Implications of Nigeria Central Bank’s Waiver on Milk Imports

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The Central Bank of Nigeria (CBN) last week exempted six companies from the restrictions to import milk, its derivatives and dairy products: Chi Ltd, FrieslandCampina WAMCO Nigeria, Integrated Dairies, Nestle Nigeria, Promasidor Nigeria, and TG Arla Dairy Products.

This follows the central bank’s decision in July 2019 to restrict access to FX for milk imports, on the pretext that it would result in FX savings and that Nigeria could considerably ramp up its milk production within 12 months.

The latest measure is expected to increase local milk production by c50,000 metric tonnes within the next 12 months and ease pressure on the prices of domestic dairy products, which have been rising. Over the past few months, milk and dairy products have been key drivers behind the acceleration of food price inflation, which came in at 14.7% in December, against an 11.9% core inflation figure.

Nigerian milk and inflation

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Nigeria boasts c19.5mn cattle, of which 85% are owned and managed by nomadic herdsmen, leaving 15% to medium- and large-scale farmers.

The country’s milk production is estimated at 600,000 metric tonnes (accounting for 13% of West Africa’s total production) as compared with demand, which is estimated at 1.3mn metric tonnes. This is a sizeable shortfall; hence imports cost cUS$1.2bn-1.5bn annually.

In addition, the ability of local cattle to produce milk is undermined by the long distances they travel for grazing (characteristic of Nigeria’s nomadic herders) and the inadequate supply of feed and water, among other factors, all of which result in lower returns, creating a disincentive for local milk manufacturers and reducing the activity’s commercial viability. More recently, the conflict between herders and farmers over encroachment on land used for crop farming has deterred local producers from pursuing backward integration.

Read Also:  Inflation moderates slightly, but floods may drive rebound

The CBN highlighted that the six companies had shown a willingness to participate in its backward integration program aimed at scaling up the capacity to improve local milk production.

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Positive for the six firms

For the individual companies, this is a positive, as the recent policies around the FX ban on milk importation, the border closure and the newly implemented higher VAT rates have all exerted upward pressure on inflation, in turn resulting in the erosion of consumer purchasing power and earnings taking a hit.

Apart from these six players, there are other participants looking to boost local production of milk and other dairy products. They include L&Z Integrated Farms, a Kano-based dairy farming firm with a capacity of 24,000 liters of milk daily (c8.7 metric tonnes per year).

However, we believe the sector still requires sizeable capital expenditure and that the government can encourage this by complementing the efforts of the CBN through improving access to pasture and water, and improving critical infrastructure (feeder roads, milk collection centers, cargo trains, etc.) to encourage investment. More importantly, the government needs to establish a framework to resolve the long-standing herder-farmer conflict to enable local producers to increase production and create an incentive for the backward integration objective.

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This article appeared first on TELLIMER

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