The study aimed to measure, analyze and interpret price incentives for milk in Uganda over the period 2005-2013. The analysis was based on available data from secondary sources and primary data collected from various sources including DDA, the private dairy industry and experts through personal communication.

Milk production

Figure 1. Distribution of milk production by milk shed Source: DDA 2008

Cattle concentration is more in Western region (31% ca), Central region (29% ca), Eastern region (23%) and Northern region about (18% ca) (EADD 2008). Milk production also follows the same pattern. The South west milk shed produces the highest milk (25%) followed by Central region 24%. , Eastern, Midwest, Northern and Karamoja respectively produce 21%, 12%, 11% and 7% of total milk produced in Uganda.

Milk production was low and stable from 2005 to 2009 from this year on wards milk increased tremendously. This was attributed to increased productivity per cow due to increased numbers of improved breeds kept by farmers mainly in south western and central regions.

Figure 2. Milk Production trends in Uganda Source: Nakiganda et al 2014, UBOS 2013

Dairy value chain

The milk market in Uganda has gradually undergone transformation from a government controlled marketing system to a more competitive sector in which private traders and processors play an increasingly active role (Mbowa, Shinyekwa and Lwanga 2012), giving rise to the existing value chain. EADD (2008) described the dairy value chain in Uganda (Figure 3).The fresh milk is distributed through two channels: the formal (10%) and informal (90%) channels. Formal milk market is defined as milk processed by a registered processor (15 in Uganda).

Figure 3. Dairy value chain; source: EADD 2008

The informal market comprises both direct sales by producers to consumers in the neighbourhood of their farms and sales to traders, vendors and associations that transport milk to local urban markets (Mbowa, Shinyekwa and Lwanga 2012).The value chain of both informal and formal market is fragmented with many players at each step, and low level of vertical integration, with rare exceptions (EADD 2008). In the formal value chain, the milk is first transported to primary collection centres and to chilling and bulking centres before being delivered to a processing facility. Once milk is processed, agents or distributors deliver it to a point of sale. The informal market connects producers to consumers normally via a number of hawkers/brokers. Given the remoteness of most of the producers and the poor state of infrastructure, first transportation is usually by bike or on foot.

Pricing

Milk takes various routes from producers to the end consumer. At the producers’ level, regional milk markets are not well integrated. Consequently, farm gate milk prices are perpetually low in the milk surplus Western region and high in the milk deficit regions (Eastern and Northern). For example, SALL sets periodic low milk prices and milk purchase quotas during peak season, a practice widely construed as monopoly tendencies by dairy farmers in the Western region. The low farm gate price offered to farmers especially during the peak season in relation to the increasing prices of imported inputs (e.g. veterinary drugs and acaricides) is a big source of instability in the milk surplus South-Western region (Mbowa, Shinyekwa and Lwanga 2012). Because of wide fluctuations by season and particularities of individual locations, the price to the end consumer in the informal market can vary widely (from USh250 (US$ 0.0714 up to USh2000 (US$ 0.571 per litre). The price to the end consumer in the formal market is flat across regions and seasons (USh 3000 (US$ 0.857) per litre).

According to EADD (2008), processing cost is estimated at US $0.22 per litre which is shown to be in line with international benchmarks (US $ 0.20 in USA and US $0.21 in Kenya). According to the same study, the average profit margin for a Ugandan processor is estimated at 22% of operation costs (compared to only 10% in Kenya). Though the cost structure of dairy processing and the sale prices of processed products are very similar in Kenya and Uganda, the profit margin is higher in Uganda due to the lower milk purchasing price in Uganda.

Milk consumption in Uganda

Uganda’s annual average consumption per capita is 58 litres (Mbowa, Shinyekwa and Lwanga, 2012) which is far below the 200litres consumption per capita recommended by the World Health Organization. However, overall milk consumption is growing at an average rate estimated at 8% per annum (DDA 2008). Since 2001, milk consumption in Uganda increased steadily to more than double by 2011 according to Agriterra (2012).

Marketing and trade

According to Balikowa (2011), 70% of the total milk produced is marketed and 30% remains and consumed at the farm. The western region is the main source of marketable milk followed by the central region.

A number of dairy products are imported into Uganda and these include: long life milk products, cheese, infant milk products and yoghurt and with exception of infant milk products, the rest of the products have local substitutes (Agriterra 2012). Approximately 50% of imports come from Kenya.

UHT is exported to regional markets, including Rwanda, Kenya, Tanzania, DR Congo, Southern Sudan and Mauritius (DDA 2008). Milk powder is exported to Mauritius, Syria, Egypt and Ghee is exported to India (DDA 2012).

Figure 4. MilkTrade Balance in Uganda 2005-2013 Source: Nakiganda et al 2014, UBOS 2014

The total quantity of milk and milk products imported has been declining progressively since 2003 (DDA 2008). For example in 2012, milk imports decreased to UShs 3.7 billion from shs 5.2 billion in 2011 (Tugume and Nakawesi 2013).

The value of exports remained lower than that of imports until 2008 when a new milk powder plant (SALL) started production and export of milk powder. After installation of the milk powder plant in 2008, the company commenced production and export of SMP and whole milk powder to many African countries and the Middle East (Balikowa 2011). This led to a dramatic increase in the quantity and value of milk and dairy products exported by Uganda. Export revenue increased from US$ 0.306 million in 2004 to an estimated US $ 5 million in 2008, effectively surpassing the value of dairy imports for the same year. Currently, Uganda is a net exporter of milk, although the trade intensity is still very small (less than 1 percent).

Policy environment

The dairy sector in Uganda has undergone significant policy reforms since 1990s. Liberalization and exchange rate adjustments were key elements of the government’s economic reforms to stimulate agricultural production (MAAIF 1993).

Dairy Master Plan was prepared and adopted in 1993. There are three key recommendations in the master plan: i) Liberalization of the dairy industry, ii) Restructuring and privatization of the government owned dairy processing company, Dairy Corporation (DC) and iii) Establishment of a Dairy Board to take over the development and regulatory functions of the former Dairy Corporation (DDA 2008).

The Authority is currently implementing the Dairy (Marketing of Milk and Milk Products) Regulations (2003).

Dairy Corporation Limited (DCL) was privatized in August 2006. The new operator is SAMEER Agriculture and Livestock Limited (DDA 2008). According to EADD (2008), SAMEER is a dominant player in the processing industry with installed capacity of 550,000 litres and biggest fleet of transportation tankers and milk collection centres and commands 30% value of processed milk. SAMEER as a result influence all the activity in the market particularly the retail price and the farm gate prices (Agriterra 2012).

Uganda is a member of two important regional economic blocks, namely East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA). Members of the EAC signed a Customs Union Protocol which allows them to trade with each other on favourable terms aiming at eliminating both tariff and non-tariff barriers particularly for locally produced goods. Under this arrangement, Ugandan milk is exported to Kenya and Tanzania tariff free and the reverse is true (DDA 2008).

At an international level, Uganda has tariff free access to the European Community market as well as favourable access to the American market through the African Growth and Opportunities Act (AGOA) (Agriterra 2012).

Methodology

The study started by reviewing literature of milk value chain analysed in recent years, consulting published data from government sources e.g. (Ministry of Agriculutre, Animal Industry and Fisheries (MAAIF), Uganda Bureau of Statistics (UBOS)), commodity authorities and organizations (Dairy Development Authority (DDA), National Livestock Resources Research Institute (NaLIRRI)), Private sector (Dairy processors) and United Nations Trade database (UN COMTRADE)

The study measured price incentives for milk producers and other marketing agents in the milk value chain. The analysis was based on the comparison between observed domestic prices and constructed reference prices. Reference prices were calculated from the international price of the product at the country’s border, where the product enters the country (if imported) or exits the country (if exported). This price was considered the benchmark price free of influence from domestic policies and markets. The study estimated two types of reference prices – observed and adjusted. Observed reference prices are those that producers and other marketing agents could receive if the effects of distortions from domestic market and trade policies, as well as overall market performance, were removed. Adjusted reference prices are the same as observed reference prices, but also exclude the effects of any additional distortions from domestic exchange rate policies, structural inefficiencies in the commodity’s value chain, and imperfect functioning and non-competitive pricing in international markets.

The price incentives analysis was based on the law of one price, which is the economic theory that there is only one prevailing price for each product in a perfectly competitive market. This law only applies in the case of homogeneous goods, if information is correct and free, and if transaction costs are zero. Thus, this analysis was conducted for goods that are either perfectly homogeneous or perfect substitutes in the local market in terms of quality, or, failing that, are simply comparable goods. Indicators calculated from reference and domestic prices would, therefore, reveal whether domestic prices represent support (incentives) or a tax (disincentives) to various agents in the value chain.

Domestic prices were compared to reference prices at two specific locations along commodity value chains – the farm gate (usually the main production area for the product) and the point of competition (usually the main wholesale market where the domestic product competes with the internationally traded product).

Milk being an exported commodity, the border is generally considered the point of competition (wholesale), and the unit value FOB price for the commodity was taken as the benchmark price. Furthermore, observed and adjusted reference prices at wholesale were obtained by subtracting, the access costs between the border and wholesale. Mathematically, the equations for calculating the observed reference prices at wholesale  (RP_owh )   and farm gate (RP_ofg )  for an exported commodity are as follows:

RP _owh = P_b – AC _owh

RP _ofg = RP _owh –AC _ofg

Where AC _{o w h} are the observed access costs from the wholesale to border, including handling costs at the border, transport costs from whole sale market to the border, profit margins and all observed taxes and levies, except tariffs, and P_b is the benchmark price. AC_{o f g} are the observed access costs from the farm gate to wholesale, including handling costs at the farm, transport costs from farm to wholesale market, processing, profit margins and all observed taxes and levies.

After observed and adjusted reference prices were calculated for the commodity, they were subtracted from the domestic prices at each point in the value chain to obtain the observed and adjusted price gaps at wholesale and farm gate. Observed price gaps captured the effect of distortions from trade and market policies directly influencing the price of the commodity in domestic markets (e.g. price ceilings and tariffs), as well as overall market performance. Adjusted price gaps captured the same as the observed, in addition to the effect of any distortions from domestic exchange rate policies, structural inefficiencies in the commodity’s value chain, and imperfect functioning and non-competitive pricing in international markets. Mathematically, the equations for calculating the observed price gaps at wholesale (PG_owh ) and farm gate  (PG_ofg ) are as follows:

PG_owh = P_wh - RP _owh

P_ofg = P_fg - RP_ofg

Where P_fg is the domestic price at farm gate,RP_ofg is the observed reference price at farm gate, P_owh  is the domestic price at wholesale, and RP_owh  is the observed reference price at wholesale.

A positive price gap, resulting when the domestic price exceeds the reference price, means that the policy environment and market functioning as a whole generate incentives (support) to producers or wholesalers. On the other hand, if the reference price exceeds the domestic price, resulting in a negative price gap, this means that the policy environment and market functioning as a whole generate disincentives (taxes) to producers or wholesalers.

In general, price gaps provide an absolute measure of the market price incentives (or disincentives) that producers and wholesalers face. Therefore, price gaps at wholesale and farm gate were divided by their corresponding reference price and expressed as a ratio, referred to as the Nominal Rate of Protection (NRP), which can be compared between years, commodities, and countries.

The Observed Nominal Rates of Protection at the farm gate ( NRP _ofg)

and whole sale (NRP _owh) are defined by the following equations:

Where  PG_ofg  is the observed price gap at farm gate,   RP_ofg  s the observed reference price at the farm gate,  PG_owh is the observed price gap at wholesale and  RP _owh  is the observed reference price at wholesale.

Similarly, the Adjusted Nominal Rates of Protection at the farm gate ( NRP_afg)  and wholesale ( NRP_awh)   were defined by the following equations:

 Where  PG_afg  is the adjusted price gap at farm gate,  RP_afg   is the adjusted reference price at the farm gate, PG_awh  is the adjusted price gap at wholesale and   RP_awh  is the adjusted reference price at wholesale.

Results and discussions

Producer Price and Reference price at farm gate

Figure 5. Producer price and reference price at farm gate

Reference price at farm gate was the price the farmer would get in an efficient market for example the market without distortions. The price of milk in the world market (reference price) was varying a lot and was above the producer’s price except in 2007 when it went down and this was when there was violence after elections in Kenya. The area between the reference price at farm gate and producer’s price was a price gap.

Price gap

The price gaps between reference prices and producers’ prices indicate the extent to which incentives (positive gaps) or disincentives (negative gaps) were present at the farm gate level. The price gaps are expressed in relative terms as a percentage of the reference price, referred to as the Nominal Rate of Protection (NRP). The nominal rate of protection at farm gate was negative for all the study period (figure 6)

Figure 6. Nominal rate of protection

Both exporters and producers were selling at prices below the prices of the milk at the international market. This was mainly because of the competition for consumers between the formal and informal milk market domestically and the monopsony tendencies by large processors. The informal market took over 90% of total marketed milk. Also the poor roads and market infrastructure contributed to the high marketing costs of milk and milk products which lowered producers’ prices and hence the disincentives to the dairy farmers. In addition, inefficiencies in the value chain, excessive profit margins which accumulated from the traders, processors and wholesale markets contributed to the disincentives to the milk producers

This market development gap could also be attributed to asymmetry of market information between dairy producers and wholesalers on one side and between wholesalers and processors/ exporters on the other side. There was poor market information flow between wholesalers and the dairy producers

Conclusions

• Producer price disincentives in the milk market in Uganda were high and persistent which was caused by the low prices offered to producers.
  
  
• The main drivers of the price disincentives were structural related to marketing power in the hands of milk formal and informal traders and the inefficient value chain with too many vertically disintegrated actors and intermediaries.
  
  
• While milk processors were selling at wholesale prices often below the reference price, they were still maintaining a profit higher than the international benchmark and in neighbouring countries.
  
  
• This resulted in stagnant and low producer price and rising wholesale prices.

Recommendations

• It was recommended that the Uganda government provide an enabling policy framework to formalize the informal sector, reduce the size of the informal sector and ensure reasonable and stable farm gate prices to sustain milk production, and consumer prices that ensure affordable consumption of quality milk.
  
  
• Government should empower farmers to add value on their milk, by mobilizing them into groups and give them financial support in addition to improving roads and market infrastructure

Acknowledgement

This paper is a product of the research conducted under the Program Monitoring African Food and Agricultural Policies (MAFAP)

We acknowledge organizations which participated in implementation of this study namely Food and Agriculture Organization of the United Nations (FAO) in collaboration with the Organization for Economic Co-operation and Development (OECD), National Agricultural Research Organization (NARO) and the Ministry of Agriculture Animal Industry and Fisheries (MAAIF). We are grateful for the financial support from the Bill and Melinda Gates Foundation, the United States Agency for International Development (USAID) and FAO.

References

Agriterra 2012 Identification of Livestock investment Opportunities in Uganda: Final Report 2012. Arnhem, Netherlands, 2012.

Balikowa D 2011 A Review of Uganda’s Dairy Industry. TechnoServe /East Africa Dairy Development Project (EADD). http://www.fao.org/docrep/017/aq292e/aq292e00.pdf.

Daily Monitor 2013 Uganda’s Dairy Exports Revenue Grow to Shs 30 Billion. A report by Tugume J and Nakawesi D in Daily Monitor, March 27, 2013.

Dairy development Authority 2008 Overview of the Status of Uganda’s Dairy Industry: Dairy Development Authority, Kampala. February 2008

East African Dairy Development Program (EADD) 2008 The Dairy Value chain in Uganda. A report by TechnoServe Uganda for theEast Africa Dairy Development Program.

Ministry of Agriculture Animal Industry and Fisheries (MAAIF) 1993 Master Plan for the Dairy Sector, Vol II, Main Report. Ministry of Agriculture, Animal Industry and Fisheries. Entebbe, Uganda.

Mbowa S, Shinyekwa I and Lwanga M M 2012 Dairy Sector Reforms and Transformations in Uganda since the 1990s. EPRC Research Report No. 4

Nakiganda A, Mohamed A, Ojangole S and Kaukha R 2014 Analysis of price incentives for milk in Uganda. Technical notes series, MAFAP, FAO, Rome.

Uganda Bureau of statistics 2009 Population and Household Census. UBOS, Kampala, Uganda.

Uganda Bureau of Statistics 2013 Statistical Abstract. UBOS, Kampala, Uganda.

Uganda Bureau of Statistics 2014 Statistical Abstract. UBOS, Kampala, Uganda.

United Nations Trade data base UNCOMTRADE 2014

Received 31 December 2016; Accepted 1 March 2017; Published 1 April 2017

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