Ugandan milk at the mercy of Kenyan politics

by Business Times
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To the dismay of many Ugandans, last week the Kenyan government re-imposed an import ban on Ugandan milk products.

Coming so soon after the Dairy Development Authority announced earnings of UGX382 billion ($103 million) from Uganda’s total milk exports during financial ending June 2022 (compared to UGX344 billion for 2020), the Kenyan move caught the local dairy industry by surprise.

Uganda’s milk products mainly consist of milk powder, UHT milk, butter, cheese, case in powder and whey protein. Apart from sales in COMESA countries, other markets include India, Japan, the United States and Ethiopia.

Although Kenya is not the only export destination, it still ranks as an important customer. However, Ugandan producers have been hurting following an earlier ban imposed at the end of 2019.

The crux of the matter is, when it comes to dairy farming, Uganda has lower costs of production. This rubs the Kenyans the wrong way, because they view this as an unfair advantage.  In truth, this is a comparative advantage. Add to an improving regulatory environment and rising efficiencies, there is no reason why Uganda should not exploit this trend except for the fact that milk is a highly sensitive area for Kenyans.

The sector provides income and employment opportunities to nearly two million households across the dairy value-chain and contributes about four percent of Kenya’s GDP. At five billion litres a year and in contrast to Uganda’s 2.3 to 2.5 billion litres, Kenya is both a leading producer and consumer of milk products.

One snag is that in the wake of the Covid-19 pandemic, Kenyan dairy farmers have consistently been complaining to the government about the continued rise of animal feeds.

This has impacted the majority of them, because their output is based on the zero-grazing model as opposed to Uganda where the cows free range. Ironically, some of the most important ingredients for these feeds are also sourced from Uganda.

During October last year, visiting President William Ruto reassured Ugandans about his views on the matter which he had already passed on to the Kenyan public a week earlier, “Uganda should bring in cheaper milk, because they can produce it much more cheaply. We should be adding value to our own milk,” he said.

In February, Ruto followed up these words up by sending Kenya trade minister Moses Kuria to meet President Yoweri Museveni and other top officials to sort out details.

Such was the feel-good atmosphere that Museveni tweeted: ‘I thank Ruto for opening the market for our milk, eggs and chickens’. Not long after, it was announced that Kenya had officially lifted the three year ban.

Explaining the latest ban on March 6, Margaret Kibogy, the Kenya Dairy Board managing director said in a statement to Kenyan importers, ‘In anticipation of the long rains, the government has stopped the importation of milk powders to cushion the industry from surplus production and low producer prices. Consequently, the board has temporarily suspended the issuance of these import permits until further notice.’

Uganda’s minister for East African Community Affairs, Rebecca Kadaga immediately said she was taking up the issue with her Kenyan counterpart, but the feeling among Ugandan milk producers is one of frustration, if not outright anger.

Museveni does not support tit-for-tat tactics as was suggested by some top Ugandan technocrats who sought to target Kenyan imports in the aftermath of the first Kenya ban in 2019. Nor is he likely to budge from this stance, preferring brotherly phone calls to try and resolve the impasse. Obviously, he did not make much headway with Uhuru Kenyatta.

Yet, when one goes deeper into the issue, the sudden U-turn is not altogether surprising. Towards the end of Kenyatta’s administration, Ruto had a torrid time of it. Even now, he is probably still smarting from the numerous indignities he endured.

Through Brookside Dairy Limited, the Kenyatta family has dominance over Kenya’s milk industry. The temptation to strike a blow against the company might have been the reason for Ruto’s encouraging words towards Uganda.

However Ruto probably overlooked the fact that the bulk of the hustler votes that got him and his deputy, Rigathi Gachagua into office, came from the Rift Valley and Central region.  The two regions also happen to be Kenya’s top producers of milk and where the two gentlemen also hail from respectively. Ruto’s hands were tied. It is far more politically prudent to face the ire of a neighbour than have squabbles in the home.

Furthermore, like many other countries, Kenya is going through a cost of living crisis. Anything that is seen to be hurting the incomes of the most vulnerable is sure to unleash a political backlash. But again, having access to cheaper milk for families could be considered a relief.

The challenge of doing business in the East African Common Market is that politics frequently trumps consumer choice which technically is supposed to be the driver of a free market economy.

Just before the first Kenya ban in 2019, Tom Nyagechaga, the Kenya National Federation of Farmers Secretary General said, “There is a significant increase in Ugandan milk in the Kenyan market mainly driven by lower production costs in Uganda, which allows processors to sell their products at low prices. We are worried that its dominance will hurt our dairy farming. We recognize the spirit of the East African Community Common Market Protocol, but there is a need for an intervention.”

The point about closer regional integration is that demand and supply usually determine who the most efficient producers are. When governments attempt to intervene by means of such measures as non-tariff barriers (NTBs) or subsidies, it is the final consumer who is burdened with higher prices and poor quality goods. NTBs can be classified into four broad categories: tax-like measures; quality and safety standards; import bans; and customs and trade facilitation measures.

Regional leaders have signed off on numerous communiqués telling us about the virtues of East Africa’s expanding market. Investors, seeking to exploit economies of scale, have been equally thrilled by these promises and assurances. But at the first sign of trade tensions, the instinct is to get out the big stick and close ranks.

The bigger economies of Kenya and Tanzania are more notorious for this than Uganda and Rwanda who being landlocked, are less inclined to be confrontational. Except towards one another, as happened with the three year extended border closure that begun in 2019.

Five years ago, Kenya and Tanzania were caught up in seemingly endless recriminations during a tariff war over biscuits, sweets, chocolates, industrial sugar, edible oils and cement. At one point, the Tanzania government even ordered the destruction of several thousand day-old chicks said to have been illegally imported from Kenya.

Whenever the subject comes up in high level discussions, all agree NTBs are not good for trade, but the political will remains lukewarm, in part because national interests still hold sway over East African Community economic integration. It is a situation causing much grief to the East African Business Council whose members never tire of reminding the powers-that-be of the pitfalls. Developing economies of scale cannot happen in this kind of environment.

Markets are not perfect, but are one of the best means to gauge the viability of an investment. A big problem of the EAC is the duplication of effort; people producing the same things and often seeking government protection from competitors despite the inefficiencies in their operations.

Until the East African Competition Authority becomes operational, NTBs will remain a part of our regional landscape. All the more pity, because the East African consumer will continue to suffer the consequences.

ALSO READ: Uganda’s Dairy Sector Contributed UGX 388 billion to GDP

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