DISCLAIMER. The purpose and scope of this Pre Feasibility Study is to introduce the Project and

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3 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

4 TABLE OF CONTENTS ACRONYMS... iii EXECUTIVE SUMMARY...iv CHAPTER 1 INTRODUCTION OBJECTIVE AND SCOPE OF THE STUDY METHODOLOGY STUDY TEAM... 4 CHAPTER 2 MARKET/ NEEDS ASSESSSMENT PROFILE OF PAKISTAN S DAIRY SECTOR MODERN MILK PROCESSING IN PAKISTAN PRODUCT PROFILE & MARKET SHARES OF THE PROCESSING SECTOR SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND CONSUMPTION SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT PROCESSED MILK MARKETING OF MILK AND DAIRY PRODUCTS MARKETING OF PROCESSED LIQUID MILK MARKETING OF DAIRY PRODUCTS CHAPTER 3 TECHNICAL EVALUTION LOCATION PREFERENCE SPECIALIZED MANPOWER REGULATORY FRAMEWORK IN-HOUSE QUALITY ASSURANCE RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT PROPOSED UHT PROCESSING UNIT THE UHT PROCESS FLOW TECHNICAL REQUIREMENTS & THEIR AVAILABILITY CHAPTER 4 GOVERNANCE AND MANAGEMENT STRUCTURE GOVERNANCE STRUCTURE MANAGEMENT STRUCTURE RAW MILK PROCURMENT & TRANSPORTATION PLANT OPERATIONS AND QUALITY ASSURANCE MARKETING AND SALES FINANCE DEPARTMENT HUMAN RESOURCE DEPARTMENT CHAPTER 5 FINANCIAL EVALUATION CAPITAL COST OF THE PROJECT PROJECTED PROFIT & LOSS ACCOUNTS PROJECTED CASH FLOW PROJECTED BALANCE SHEETS INTERNAL FINANCIAL RATE OF RETURN RATES OF RETURN PAYBACK PERIOD FUNDING OF THE PROJECT CHAPTER 6 CONCLUSION...49 i

5 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 TABLE 6 MILK PRODUCTION (REGION WISE) TABLE 7 MILK PRODUCTION IN PUNJAB TABLE 8 INTERNATIONAL MILK PRODUCTION COST BENCHMARKS TABLE 9 UHT MILK PROCESSING PLANT PROJECTED CAPITAL COST TABLE 10 PROJECTED PROFIT & LOSS ACCOUNTS TABLE 11 PROJECTED CASH FLOW TABLE 12 PROJECTED BALANCE SHEET TABLE 13 PROJECTED IFRR TABLE 14 RATES OF RETURN TABLE 15 PAYBACK PERIOD ANNEXURE- 1 PAKISTAN A PROFILE ii

6 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 iii

7 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 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. iv

8 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: 1

9 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 2

10 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 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, 3

11 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. 4

12 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 TABLE - 1 MILK PRODUCTION IN SELECTED COUNTRIES (1,000 Metric Tonnes) Sr. Total Production No. Country India 78,100 81,000 84,800 89,500 91,200 90, U.S.A 73,804 76,023 75,068 77,139 77,252 77, Russia 32,300 32,276 32,905 33,503 33,300 31, Germany 28,356 28,353 28,213 27,899 28,380 28, Pakistan 24,281 24,949 25,646 26,372 27,140 27, France 25,388 25,484 25,415 25,733 25,160 24, Brazil 19,802 20,527 21,284 22,453 23,453 23, UK 15,014 14,488 14,707 14,869 15,056 14, Ukraine 13,344 12,640 13,411 14,108 13,633 13, Poland 12,284 11,889 11,884 11,873 11,892 12, World 561, , , , , ,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 5

13 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) Year Milk Production Milk Production by Regions Buffalo Others Punjab Sindh Others 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 6

14 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: CHART -1 DAIRY VALUE CHAIN IN PAKISTAN Bacterial count>5 mio./ ml Middleman (Rs. 11) Processors (Rs. 15) Processed, Unpackaged Milk (Rs. 23) Packaged Milk (Rs. 29) Farmer (Rs. 10) Contractor (Rs. 13) Milk-man (Rs. 15) Loose Milk (Rs ) Source: SWOG Estimates 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 shelflife 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- 7

15 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 Sr. Daily Capacity Capacity Average Daily No. Processors (million liters) Flush ii ilean (million liters) 1. Nestle HFL Millac Vita Halla Prime Nurpur Nirala DairyCrest Engro Foods K&K Butt Dairies Munno Dairies Karachi Dairies Military Dairy Farms Total 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 8

16 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% UHT Tetra Pack 4.98% 32 Open Pasteurized Milk 3.76% 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% 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. 9

17 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 , , (103.38) , , (1,311.67) , , (1,320.28) , , (1,280.22) , , (1,124.43) , , (866.00) , , (519.17) Average , , (1,170.41) Source: Lahore University of Management Sciences,

18 PROJECTION OF FRESH MILK PRODUCTION AND 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,000 Avg CONSUMPTION, TO 2010 (MILLION LITERS) Avg 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 11

19 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 12

20 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 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 Formal Sector 2-3% Share Dairy Farmer Gawalla (milk man) Informal Sector 98% Share Milk Collection Agency Milk Collector Milk Processing Plant Distributor/ Retailer Retailer Consumer Source: Strategy Development in Milk Production and Distribution (SMEDA Report, 2000) 13

21 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 small milk producers, collecting some 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 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 14

22 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 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 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 15

23 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 and in summer Rs 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 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 16

24 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 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 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 ( 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. 17

25 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 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 18

26 vegetable ghee or oil, which costs only a third of the price and is used increasingly as a substitute. In contrast, desi butter seems to have a stable market, especially during the winter months. The quantity marketed may reach 60 thousand tonnes/year. The larger dairy shops in the cities and special creameries are the principal manufacturers of local butter. They usually buy cream from wholesalers or pacca dodhis and produce only what can be sold the same day. Some milk processing plants have introduced a number of new dairy products into the market like: Yogurt (natural and flavoured) Drinking yogurt (lassi) Sweetened, flavoured milk UHT and pasteurised cream Butter Ghee Cheese and Ice cream mix. The quantities sold, however, are very modest for most items; only yogurt and butter sales have reached significant volumes. Three major yogurt manufacturers sell about 4000 tonnes annually. Consumer prices of Rs per 450 ml cup (3.5% fat) assure a good margin despite high packaging costs. The modern butter manufacturers produce about 800 tonnes per year. It is mainly packed and sold in portions of 200 g with ex-factory prices from Rs /pack and consumer prices from Rs /pack. The ice cream industry, producing 9 10 thousand tonnes of ice cream/annum, uses mainly dairy ingredients, especially fresh cream. Fresh milk is mostly substituted by imported milk powder. 19

27 As discussed above, in view of the growing acceptance by the consumers of UHT milk and the expected white revolution which should see milk production more than double in the medium term, it is proposed to set up a UHT milk processing plant of 100,000 liters per day capacity. This is an economically viable sized plant, although the market demand justifies a larger capacity, it is suggested that the sponsors work with a smaller capacity till such time that they are able to organize the milk collection system to provide larger raw milk inputs. Raw milk input for a 100,000 liters per day plant located in central Punjab should not be a problem with the existing milk supply chain. 20

28 CHAPTER 3 TECHNICAL EVALUATION In view of the growing acceptance by the consumers of UHT milk and the expected white revolution which should see milk production and consumption of processed milk more than double in the medium term, it is proposed to set up a UHT milk processing plant of 100,000 liters per day capacity. This is an economically viable sized plant, although the market demand justifies a larger capacity, it is suggested that the sponsors work with a smaller capacity till such time that they are able to organize the milk collection system to provide larger raw milk inputs. Raw milk input for 100,000 liters per day plant located in central Punjab should not be a problem with the existing milk supply chain. The technical assessment of the viability for setting up a 100,000 litres per day UHT milk processing plant depends on several major factors. These are discussed below: 3.1 LOCATION PREFERENCE The vicinity of the city of Lahore has been chosen for setting up the plant, the major reason being the availability of fresh milk in the region. Punjab, of which Lahore is the capital, produces 70% of Pakistan s milk; PAKISTAN MILK PRODUCTION STATISTICS Milk Production by Region Liters (bn) Source: International Farm Comparison Network (IFCN) Others Sindh Punjab 21

29 TABLE -6 MILK PRODUCTION (REGION WISE) (million Tonnes) Year Milk Production Milk Production by Regions Buffalo Others Punjab Sindh Others Source: IFCN, 2003 TABLE 7 MILK PRODUCTION IN PUNJAB (million Tonnes) Years Milk Production by Regions Composition of Punjab Milk in Punjab (MillionTons) the Dairy Herd Production Center Souther Potohar Buffal Others Buffalo Others Source: IFCN, 2003 As can be seen from the above Table, out of the approximately 24 million tonnes of milk produced annually in the Punjab, 18 million tones or about 75% is produced in the Central Region of Punjab. This region will be the milk catchment area for the proposed Plant. In addition a supply chain has already been developed in the area which ensures that milk from the smaller farmers who have among the lowest production costs in the world is made available to the milk processing plants: 22

30 TABLE 8 INTERNATIONAL MILK PRODUCTION COST BENCHMARKS Country US$/100kg milk Argentina 7-11 Pakistan 9-12 Australia India Austria 57 Switzerland 79 Source: IFCN, 2003 The setting up of the first UHT plant in 1977 in the area has ensured that the skill levels of the workers have developed to the required level, in addition local engineering expertise, transportation network, marketing channels and support services for the plant as well as marketing have developed. Karachi, the main city of Pakistan and the largest market for UHT, is not considered as a location for the plant because of the higher cost of raw milk. Raw milk prices in Karachi, because of the shortage of green fodder and greater emphasis on higher priced concentrates as diet for the milch animals means that prices of raw milk are approximately 30% higher in Karachi as compared to Lahore. 3.2 SPECIALIZED MANPOWER The plant will require technically qualified and experienced professionals in the areas of production management, operations and marketing. These will include dairy processing experts; food chemists; cold storage technologists; laboratory technicians; milk collection experts; marketing, human resource, accounting and finance experts; etc. The presence of a large number of milk and food processors including Nestle, Unilever, Cadbury, Shezan, Mitchells, and Haleeb etc. ensures the availability of a constant supply of trained and experienced professionals. As stated earlier, the Government of Pakistan has also accorded a high priority to the Dairy Industry and has set up a company known as Dairy Pakistan on the 23

31 lines of Dairy Australia; among the areas in which Dairy Pakistan is concentrating includes human skill development of the professionals required for the Dairy industry. 3.3 REGULATORY FRAMEWORK The legislative framework that guides food markets in Pakistan is governed by the Pure Food Rules (PFR) of 1965(and Cantonment Pure Food Rules of 1967 for military areas), and the Pure Food Ordinance of The most important aspects of regulation that guides milk industry are to be found in PFR, and include the following: Section 18: Containers for milk sales, distribution or storage must be labeled. Metallic containers (typically used by gawallas in the delivery of milk) must have a clear and distinct label attached. Section 19: Imperfect enameling and tinning of containers is illegal. Section 20: Milk from diseased animals is illegal. Section 21: Persons with contagious diseases are disallowed from milking animals, working at dairy farms, handling milk or any container meant to be used for storage or transportation of milk. Section 22: Pasteurization and sterilization parameters are laid down. Section 23: Equipment and processes needed for gaining approval by the government to operate milk processing plant have been specified Sections 272 and 273 of the Pakistan Penal Code deal with the issues of penalties for adulteration of food and drinks. The prescribed penalty for food adulteration is six months in prison, and/or one thousand rupees fine. PFR gives authority to provincial governments to appoint public analysts for investigation of quality and safety of food. There is no federal structure of a food safety program in Pakistan. Enforcement is done through health service delivery channels of provincial governments. The District Health Officer and Deputy Health Officer function as food inspectors for sampling and inspection. On the other hand, the concerned 24

32 Municipality Corporation may also appoint food inspectors and sanitary inspectors for sampling purposes. Any other public servant can also be appointed as inspector and can execute the power of food inspector. The Sanitary and Phyto Sanitary (SPS) Agreement lays down certain requirements that aim to ensure transparency in the implementation of SPS measures in member countries. Members are required to establish specific contact points to facilitate communication regarding SPS measures. This involves firstly, a single national enquiry point, which is responsible for responding to queries from a single national notification authority, which is responsible for all procedures associated with notification of new or amended SPS measures. These notifications and measures serve as guidelines for customs and health authorities in importing countries in assessing risk failure to notify and convince importing countries that SPS measures are up to date and implemented results most of the time in time-consuming inspections and quarantine measures which effectively hurts exporters by creating trade barriers. 3.4 IN-HOUSE QUALITY ASSURANCE Physical dispersal of gawallas and small dairy farms makes enforcement of quality standards difficult, but crucial. One factor would be the tracking of milk that is largely collected through informal channels, from hundreds and thousands of farmers and gawallas to the processing unit. Other issues where control is expected to yield positive results include adequate testing/laboratory facilities and close monitoring of staff to ensure that necessary quality checks are made and standards enforced. 3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT The rationale for setting up the proposed UHT milk processing plant of 100,000 litres per day capacity includes: 25

33 Current availability of more than 33.0 million tonnes per day (projected figure 2006) of raw milk, out of which only 2 3% is actually being processed. A current market size of more than 200 million litres per annum of processed milk, market for processed milk growing at more than 20% per annum for the past 3 years and projected to continue growing at the same rate for the next 5years. The Government of Pakistan s Strategic initiative for the milk processing industry which includes; increasing milk yield per animal, stronger enforcement of laws relating to adulteration and hygiene, a media program aimed at informing consumers about the dangers of consuming raw milk, a concentrated program by the dairy industry promoting the use of UHT treated milk. Availability of requisite technology for setting up a UHT processing plant and trained manpower for running the same. Huge export potential for UHT treated milk in the Region, with Pakistan being the only milk surplus country in the Region. In view of the above it is suggested to establish a UHT milk processing unit of 100,000 litres per day capacity with provision of expansion in the future. 3.6 PROPOSED UHT PROCESSING UNIT As already stated in Chapter 2, the demand for UHT milk is currently estimated at 200 million litres per annum which is increasing at an annual rate of 20%. With only 2 3% of the more than 33.0 million tonnes of milk produced annually, (projected figure for 2006) being processed and the abundant availability of milk, especially in central Punjab the case for setting up of a UHT milk processing plant very strong THE UHT PROCESS Although pasteurization effectively eliminates potential pathogenic micro-organisms, it is not sufficient to inactivate the thermo resistant spores in 26

34 milk. The term sterilization refers to the complete elimination of all micro organisms. The food industry uses the more realistic term "commercial sterilization"; a product is not necessarily free of all micro organisms, but those that survive the sterilization process are unlikely to grow during storage causing product spoilage. Milk can be made commercially sterile by subjecting it to temperatures in excess of 100 C, and packaging it in air-tight containers. The milk may be packaged either before or after sterilization. The basis of UHT, or ultra-high temperature, is the sterilization of food before packaging, then filling into pre-sterilized containers in a sterile atmosphere. Milk that is processed in this way using temperatures exceeding 135 C, permits a decrease in the necessary holding time (to 2-5 s) enabling a continuous flow operation ADVANTAGES OF UHT High quality: The reduction in process time due to higher temperature (UHTST) and the minimal come-up and cool-down time leads to a high quality product. Long shelf life: Shelf-life greater than 6 months, without refrigeration, can be expected. Packaging size: Processing conditions are independent of container size, thus allowing for the filling of large containers for food-service or sale to food manufacturers. Cheaper packaging: Cost of package and storage; transportation costs; laminated packaging allows for use of extensive graphics. 27

35 3.6.3 DIFFICULTIES WITH UHT Sterility: High performance equipment and plant are needed to maintain sterile atmosphere between processing and packaging (packaging materials, pipe works, tanks, pumps); sterility must be maintained through aseptic packaging; this would require higher skilled operators. Keeping Quality: Heat stable lipases or proteases can lead to flavor deterioration, age gelation of the milk over time - nothing lasts forever! There is also a more pronounced cooked flavor to UHT milk UHT METHODS There are two principal methods of UHT treatment: Direct Heating Indirect Heating Direct heating systems: The product is heated by direct contact with steam of potable or culinary quality. The main advantage of direct heating is that the product is held at the elevated temperature for a shorter period of time. For a heat-sensitive product such as milk, this means less damage. There are two methods of direct heating: 1. injection 2. infusion Injection: High pressure steam is injected into pre-heated liquid by a steam injector leading to a rapid rise in temperature. After holding, the product is flashcooled in a vacuum to remove water equivalent to amount of condensed steam 28