PRE-FREASIBILITY STUDY FOR DAIRY PROCESSING PLANT docx

DISCLAIMER

The purpose and scope of this Pre Feasibility Study is to introduce the Project and
provide a general idea and information on the said Project including its marketing,
technical, locational and financial aspects. All the information included in this Pre-
Feasibility is based on data/information gathered from various secondary and primary
sources and is based on certain assumptions. Although, due care and diligence have been
taken in compiling this document, the contained information may vary due to any change
in the environment.

The Planning & Development Division, Government of Pakistan, Mascon Associates
(Pvt.) Ltd who have prepared this Pre-feasibility study, or National Management
Consultants (Pvt.) Limited who have quality assured this document do not assume any
liability for any financial or other loss resulting from this Study.

The prospective user of this document is encouraged to carry out his/ her own due
diligence and gather any information he/she considers necessary for making an informed
decision


i
TABLE OF CONTENTS

ACRONYMS iii
EXECUTIVE SUMMARY iv

CHAPTER 1 – INTRODUCTION 1
1.1 OBJECTIVE AND SCOPE OF THE STUDY 3
1.2 METHODOLOGY 3
1.3 STUDY TEAM 4

CHAPTER 2 – MARKET/ NEEDS ASSESSSMENT 5
2.1 PROFILE OF PAKISTAN’S DAIRY SECTOR 5
2.2 MODERN MILK PROCESSING IN PAKISTAN 7
2.3 PRODUCT PROFILE & MARKET SHARES OF THE PROCESSING SECTOR 8
2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND CONSUMPTION 9
2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT PROCESSED MILK 10
2.6 MARKETING OF MILK AND DAIRY PRODUCTS 13
2.7 MARKETING OF PROCESSED LIQUID MILK 17
2.8 MARKETING OF DAIRY PRODUCTS 18

CHAPTER 3 – TECHNICAL EVALUTION 21
3.1 LOCATION PREFERENCE 21
3.2 SPECIALIZED MANPOWER 23
3.3 REGULATORY FRAMEWORK 24
3.4 IN-HOUSE QUALITY ASSURANCE 25
3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT 25
3.6 PROPOSED UHT PROCESSING UNIT 26
3.7 THE UHT PROCESS FLOW 31
3.8 TECHNICAL REQUIREMENTS & THEIR AVAILABILITY 33

CHAPTER 4 – GOVERNANCE AND MANAGEMENT STRUCTURE 35
4.1 GOVERNANCE STRUCTURE 35
4.2 MANAGEMENT STRUCTURE 37
4.3 RAW MILK PROCURMENT & TRANSPORTATION 39

4.4 PLANT OPERATIONS AND QUALITY ASSURANCE 39
4.5 MARKETING AND SALES 39
4.6 FINANCE DEPARTMENT 40
4.7 HUMAN RESOURCE DEPARTMENT 41

CHAPTER 5 – FINANCIAL EVALUATION 42
5.1 CAPITAL COST OF THE PROJECT 42
5.2 PROJECTED PROFIT & LOSS ACCOUNTS 44
5.3 PROJECTED CASH FLOW 45
5.4 PROJECTED BALANCE SHEETS 46
5.5 INTERNAL FINANCIAL RATE OF RETURN 47
5.6 RATES OF RETURN 47
5.7 PAYBACK PERIOD 48
5.8 FUNDING OF THE PROJECT 48

CHAPTER 6 – CONCLUSION 49



ii
LIST OF TABLES
TABLE 1 – MILK PRODUCTION IN SELECTED COUNTRIES 5
TABLE 2 – MILK PRODUCTION (REGION WISE) 6
TABLE 3 – PROCESSOR CAPACITY 8
TABLE 4 – MARKET SHARE AND SELLING PRICE OF MILK PROCESSED IN
THE FORMAL SECTOR 9
TABLE 5 – PROJECTION OF FRESH MILK PRODUCTION AND
CONSUMPTION TO 2010 10
TABLE 6 – MILK PRODUCTION (REGION WISE) 22
TABLE 7 – MILK PRODUCTION IN PUNJAB 22

TABLE 8 – INTERNATIONAL MILK PRODUCTION COST BENCHMARKS 23
TABLE 9 – UHT MILK PROCESSING PLANT PROJECTED CAPITAL COST 42
TABLE 10–PROJECTED PROFIT & LOSS ACCOUNTS 45
TABLE 11–PROJECTED CASH FLOW 45
TABLE 12–PROJECTED BALANCE SHEET 46
TABLE 13–PROJECTED IFRR 47
TABLE 14–RATES OF RETURN 47
TABLE 15–PAYBACK PERIOD 48

ANNEXURE- 1 PAKISTAN – A PROFILE


iii
ACRONYMS


ADB Asian Development Bank
ASEAN Association of South East Asian Nations
BOO Build Operate Own
BOT Build Operate Transfer
CAA Civil Aviation Authority
CAR Central Asian Republics
CMER Center for Management and Economic Research (of LUMS)
CNG Compressed Natural Gas
ECO Economic Cooperation Organisation
EIZ Eastern Industrial Zone
FAOSTAT Food & Agricultural Organization of UN Statistics
FDI Foreign Direct Investment
FM Filling Machine
GCC Gulf Cooperation Council

GDP Gross Domestic Product
GNP Gross National Product
GoP Government of Pakistan
HDIP Hydrocarbon Development Institute of Pakistan
IFC International Finance Corporation
IFCN International Farm Comparison Network
km Kilometre
KPT Karachi Port Trust
LUMS Lahore University of Management Sciences
MINFAL Ministry of Food, Agriculture and Livestock
NHA National Highway Authority
OEM Original Equipment Manufacturer
PIA Pakistan International Airlines
PISDAC Pakistan Initiative for Strategic Development And Competitiveness
PNSC Pakistan National Shipping Corporation
PTA Pakistan Telecommunication Authority
PTCL Pakistan Telecommunication Limited
Rs Pak. Rupees
SAARC South Asian Association for Regional Cooperation
SBP State Bank of Pakistan
SMEDA Small and Medium Enterprise Development Authority
SPS Sanitary and Phyto Sanitary
SWOG Strategic Working Group
UAE United Arab Emirate
UHT Ultra High Temperature
UNICEF United Nations International Children’s Emergency Fund
WTO World Trade Organization


iv

EXECUTIVE SUMMARY

Pakistan is regarded as the fifth largest producer of milk in the world. In 2004 it produced
more than 28 million tonnes of milk, based on current projections it is expected to
produce more than 33 million tonnes in 2006.

In addition, Pakistan is a “milk surplus” country in a “milk deficient” region, despite this,
it had to import US$ 12 million worth of milk powder to even out seasonal supply
imbalance. This Pre-feasibility Study explores the possibility of setting up a 100,000
litres per day UHT milk processing unit near Lahore in the Punjab province of Pakistan.
The rationale for setting up the plant is:

• The market for processed milk is estimated at 200 million litres per annum while
supply is 139 million litres per annum; in addition the market is growing at around
20% per annum.
• The consumers have developed a taste for UHT milk and also for its variants like
“flavoured milk”, etc.
• The location of the plant is proposed near Lahore, as the surrounding areas of Lahore
produce 70% of the total milk produced in Pakistan
• The Government of Pakistan has launched a program to increase milk yield per
animal from the current 6 litres per day to 13 by 2012, in addition the GoP is
launching a mass consumer awareness program aimed at highlighting the dangers of
consuming raw unprocessed milk.
• The technology and the skills required for setting up a modern UHT plant and its milk
collection infrastructure exists in the region. The first UHT plant which was set up in
1977 is still operating and has seen continuous capacity increase over the years.
• The aseptic packaging which increases the shelf life of the UHT processed milk is
ideally suited for the local climate in Pakistan which is characterized by high summer
temperatures.
The total cost of the project is estimated at Rs.670 million with a pay back period of

approximately 4 years.

1
CHAPTER 1
INTRODUCTION

Agriculture is the largest sector of Pakistan’s economy, contributing nearly 22%
of the total output (GDP) and employing around 45% of the total labor force.
Livestock contributes nearly 50 percent to the value addition in the agricultural
sector, and almost 11 percent to Pakistan’s GDP. Livestock is the main supplier
of basic raw material to the Pakistani food processing industry, with milk being
the most important sub-sector; the value of milk produced is higher than the value
of two major crops, i.e. wheat and cotton.

Pakistan is regarded as the fifth largest producer of milk in the world with a total
production of about 28 million metric tons in 2004, despite such a huge volume
the country is a net importer of milk and milk products. The major reason for this
is that 12 – 15% of the milk produced is “lost” during transportation and storage
due to lack of proper processing facilities.

The Government of Pakistan (GoP) in cooperation with various multilateral donor
agencies, apart from utilizing its own in-house capabilities, has prepared a
comprehensive strategy for bringing about a “White Revolution” in Pakistan. The
main objective of the GoP is poverty alleviation in the rural areas by helping the
subsistence farmer, who provides the bulk of the milk, to increase the yield of
milk. Currently, animal productivity is well behind other major dairy producers.
Pakistan has three times the animals that Germany has, but milk−yield per animal
is one fifth of Germany and one third of New Zealand representing a significant
loss in economic potential.

The strategy developed by the GoP will focus on raising productivity and to do
so, the dairy industry will:


2
• Establish model commercial dairy farms across full range of farm sizes to
increase overall farm productivity by demonstrating new technologies and
better practices;
• Upgrade rural and urban supply chains by facilitating investment in chilling
tanks for purchase and collection of milk which will give farmers a guaranteed
sale for quality milk;
• Investigate modern technologies, systems, and underlying seasonal economics
of dairy production to improve quality of investment decisions and to correct
market distortions;
• Expand supply pockets to increase the milk supply and create new income
earning opportunities; and
• Improve the quality of animal feed to ensure better quality of milk.

As per the GoP strategy in order to improve the business and regulatory
environment, workforce, and industry organization the milk processing industry
will be duly supported to:

• Rseolve the health and safety problems associated with poor quality milk;
• Improve and enforce existing food safety standards in line with international
standards;
• Promote policies which will support the development of an expanding export
industry;
• Provide practical training to farmers on modern farming practices;
• Raise capacity of training institutions to provide required training and
qualifications;

• Establish a permanent industry organization, “Dairy Pakistan”, representing
farmers, processors, and government stakeholders with responsibility to carry
out the Dairy Industry Strategic Plan.

This Strategy for increasing productivity and quality of milk, is expected to
deliver value to both the producers and consumers. Conservative estimates show

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an additional Rs.11million per day of income generated for farmers, with more
optimistic scenarios showing over Rs.30million. The average farm income per
year stands to increase by a factor of four by 2015, significantly reducing rural
poverty. In addition, the Strategy aims at increasing average yield per animal from
the current 6 liters per day to 13 liters by 2015. As a first step, the Government of
Pakistan has established “Dairy Pakistan” to ensure that the targets set forth by
the Strategy are achieved.

The expected increased availability of milk will help Pakistan enter the export
market, as it is located in a “dairy deficient” area where most of its neighbors to
the west are net importers.

1.1 OBJECTIVE AND SCOPE OF THE STUDY
The purpose of this Pre-Feasibility Study is to establish the need for setting up of
a milk processing plant to avail more than 20 percent growth per annum in the
Sector. Pakistan has got large quantities of raw milk which in 2004 was estimated
at close to 28 million tonnes per annum with only 2 – 3% actually being
processed by the dairy industry.

The scope of the study is to undertake, inter alia, need assessment, technical
evaluation, assessment of governance and management structure and financial
evaluation of the project, on the basis of which recommendations are to be

developed for setting up the said project.

1.2 METHODOLOGY
The methodology employed for this study consists of review of published data as
well as exhaustive interviews of the stakeholders including farmers, dairy experts,
dairy marketing companies, multilateral agencies and Government of Pakistan
officials as well as those belonging to MINFAL and the Government of Punjab.
Lastly, we would like to bring on record the cooperation extended by those
individuals and companies who though no longer associated with the Industry,

4
were willing to share their opinions and experiences to facilitate new entrants
coming into the industry.

The data collected has been analyzed using quantitative and qualitative
techniques, where required necessary assumptions have been made which have
been mentioned in the report.

1.3 STUDY TEAM
The study team comprised of experts in the fields of dairy and animal husbandry,
economics, engineering, food processing, marketing and finance.

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CHAPTER 2
MARKET/ NEED ASSESSSMENT

2.1 PROFILE OF PAKISTAN’S DAIRY SECTOR
As stated earlier, agriculture is the largest sector of Pakistan’s economy,
contributing nearly 22% of the total output (GDP) and employing around 45% of
the total labor force. Livestock contributes nearly 50 percent to the value addition

in the agricultural sector, and almost 11 percent to Pakistan’s GDP. Livestock is
the main supplier of basic raw material to the Pakistani food processing industry,
with milk being the most important sub-sector; the value of milk produced is
higher than the value of two major crops, i.e., wheat and cotton. Pakistan is
regarded as the fifth largest producer of milk in the world with a total production
of about 28 million metric tons in 2004.

TABLE - 1
MILK PRODUCTION IN SELECTED COUNTRIES
(1,000 Metric Tonnes)
Total Production
Sr.
No.
Country
1999 2000 2001 2002 2003 2004
1. India 78,100 81,000 84,800 89,500 91,200 90,420
2. U.S.A 73,804 76,023 75,068 77,139 77,252 77,565
3. Russia 32,300 32,276 32,905 33,503 33,300 31,140
4. Germany 28,356 28,353 28,213 27,899 28,380 28,028
5. Pakistan 24,281 24,949 25,646 26,372 27,140 27,934
6. France 25,388 25,484 25,415 25,733 25,160 24,750
7. Brazil 19,802 20,527 21,284 22,453 23,453 23,458
8. UK 15,014 14,488 14,707 14,869 15,056 14,600
9. Ukraine 13,344 12,640 13,411 14,108 13,633 13,993
10. Poland 12,284 11,889 11,884 11,873 11,892 12,400
11.
World 561,175 571,077 580,608 593,723 605,516 605,263
Source: FAOSTAT

The average per capita production of milk in Pakistan at about 230 liters/year is

the highest of all South Asian countries. Punjab has by far the lion's share in both

6
milk production and number of dairy animals. It produces over twenty million
metric tons of milk or about 70% of the country’s total.

The production of milk in different provinces of Pakistan is given below:

TABLE -2
MILK PRODUCTION (REGION WISE)
(mllion Tonnes)
Milk Production Milk Production by Regions
Year
Buffalo Others Punjab Sindh Others
1996 18.0 9.0 19.0 7.0 3.0
1997 20.0 9.0 21.0 5.5 4.0
1998 20.0 9.0 21.0 5.5 4.0
1999 21.0 9.5 21.5 6.0 5.0
2000 21.7 10.0 22.0 5.0 5.0
2001 21.8 9.5 22.5 4.5 5.0
2002 23.0 10.0 23.0 6.0 5.6
Source: International Farm Comparison Network (IFCN), 2003

Dairy product mostly distributed and sold in Pakistan is still fresh milk.
However, as per study conducted by Unilever Pakistan Ltd., processed milk
consumption is growing at above 20% per year. Of the different types of
processed liquid milk, pasteurized milk and UHT milk in Tetrapacks are by far
the most popular products. Yogurt, butter, cheese and ice cream represent a small
proportion of the processed dairy products. The informal sector produces Lassi (a
drink from boiled and/or raw milk), which is very popular in the summer months.

Other common indigenous milk products are boiled milk and sweet-meats
produced by condensing liquid milk, which is called Khoyia (condensed milk
with or without sugar).

Only 3-4% of total milk production is processed and marketed through formal
channels. For the other 97%, an extensive, multilayered distribution system of
middlemen has evolved to supply milk produced for immediate consumption.
“Katcha Dodhies” collect their milk from villages and either sell to the local

7
market or to “Pacca Dodhies”. “Pacca Dodhies” then supply milk to distributors
and retailers in urban areas, “Gawallas” and dairy processors. The Gawalla
supplies milk directly to urban and rural households. The current value chain is
illustrated below:











A long tradition of dairy consumption, a sizeable domestic market, high per capita
rates, and yet underdeveloped processing and value-added products present
significant potential to increase both the economic and social value of the
industry.

2.2 MODERN MILK PROCESSING IN PAKISTAN
Modern milk processing in Pakistan started in the early 1960s when the first
modern milk sterilization plant was set up. By the mid-1970’s 23 milk
pasteurization and sterilization plants had been set up. However, due to the
logistic difficulties in setting up an efficient milk collection system, short shelf-
life of the product and lack of skilled labor, all but one of these plants shut down.
The first UHT plant was set up in 1977 and proved quite successful. With the
exception of army and Idara-e-Kisan dairy plants, the production of liquid
pasteurized milk has ceased since the first units producing UHT long-life milk
went into operation. Table 3 presents basic information on the UHT milk-
CHART -1
DAIRY VALUE CHAIN IN PAKISTAN
Farmer
(Rs. 10)
Middleman
(Rs. 11)
Contractor
(Rs. 13)
Processors
(Rs. 15)
Milk-man
(Rs. 15)
Processed,
Unpackaged
Milk (Rs. 23)
Loose Milk
(Rs. 20-28)
Packaged
Milk (Rs. 29)
Sou

r
ce:

SWOG
E
s
timat
es
Bacterial count>5 mio./ ml

8
processing plants that are operating currently. The data in the table referring to
installed daily capacity are based on shifts including preparation and cleaning.

TABLE – 3
PROCESSING CAPACITY
Capacity
ii i
Sr.
No.
Processors
Daily Capacity
(million liters)
Flush Lean
Average Daily
(million liters)
1. Nestle 1.30 1.30 0.780 1.0400
2. HFL 0.90 0.90 0.540 0.7200
3. Millac 0.30 0.30 0.180 0.2400
4. Vita 0.05 0.03 0.018 0.0240

5. Halla 0.15 0.15 0.090 0.1200
6. Prime 0.10 0.10 0.060 0.0800
7. Nurpur 0.15 0.15 0.090 0.1200
8. Nirala 1.00 0.10 0.060 0.0800
9. DairyCrest 0.15 0.15 0.090 0.1200
10. Engro Foods 0.20 0.60 - 0.6000
11. K&K 0.40 - - -
12. Butt Dairies 0.06 0.06 0.036 0.0480
13. Munno Dairies 0.02 0.02 0.012 0.0160
14. Karachi Dairies 0.10 - - -
15. Military Dairy Farms 0.18 0.18 0.108 0.1440

Total 5.30 3.44 2.064 2.7520
Source: SWOG Estimates

2.3 PRODUCT PROFILE & MARKET SHARES OF THE
PROCESSING SECTOR
The main products of Pakistan’s dairy industry are Ultra Heat Treated (UHT) and
pasteurized milk, dry milk powder and condensed milk. Other products of less
importance include butter, yogurt, ice cream, cheese, cream, and butter oil (ghee).
Roughly 50% of the milk that is made available to the processing industry (not
counting gawallas) is processed into UHT, 40% into powdered milk, and the
remaining 10% into other by-products. The majority of the dairy processing
facilities are located near Lahore, which serves as the hub for the industry. The
total volume of industrially processed milk sold is about 139,000 metric tons a

9
year, roughly equal to about 0.5% of total (raw) milk produced. However, the
domestic market for packaged milk is estimated at about 200,000 metric tons a
year, or a bit more than US$100 million at prevailing price levels of Rs32/liter

(refer to Table 4 for details on market share of different types of milk in the formal
sector).
1


TABLE – 4
MARKET SHARE AND SELLING PRICE OF
MILK PROCESSED IN THE FORMAL SECTOR
Types of Milk Market Share in Volume Sale Price Rs/Liter
Open Gawalla
(Milkmen) Milk
90.00% 12-14
UHT Tetra Pack 4.98% 32
Open Pasteurized Milk 3.76% 14-15
Open Milk Sold at Milk
Shops
0.98% 18
Pasteurized Pouch 0.24% 20
UHT Poly Pack 0.02% 22
Direct to Home 0.02% 15-18
Source: SMEDA. (Small & Medium Enterprise Development Authority)

2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND
CONSUMPTION
The production (supply) and consumption (demand) for milk and milk products in
Pakistan is characterized by conflicting seasonal fluctuations. Milk production is
at its maximum during the period between January and April and at its minimum
during May – August when fodder is limited. Milk consumption is at its peak in
summer. At this time, because of the warmer ambient temperatures, people
increase their milk intake and consume a greater range of dairy products including

ice cream and yogurt.



1
The market share of industrially processed (sold) milk estimated by SMEDA at around 5% of milk
processed in the formal sector should not be confused with that share of 0.5% of milk produced in the
country.

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Milk supply from rural animal holders decreases by half in mid-summer. In
contrast, the peri-urban producers (13% of all producers) have better control over
their contribution to supply, which fluctuates less through the months. It is
assumed that the overall supply reaches a low point in mid-June; at this point,
supply is only 55% of what is supplied during the peak period in mid-February.
Based on preliminary results from several small surveys, the overall demand
varies from its highest point in June to an estimated low of 60% in December.

2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT
PROCESSED MILK
Although Pakistan is the 5
th
largest producer of milk in the world, it faces a
shortage of milk primarily because not all of its production actually makes it to
the market. It is estimated that only 45% of the milk produced is actually
available for sale. Of the milk that is sold by farmers, an additional 15-19% is
wasted enroute-to-market due to spoilage from lack of proper cooling, storage,
and transport systems. In total, 55-60% of current milk production is lost from
potential income generation and value addition. A study done by the Lahore
University of Management Sciences shows Demand and Supply for milk as

follows:

TABLE – 5
PROJECTION OF FRESH MILK PRODUCTION AND
CONSUMPTION TO 2010)
(million Liters)
Years
Average
Production
Average
Consumption
Annual
Deficit
Average 1971-2004
15,498.15 15,601.53 (103.38)
2004-2005
29,882.92 31,194.59 (1,311.67)
2005-2006
31,211.81 32,532.09 (1,320.28)
2006-2007
32,504.91 33,785.13 (1,280.22)
2007-2008
33,805.10 34,929.54 (1,124.43)
2008-2009
35,495.25 36,361.25 (866.00)
2009-2010
37,669.75 38,188.92 (519.17)
Average 2005-2010
33,428.29 34,498.70 (1,170.41)
Source: Lahore University of Management Sciences, 2005

11
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Avg.
1971-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-
2010
Avg.
2005-

2010
Average
Production
Average
Consumption
Annual Deficit



Currently this gap is being filled by the import of powdered milk. About 6,000 to
8,000 tons or between US$10 million and US$12 million worth of powdered milk
is imported on an annual basis to fill the mismatch between an ever increasing
demand and local supply. Powdered milk is imported in the form of Dry Whole
Milk, Dry Skim Milk and to a lesser degree, Dry Whey. Imports of Dry Skim
Milk vary between 15% and 25% of the total powdered milk imports. However,
the trend reversed in 2003 with Dry Skim Milk imports comprising about 70% of
total powder milk imports.

Another factor that is contributing to this gap is the concentration of milk
production in the Punjab where nearly 70% of the milk is produced and because
of its very perishable nature it cannot be transported over long distances unless it
is processed using UHT. This has seen UHT milk being marketed in the remotest
areas of Pakistan including Gilgit, Gawadar, Punjgur etc.

With increased urbanization in the country and the movement of Dairy animals
out of the city limits, farms which are in the peri-urban areas of large cities like
Karachi and Lahore are unable to cater to the demands of the rapidly increasing
population. This leads to frequent price increases and chronic shortages. It is
PROJECTION OF FRESH MILK PRODUCTION AND
CONSUMPTION, TO 2010 (MILLION LITERS)

12
therefore no wonder that the main centers for UHT milk consumption are the
urban areas like Karachi, Lahore, Islamabad etc.

As stated earlier, there is greater awareness of the current milk handling processes
in the traditional system by the urban consumer and he is extremely reluctant to
consume fresh milk that has been handled in the traditional manner. Traditional
milk is collected in an unhygienic manner and there is no enforcement of
standards, resulting in poor quality product. In order to keep milk temporarily
fresh, middlemen commonly add ice to the milk, which results in dilution of milk
solids by up to 30% and often micro contamination takes place due to poor quality
water in the ice.

Although consumers have a greater preference for fresh milk, it needs to be boiled
before consumption. Working women in the cities have realized the convenience
of using UHT milk as it can be consumed directly from the packaging as it has a
greater storage life.

Fresh milk has high fat content, with greater health consciousness among the
population, consumers are shifting to the use of UHT milk that has got lower fat
content.

According to a report prepared by Unilever Pakistan Limited, titled: Modern
Dairy Technology and Prospects for Growth, “The packaged milk market is
estimated at 200 million liters per annum, valued at over Rs.6 billion, with a
yearly growth rate of close to 20 percent over the last few years.”

With the large investments that the Government of Pakistan is making in the milk
production side of the supply chain, both the quantity as well as the quality of the

milk available for processing is going to improve. In addition, a comprehensive
strategy is being prepared to increase consumer awareness about the current state
of the quality of milk that is being sold as well as strengthening implementation of

13
food laws to international levels. These steps are expected to see a surge in the
demand for UHT processed milk in Pakistan; also exportable surpluses are
expected to be generated because of the increased supply of milk.

2.6 MARKETING OF MILK AND DAIRY PRODUCTS

2.6.1 MARKETING OF RAW LIQUID MILK
Because of the various systems of milk production in Pakistan and the task of
supplying fresh milk regularly to consumers and manufacturers in both rural and
urban areas, different marketing systems have been developed that often involve
several intermediaries who form the marketing chain. Intermediaries are rural
milk traders (katcha dodhis), highway collectors (pacca dodhis), rural vendors /
processors, commission agents, urban wholesalers, shopkeepers/processors and
street and door-to-door vendors. The flow chart is shown below in chart 2.

CHART - 2
SIMPLIFIED DIAGRAM OF FLOW CHANNELS FOR
MILK IN PAKISTAN

Source: Strategy Development in Milk Production and Distribution (SMEDA Report, 2000)
Dairy Farmer
Milk Collection Agency
Milk Processing Plant
Distributor/ Retailer
Consumer
Gawalla (milk man)
Formal
Sector 2-3%
Share
Milk Collector
Informal
Sector 98%
Share
Retailer

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2.6.2 MARKETING THROUGH RURAL MILK TRADERS
Traditionally, the most important middlemen are the numerous rural milk traders,
commonly called katcha dodhis. Equipped with a bicycle or horse cart, or in some
cases now with a motorcycle and two to four milk cans, they make daily visits to
15–20 small milk producers, collecting some 75–90 litres of raw milk. This may
take three hours and the distance cycled can easily be 20 km. Most of the katcha
dodhis are independent. Larger highway collectors, however employ a few of
these katcha dodhis. Under the traditional system, women sell the milk to the

middlemen.

Where competition is strong, usually in production areas with good access, the
katcha dodhis often have contracts with the producers to secure milk supply for a
certain period. Then the purchasing price may be fixed, interest free advances
may be given or both mechanisms may be used. The value of advances usually
corresponds to the value of milk supplied within two to four weeks. As most
katcha dodhis do not have sufficient resources to finance their suppliers, they in
turn get advances from the larger collectors and sometimes from rural
shopkeepers. If no advances are granted, payment is normally effected within one
week after milk collection.

With a few exceptions, milk is collected only in the morning, the evening milk
being used mainly for home consumption. Milk is always collected by volume,
never by weight, using measures of varying types and sizes. Milk producers
normally supply pure, unadulterated milk; however, to prevent deterioration of the
milk during their collecting tour, especially in the hot season, the katcha dodhis
add certain quantities of ice to prevent the milk from turning sour.

2.6.3 MARKETING THROUGH RURAL & HIGHWAY MILK COLLECTORS
The highway milk collectors, or pacca dodhis, obtain their supply of milk almost
exclusively from the katcha dodhis. The daily volume collected by a pacca dodhi
often exceeds 2000 litres, especially in the Punjab. The number of katcha dodhis

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supplying a single pacca dodhi ranges from 8 to 500, with a maximum of about
70 per collection point.

At their collection points along or near the main roads, most pacca dodhis check
the milk visually, test fat and solids-not-fat (SNF) contents and measure the

volume by pouring the milk into their own cans. If the quality meets
requirements, the agreed price will be paid. Collectors supplying to dairy plants
all use fat testing equipment.

The pacca dodhis do not own chilling facilities, but most of them have one or
more motor vehicles. Only the smaller collectors send milk to town by public
transport or join other collectors who own or hire a small pick-up truck. One
pacca dodhi may supply between 1 and 40 clients, depending on the milk volume
marketed and the demand of the individual contractor, milk shop or manufacturer.
Advances from shopkeepers seem to be rare. The rural collector has cash
expenses of about Rs. 1/litre for ice and octroi (communal merchandise tax), the
highway collector pays a similar amount and eventually Rs. 1/litre for hired
transport. The vendor increases his margin through the sale of sweetened milk and
the manufacture of dahi or sweetmeats.

2.6.4 MILK COLLECTORS SUPPLYING DAIRY PROCESSORS
Since the establishment of milk processing plants, highway milk collectors have
been their most important and effective suppliers. Despite rigid quality testing and
payment according to butterfat content, plants procure the major part of their raw
milk through private milk collectors. This leads to difficulties during the lean
production season when the supply gap results in price increase, which the
manufacturers are not generally willing or able to pay.

2.6.5 MILK SALE TO COLLECTION CENTRES OF DAIRY PROCESSORS
Neither factory linked livestock farms nor dairy co-operatives have managed to
become major suppliers to dairy processing plants. Size and production of the

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commercial farms have limited their contribution. Of the milk marketed by the
functioning co-operatives and Village Livestock Associations, created in some

districts of Punjab to supply the Lahore Milk Plant (their designated long-term
marketing partner), only a small proportion is channeled to the dairy plants.

To improve the handling of raw milk and achieve a better quality for processing at
the plant site, some dairy plants have started to equip milk collection centres with
chilling units and to use insulated road tankers for bulk transport from the centres
to the plant. This enables them to buy milk directly from the katcha dodhis. Some
plants already collect 80% of their procurement themselves. Large-scale
collectors supply the balance milk.

Milk collection is undertaken by dodhis or co-operative organizations, but the
milk producers may also deliver to the centres themselves and receive a higher
price. The farm-gate price in winter is Rs. 8–10 and in summer Rs. 10–12 per litre
(6% fat basis). Some processing plants pay a bonus of Rs. 1.00/litre, if the milk is
put into chilling tanks provided by the plants but operated by the producers.

2.6.6 DIRECT MARKETING & CONTRACT SALE
Some producers manage to market their milk without the help of dodhis.
They produce quantities large enough to contract regular supplies with urban
wholesalers/retailers or they sell straight to consumers (at the farm, in their own
urban retail outlets or at the consumer’s door).

The peri-urban milk producers, especially in Sindh, sell most of their milk on a
contract basis (one year, fixed price) to urban distributors, milk shops and
institutional consumers (hotels and restaurants). Milk in excess of the contracted
quantities is sold through commission agents in the ‘free’ wholesale market
(auction sale). If a milk producer cannot supply the agreed quantity in full, he is
obliged to make up the deficit from outside purchases (e.g. in the wholesale
market). Some of the milk producers at Landhi Cattle Colony near Karachi have

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established an association. Most peri-urban and rural commercial milk producers
who market milk themselves do not maintain additional or better facilities than
the pacca dodhis. Milk, with ice added, is transported in their own cans and
usually their own vehicles to the customers or the wholesale markets. In general,
milk is distributed in cans with volumes of 40–50 litres.

Milk producers who own transport facilities usually deliver milk to their urban
contractors receiving about Rs. 14/litre of undiluted milk. Contractors are often
milk shops converting part of the milk into customary products. In summer, the
margins of intermediaries are much higher as more ice is added to cool the milk.

2.6.7 MILK RETAILERS
The final middlemen in raw milk marketing are the milk shops, which in urban
centres often exercise distribution functions (supply to the small retailers) and/or
transform milk into local yogurt (dahi), yogurt drinks and a simmered, sweetened
concentrate (khoa) for sweet meats or ice cream. They often separate cream from
part of the milk purchased.

The major part of the raw milk reaching the milk shops is sold untreated within
one to two hours after arrival. Some shops, particularly those operated by
commercial milk producers keep the milk in cooling tanks (500–1000 litres
contents) or fill a certain proportion into plastic sachets, which after sealing are
kept in a refrigerator. Milk, which is not sold immediately, is boiled for sale later
or converted into dahi, khoa etc. Nevertheless, the consumers boil all liquid milk
bought before consumption.

2.7 MARKETING OF PROCESSED MILK
The only type of processed liquid milk that is found in markets all over the
country is sterilised long-life (ultra heat treated; UHT) milk. Standardised UHT

milk is marketed in 250, 500, 1,000 and 1,500 ml packages, mostly as tetra briks.

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The 500-ml packages account for about 60% of the total quantity sold, 250ml
packages for 20–25% and the 1,000 ml tetra briks for 15–20%.

The marketing chain is short; from the factories, the milk is transported by truck
to regional distributors/wholesalers who in turn supply it to general stores and
supermarkets in the big cities. Regional distribution of sales demonstrates that the
majority of milk is consumed within a limited area around the Regional
Distributors.

Ex-factory prices vary according to the destination of sales and freight costs
involved. The distributor–wholesaler receives commission of between Rs. 1.00
and 2.00/litre, depending on brand and package size. Most manufacturers refund
or replace damaged and expired packages.

Compared with the margins in the retail marketing of raw liquid milk (especially
the extra margins resulting from dilution), the margins on processed milk are
much smaller and cannot be increased by adulteration. However, retailers do not
deal exclusively in UHT milk, it is just one of many items sold; this applies to
most wholesalers as well.

2.8 MARKETING OF DAIRY PRODUCTS
Traditional dairy products like dahi and khoa are manufactured and sold by most
milk shops across Pakistan. On average, these shops convert about 20% of the raw
milk purchased into dahi and/or khoa. During Ramadan and in summer, dahi
consumption increases considerably.

Milk Farmers mainly produce butter or desi ghee in areas that are not penetrated

by milk collectors. The major part of ghee is home consumed but an estimated
annual volume of 34% is marketed through wholesalers, vendors and
shopkeepers, both in rural and urban areas. Because of its relatively high price
(consumers have to pay between Rs. 160 and 180/kg), it cannot compete with