Relief for consumers as milk prices fall

A shopper at a Nyeri supermarket recently. Key retailers cut the price of 500ml packet of milk to Sh45 from a high of Sh60 in some outlets. FILE  NATION MEDIA GROUP

By Gerald Andae

In Summary

• When the levy on processed milk was introduced on September 2, prices jumped from Sh45 to Sh55 per 500ml sachet.
• A spot check by the Business Daily on Thursday revealed that Nakumatt, Uchumi and Tuskys supermarkets had reduced their prices by Sh10 for 500ml milk in pouched packaging.

Milk prices have finally dropped back to last month’s levels, sending a sigh of relief to consumers who were grappling with the high cost of the commodity following confusion over its value added tax (VAT) status.

When the levy on processed milk was introduced on September 2, prices jumped from Sh45 to Sh55 per 500ml sachet.

The Kenya Revenue Authority (KRA), however, clarified on Tuesday that packaged milk was exempted because it had only been treated (pasteurised) to increase its shelf life without significant value addition.

Traders had by Wednesday not responded to the clarification, prompting the taxman to announce that the prices should be reviewed downwards immediately. On Thursday, key retailers reduced the price of a 500ml packet of to Sh45.

A spot check by the Business Daily on Thursday revealed that Nakumatt, Uchumi and Tuskys supermarkets had reduced their prices by Sh10 for 500ml milk in pouched packaging while the same quantity on tetra pack packaging was selling at Sh50 from Sh60.

Processors had accused the retailers of not reducing the prices immediately after the notice. A marketing officer at Githunguri Dairies, who sought anonymity, said they had reduced their wholesale price of 500ml milk to Sh39 and retailers should sell the milk to consumers at Sh43.

Buzeki dairies, reduced their wholesale price from Sh52 to Sh41 and that the retailers must henceforth sell to consumers at Sh45. 

However, consumers may not be out of the woods yet because of rising costs of producing milk at the farm level.

According to the Kenya Dairy Board the cost of producing a litre of milk went up to Sh35 from Sh26 after the enactment of the VAT Act 2013.

“The cost of production is currently high. This implies that farmers who are keeping their cows under the zero-grazing system may have to abandon it to avoid making losses,” says Buzeki managing director Kiprotich Bundotich.  

The price of the 70kg bag of high yield dairy meal is retailing at Sh3,000 from Sh2,650 after it was removed from the zero-rated category meaning producers cannot claim back taxation costs. A 50kg bag of ordinary meal costs Sh1,550 from a low of Sh1,275.

“Charging VAT on the input and exempting it on output definitely means that dairy farmers will have to incur additional cost in production and they are likely to make losses or cut down on expenditure, hence a decline in production,” said Nikhil Hira, a tax expert with Deloitte & Touche. 

In the event that processors who dictate the price of milk increase producers prices, in order to cushion farmers from losses, there would be upward pressure for the consumer price to go up again.

“If processors decide to pay farmers a little bit higher, then we expect the consumer price to go up,” Mr Hira said.

The Kenya Dairy Producers Association said the only way to keep prices stable was for the government to zero-rate inputs.