Nigeria is a large importer of dairy products, in particular milk powder. It is a well-known reality that it is almost impossible to compete on price in Africa with milk powder imported from countries that have climates favourable to dairy, such as most of North Western Europe. The Central Bank of Nigeria is now making active steps toward import substitution. Importers of milk powder and other dairy products need to develop local production and sourcing in order to keep an import license, and in the future import, quotas may be linked to domestic production levels. A similar strategy was implemented a number of years back in the rice sector and has contributed to the rapid growth of domestic rice production.
The importer in question had been supporting a local dairy project for a while in central Nigeria. A system was developed where herdsmen concentrate their lactating cows at central hubs where good grazing and food can be provided. Milk is sold to a local processor who mainly produced drinking yoghurt. In addition, it had plans to participate in the development of a dairy project where nomadic herdsmen would re-settle on a piece of land surrounding a dairy plant, and each given animals to start off with.
Sense was contracted by IFC to provide solid advice on which projects should be supported, and provide clear recommendations for these projects.
Even though it will probably not be possible to compete on price with imported drinking yoghurt, or drinking yoghurts made from imported milk powder, we do need to find out if the activity itself is still profitable. If production is not profitable, the activity will still fail to take off even if imports are banned. We agree that an importer could choose to cross-subside this activity in order to continue importing, but there would be no incentive to scale the business and reach meaningful impact because each litre of milk collected would increase losses. Market research was the first step in this analysis.
Using our network we organised a number of expert interviews with former managers of large dairy companies active in Nigeria. Furthermore, we looked for trade data and trends in Nigeria and other African countries. Finally, market information was obtained via the local dairy company, and through in store visits.
Based on this market research it became clear that the major growth market in Nigeria and most of Sub Saharan Africa is flavoured drinking yoghurt. A large part of the African population is lactose intolerant and therefore can only consume fermented dairy products. We managed to establish the pricing at the wholesale and retail level, the major competitors and their market share.
Production system analysis
A field visit to the project site of the existing project enabled us to get a good understanding of the current production systems as well as the economy of production and processing. It became immediately clear that the productivity of the Nigerian sector is at a very low level, even when compared to other countries such as Zambia, Tanzania and Senegal that have a long way to go themselves in dairy development.
For example, a key challenge is the availability of improved dairy genetics. Usually, African countries require a cross breed of local breeds with high performing dairy cows to produce hardy disease resistant animals that produce more milk than traditional cows. Furthermore, there is a need for improved production systems such as grazing on improved grasses, rainfed and irrigated silage production. Finally, there is a large need for technical training of farmers.
We also analysed the design of the resettlement project, focusing particularly on potential risks and governance issues.
The first question we tried to answer is if drinking yoghurt production is profitable in Nigeria when sourcing milk at the current farm gate price in the project. We built a business model in our Sense Analyser of a processing plan. For this, we used the wholesale prices obtained through market research, the distribution and marketing cost that typically apply to perishable Fast Moving Consumer Goods marketing in Africa, the processing cost provided as well as our own knowledge of the economics of dairy processing. This model clearly showed that drinking yoghurt production was a profitable business, provided a certain minimum scale can be obtained.
The second question we now needed to answer was whether the current farm gate price for milk allows for profitable dairy farming. The team calculated the profitability of dairy farming in a more optimised system using hybrid cows in a modern farming system based largely on a diet of maize silage and concentrate. We used the calculations made in Senegal and adapted them to the local context. We analysed two scenarios: (1) farm making their own silage (2) the farm purchases silage from independent farmers who need a 30% profit margin. The business model showed again that farming in this optimised system was profitable even when silage needs to be purchased from independent farmers.
The final conclusion was that an economically sustainable value chain can be developed wherein local farmers supply a private drinking yoghurt plant.
We finally advised IFC to support the existing dairy project, focused on drinking yoghurt. We proposed a list of potential interventions and the outline of a project. However, we advised against the resettlement project in its current design, because of the large risks involved. We identified those risks and proposed a re-design of the project.
Project: Evaluation of local dairy development in Nigeria
The challenge: Developing local dairy production