Setting minimum producer prices will help stimulate dairy industry

Agriculture Cabinet Secretary Peter Munya. FILE PHOTO | NMG

By GEORGE WACHIRA
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Summary

• Although there was no compelling regulatory framework, the CS made the “order” to New KCC because it is a state-controlled entity.
• Then the private processors correctly interpreted the ministerial intention and similarly raised farmers producer prices.
• The CS has recently announced that the Kenya Dairy Board will implement new milk regulations that will set and review minimum producer prices every six months.

It is about a year since the Cabinet Secretary for Agriculture Peter Munya stopped imports of milk from neighbouring countries, while simultaneously “ordering” the New KCC to pay a minimum producer price much higher than what processors were paying farmers, which was below Sh30 per kilo. Net prices to farmers immediately approached Sh40, a trend that has been sustained to date.

Although there was no compelling regulatory framework, the CS made the “order” to New KCC because it is a state-controlled entity. Then the private processors correctly interpreted the ministerial intention and similarly raised farmers producer prices. The CS has recently announced that the Kenya Dairy Board will implement new milk regulations that will set and review minimum producer prices every six months. A welcome step that will protect farmers with the consequence of stimulating national milk production.

Yes, Kenya is a free market economy, but there is nothing heretical in setting minimum producer prices if the economic powers of various milk value chain players are unequal. Market competition by processors at the retail level has traditionally benefitted consumers to the detriment of producers (farmers).

Adverse processor costs, like bad debts from collapsing supermarket giants, may have been “passed back” to farmers to maintain processor profitability and market shares, as various milk brands continued to compete and undercut each other at the retail shelves. Indeed, dairy farmers have no organised voice to influence their economic destiny and making regulatory intervention quite welcome.

Talking of free markets and price regulation, I remember in 2010 when the then minister in charge of petroleum, Kiraitu Murungi was at pains to explain to consumers why he could not regulate petroleum retail prices to reign in oil companies which, in the absence of effective consumer protection and competition regulation, were “passing through” unjustified costs to consumers.

The minister finally introduced price controls to protect consumers, as the IMF strongly criticised the action as not in keeping with free market practices. Free markets usually work well only when competition is perfect and fair to all stakeholders.

In respect of milk imports from our neighbours, situations of supply glut had developed in Kenya with the farmers shouldering the burden of reduced producer prices. The neighbouring countries usually seek protection from EAC trade protocols, which for Kenya appear to favour manufactured exports as exports of agricultural products into EAC are much less.

The routine milk gluts caused by seasonal production variations have always been accommodated, albeit with farmers bearing the penalties, while sparing processors and consumers, a factor that should be corrected by the coming regulations.

Kenya Dairy Board half yearly milk producer price reviews should be “cost plus” based to reflect changes in critical cost drivers. It is then that the regulator with come face to face with the reality of runaway costs of quality dairy feeds, a large fraction of milk production costs. It is usually the high cost of daily meals that makes Kenya milk uncompetitive with our neighbors whose unit costs are much lower.

Main inputs of animal feeds manufacture (maize, soya, sunflower, cotton seed, fishmeal etc) are usually imported from the neighbouring countries. And there is no justifiable reason why Kenya cannot produce most of these inputs. The CS may need to configure a separate study on how to achieve animal feeds inputs self-sufficiency, which will equally benefit pork and poultry livestock sub-sectors.

And talking of minimum producer prices, the same should be replicated for maize farmers with a price formula that considers variations in critical cost inputs. Consumer and producer protection should be addressed concurrently for sustainable food security with minimum imports.

Further for both milk and maize, we should go beyond minimum producer prices protection and help farmers to significantly adopt new technologies and practices to increase quality yields and reduce unit costs.

Motivating farmers with sufficient producer revenues is important to grow the dairy sector. It is indeed possible to make Kenya a net exporter of not only milk products but also critical feeds inputs.

I need to declare my interest in the subject of setting fair milk producer prices. I have been in dairy farming since 1990s.