Watch and listen: building a dairy industry from the ground up in Kenya
Private companies and family farms have embarked on a massive dairy development drive in the highlands of Kenya. Thomas Hubert reports from the Mt Elgon area.

Under a baking sun in the northwestern Kenyan village of Kiminini, Christine Musiasia grabbed a bunch of freshly chopped feed – a mix of tropical Rhodes grass and protein-rich desmodium and calliendra crops – and brought it to her four animals. The two milking cows and two heifers rushed to the troughs. One year ago, they produced just enough milk for the family. This year, they are netting Christine a steady cash income.

“I used to take my cows along the road,” Christine told the Irish Farmers Journal. Skinny Kenyan cattle are often seen grazing on patchy grass verges or even trash, while farmers focus on growing maize – a crop in high demand in Kenya, but one vulnerable to drought, pests and price volatility.

In just 12 months, Christine’s farm has changed radically. She has ditched maize for a mix of fodder and food crops, used AI for the first time and built a simple but efficient housing unit for her cows. She dumps their manure into a small anaerobic digester which gives her cooking gas and nutrient-rich slurry. The farm supports Christine, her husband and six children, and two farm workers. “I also have more free time,” she says.

One of her neighbours, John Wakeli, has also started to grow fodder crops for his two goats and two in-calf heifers. “This is the first time we have cattle,” he said. “We will start milking soon.”

Another local farmer, Nathan Rono, made similar changes and proudly showed his milk dockets of the past year. From under five litres, his daily deliveries have grown to above 11 litres.

These are some of the 30,000 family farms targeted by the Livelihoods Mt Elgon project, which kicked off last year to develop dairying in this region over the next decade – all from private sector resources. VI Agroforestry, a farm support organisation operating across East Africa, is training farmers into new technologies and providing seeds for the new crops.

Listen to an interview with VI Agroforestry deputy regional director Wangu Mutua in our podcast below:

Finance comes under the form of a €3.5m investment from the Livelihoods Carbon Fund, an investment body for multinationals looking to achieve social impact and offset their greenhouse gas emissions.

Sustainable farming practices will avoid the emission of 1m tonnes of CO2 through sequestration in soils and increased cow efficiency

“There are three main benefits to the Livelihoods Mt Elgon project: the first one is its positive impact on the lives of farmers and their families, starting with increased and more stable revenues over time. The second is the additional milk produced for Brookside, contributing to more economic activity. And the last one is climate action as sustainable farming practices will avoid the emission of 1m tonnes of CO2 through sequestration in soils and increased cow efficiency,” said Livelihoods Venture president and co-founder Bernard Giraud.

The French dairy giant Danone is a major player here: it was the first investor in the Livelihoods Funds and owns 40% of Brookside Dairies, the largest milk processor in Kenya. The other 60% belongs to the Kenyatta family of the first and current presidents of Kenya.

Brookside has committed to buying all the milk from the farmers involved in the project for the next ten years as long as it meets quality criteria. Kenyan consumers are spending more and more on dairy products and the company can barely meet the demand for its liquid milk, yoghurt, cream, butter and ghee.

“We have an installed capacity of 1.5m litres/day, but we process between 300,000 and 800,000l/day,” said Emmanuel Kabaki, Brookside’s head of milk procurement and extension services. The drought that hit east Africa in the past year curtailed milk supply. Importing is not an option as it would attract a 60% tariff. A new drier built to transform any oversupply into milk powder remains idle.

“This year, a bonus had to be paid. It’s challenging,” Kabaki said, even though Brookside trains 20,000 farmers each year to increase productivity. According to Kabaki, most Kenyan dairy farmers milk one to three cows on 3ac to 5ac, with the average daily yield just six litres/cow.

Brookside is offering co-ops in the Mt Elgon project its current top price of 35c/l on one-year fixed-price contracts, investing in their bulk tanks and dispatching staff for maintenance and quality control. The company hopes to lift its daily collection from the area from 5,000 litres to 135,000 litres.

Co-ops are a key link in this emerging value chain, and 15 of them are involved in this project. During the Irish Farmers Journal’s visit to Mubere, farmers brought their milk and staff offloaded creamery cans from local collection points. A Brookside employee performed density and alcohol tests before accepting deliveries into the 3,000-litre communal bulk tank. The scene was reminiscent of Ireland 60 years ago.

Mubere Dairy Farmers’ Co-operative Society started informally in 2009 but registered as a co-op just two months ago. It is targeting 3,000 registered members and more than 3,000 litres/day in collection by the end of this year. It secured a government grant to fund its bulk tank and received assistance from VI Agroforestry to establish sound governance– a key point after many Kenyan dairy co-ops collapsed 30 years ago, exposing farmers to heavy losses.

“People had lost faith in the co-op movement with the mismanagement of the 1980s,” said project manager Edward Masinde. “We’re bringing them back.”

Of the 35c/l paid by Brookside, Mubere co-op keeps 3c/l to pay its eight staff and other costs. Farmers get 32c/l in cash, bank wire or mobile phone transfer – a common form of payment in Kenya. To become members, suppliers buy a €5 share. The co-op has weathered the recent drought well and volumes are picking up again, allowing it to set money aside.

“We want to buy our own premises,” said its chair Robert Makhanu. “We will also start a health service with a vet available,” he added.

Maximising output from land

The farmers taking part in the Mt Elgon project are transforming their maize-only farms into dense patchworks of crops designed for maximum yield. On just 1.5ac, John Wakeli grows green beans between maize rows, fodder and protein crops, bananas and sweet potatoes, a combination of trees controlling soil nutrients, moisture and erosion while providing firewood and timber, and a few coffee bushes. He also keeps rabbits, laying hens, and has a nursery with dozens of seedlings. This is a reminder that a farm’s main pasture or tillage production area always leave gaps – however tiny – to pack in additional sources of output and income.

Reporting supported by the Simon Cumbers Media Fund.

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Long read: back to basics for troubled Fonterra
The world’s largest dairy exporter has become too complex in its business model. New CEO Miles Hurrell will seek to simplify Fonterra once again, writes Lorcan Allen.

Simplicity is genius, or so the saying goes. It’s certainly something Miles Hurrell will be mulling over in the winter months ahead, as he begins to find his feet as the new chief executive of Fonterra.

Appointed in August, Hurrell’s first duty as Fonterra CEO has been to explain the company’s dismal financial performance for its 2017/18 financial year to the end of July, where the farmer-owned dairy co-op racked up net losses of NZ$196m.

Telling language

The language used by Hurrell in the financial results presentation was telling. Fonterra needs to get back to getting the basics right and set more realistic forecasts – Hurrell plans to simplify the business.

In truth, this is the correct strategy. Much of the recent problems in Fonterra has been the added complexity that’s been built into the business over recent years.

Fonterra is a monopoly processor that at its height collect 96% of all the milk in New Zealand

According to New Zealand industry sources, Fonterra had grown too complex and bloated over the last number of years under the leadership of former CEO Theo Spierings, a Dutch native who joined from Friesland Campina and spent eight years at Fonterra.

History

When we look at the history of the Fonterra business we can see why. Established in 2001 under the Dairy Industry Restructuring Act (DIRA), Fonterra is a monopoly processor that at its height collect 96% of all the milk in New Zealand. It collects just over 80% of New Zealand milk today.

The Fonterra business model from the start was always focused on being the most efficient processor of milk on the planet, thereby enabling NZ farmers to compete in the global dairy market.

Weapon of choice

To do this, Fonterra chose whole milk powder (WMP) as its weapon of choice.

The co-op focussed its efforts on drying milk into WMP in an incredibly efficient and cost-effective manner, quickly earning New Zealand the nickname in global dairy markets as WMP Inc.

A simple business model, but it worked.

Fonterra’s low-cost ultra-efficient processing model has served Kiwi farmers well

Through Fonterra’s scale and efficiency, New Zealand dairy quickly eked out massive market shares in global dairy markets, particularly for basic dairy commodities and milk powders.

In 2017, New Zealand shipped more than 1.3m tonnes of WMP on to world markets, giving it a near-70% share of the 2.1m tonne global market for WMP.

New Zealand also accounts for over 50% of global butter trade, shipping just under 0.5m tonnes of butter last year.

The island country is also a significant exporter of cheddar cheese (345,000t) and skimmed milk powder (401,000t) to world markets. But WMP remains the core business.

Fonterra’s low-cost ultra-efficient processing model has served Kiwi farmers well in the main. The average farmgate milk price in New Zealand since the creation of Fonterra has been far superior to what farmers were paid before the consolidation.

Volatility

However, in recent years, as milk quotas have ended in Europe and US exporters seeks to gain a greater foothold in world markets, dairy commodity prices have become increasingly volatile due to supply spikes, which is difficult for New Zealand farmers exposed to the full force of global markets. Irish farmers have some experience of this in recent years.

In an attempt to tackle this, Fonterra, under Spierings’ leadership, sought to move further up the dairy value chain and into more added-value ingredients, such as infant formula powders.

However, this strategy has proved difficult for Fonterra and has not translated into milk prices.

If we take Fonterra’s milk price for the 2017/18 season just gone, the composition of the milk price is still heavily weighted towards basic commodities.

As can be seen in Figure 1, almost two-thirds (64%) of Fonterra’s farmgate milk price is weighted towards WMP, while SMP accounts for 20% and butter a further 9%.

The move towards more value-added dairy ingredients hasn’t translated into the milk price for Fonterra suppliers.

On top of this, the co-op has had some serious setbacks, most notably the 2008 melamine scandal in China, as well as the false botulism alarm in product sold to Danone in 2013.

Fallout

The fallout from the false botulism came to a head earlier this year when an arbitration court in Singapore ordered Fonterra to pay €106m to Danone in compensation for the food scare.

This compensation payment to Danone was one of the reasons Fonterra reported such a hefty loss for its 2017/18 financial year.

The loss was also caused by the NZ$405m (€230m) write-down of the value of the co-op's investment in an 18% shareholding in Beingmate, the Chinese infant formula company.

Beingmate has been consistently losing market share in the €30bn Chinese infant formula market over recent years as Chinese consumers opt for European product.

The different aspects of Fonterra’s business were not singing off the same hymn sheet

Aside from these exceptional setbacks, the strategy to move further up the dairy value chain has added significant complexity to Fonterra’s business model that the co-op has struggled to make work on a practical day-to-day level.

At Kerry Group, the “1 Kerry” strategy implemented under Stan McCarthy’s time as CEO was seen as a major step for the global business that connected all aspects of a broad and diverse company under one connected system.

This is something Fonterra failed to do and many arms of its business operated completely independently to other aspects of the co-op that would have some shared overlap.

Put simply, the different aspects of Fonterra’s business were not singing off the same hymn sheet.

Positive soundings

However, all is far from lost at the world’s largest dairy exporter.

While the challenges are many, the soundings from New Zealand in recent weeks are that Hurrell is the right choice for the co-op and already the internal workings of the company feel much more open.

Perhaps the most immediate tasks facing Hurrell will be regaining the trust of the co-op’s farmer suppliers and reducing the co-op's debt position.

Announcing the financial results for 2017/18, Hurrell made specific reference for the need for Fonterra to regain some financial discipline within the business once again.

The collapse in profits this year, which more than halved (-51%) even excluding the exceptional items to NZ$382 (€215m), leaves Fonterra very highly leveraged, with a debt to earnings ratio of 4.5 times based on borrowings of NZ$6.2bn (€3.5bn).

Reducing this significant debt will be a priority.

The co-op also needs to improve its messaging to farmer suppliers around milk prices and forecasts.

Hurrell has set out his stall that, moving forward, the co-op will set out much more realistic milk price forecasts for the season ahead, which will give farmers the confidence to invest in their business and plan for the year.

What is certain is that Fonterra will be an interesting business to watch over the next one to two years to see if Hurrell can get the dairy giant back to basics and back on track.

Fonterra racks up €110m in losses for its 2017-18 financial year
The New Zealand dairy co-op blamed bad milk price forecasts, high butter prices and higher cost in the business for the poor performance last year.

New Zealand’s largest milk processor, Fonterra, racked up after-tax losses of NZ$196m (€110m) for its 2017-18 financial year to the end of July.

The world’s largest processor reported a 22% decline in earnings (EBIT) to NZ$902m (€508m), while net debt in the business increased 11% in the year to NZ$6.2bn (€3.5bn).

This leaves the business highly leveraged with a net debt to earnings ratio of 4.5 times.

Sales for the year increased by 6% to NZ$20bn (€11.5bn), although sales volumes were down 3% in the year.

The principal reasons for the heavy financial losses are a result of two exceptional charges against the dairy co-op, including a once-off €106m payment to Danone and a NZ$405m (€230m) write down of the value of Fonterra’s investment in an 18% shareholding in Beingmate, the Chinese infant formula company.

However, excluding these exceptional charges, underlying profits in Fonterra still collapsed by more than half (-51%) to NZ$382 (€215m), illustrating the deeper lying problems in the business.

Mile Hurrell, who was recently appointed as the new chief executive at Fonterra, said there were four main reasons for this decline in profits.

“First, forecasting is never easy but ours proved to be too optimistic. Second, butter prices didn’t come down as we anticipated, which impacted our sales volumes and margins. Third, the increase in the forecast Farmgate Milk Price late in the season, while good for farmers, put pressure on our margins. And fourth, operating expenses were up in some parts of the business,” said Hurrell.

Lactalis forks out €740m for South African baby formula company
The French dairy giant has likely paid in excess of 25 times' earnings for the business, which is pricey when compared with recent deals of a similar nature.

French dairy giant Lactalis has acquired the infant formula business of Aspen Pharmacare, a South African pharmaceutical group, for €740m. As part of the deal for Aspen’s nutritional division, Lactalis will take control of manufacturing plants in Africa and Latin America, as well as stakes in joint ventures in the Asia-Pacific region.

The business includes a number of well-established infant formula brands in sub-Saharan Africa, Australia and Latin America such as Alula, Infacare and SMA. Aspen’s infant formula business generated sales of almost €180m and profits of €30m for the financial year ended June 2018. This gives the business a profit margin of almost 17%, which is indicative of the profitability of the infant formula sector.

However, this business has not come cheap for Lactalis. At a cash price of €740m, the French giant has likely paid in excess of 25 times’ earnings for Aspen’s infant formula division. In 2017, the UK-based consumer health and hygiene group Reckitt Benckiser paid $17.9bn, or more than 17 times’ earnings, to acquire US infant formula company Mead Johnson.