74. PROFILE ON PRODUCTION OF MILK POWDER

74. PROFILE ON PRODUCTION OF MILK POWDER

74- TABLE OF CONTENTS PAGE I. SUMMARY 74-3 II. PRODUCT DESCRIPTION & APPLICATION 74-3 III. MARKET STUDY AND PLANT CAPACITY 74-4 A. MARKET STUDY 74-4 B. PLANT CAPACITY & PRODUCTION PROGRAMME 74-7 IV. MATERIALS AND INPUTS 74-8 A. RAW MATERIALS 74-8 B. UTILITIES 74-8 V. TECHNOLOGY & ENGINEERING 74-9 A. TECHNOLOGY 74-9 B. ENGINEERING 74-10 VI. MANPOWER & TRAINING REQUIREMENT 74-11 A. MANPOWER REQUIREMENT 74-11 B. TRAINING REQUIREMENT 74-1 VII. FINANCIAL ANALYSIS 74-1 A. TOTAL INITIAL INVESTMENT COST 74-13 B. PRODUCTION COST 74-13 C. FINANCIAL EVALUATION 74-14 D. ECONOMIC BENEFITS 74-15

74-3 I. SUMMARY This profile envisages the establishment of a plant for the production of milk powder with a capacity of,000 tonnes per annum. The present demand for the proposed product is estimated at,058 tonnes per annum. The demand is expected to reach at 3,198 tonnes by the year 00. The plant will create employment opportunities for 5 persons. The total investment requirement is estimated at Birr 45.04 million, out of which Birr.5 million is required for plant and machinery. The project is financially viable with an internal rate of return (IRR) of % and a net present value (NPV) of Birr 3.85 million discounted at 8.5%. II. PRODUCT DESCRIPTION AND APPLICATION Powdered milk is a dairy product produced from cow milk. Cow milk basically contains water, fats, protein sugar and ash. About 86% to 88% of cow milk by weight is water. Milk powder is prepared by skimming the milk whereby a considerable but proportional cream substance is extracted before it is powdered. The processed milk powder, after some vitamins are added is packed in fully galvanized metal cans or plastic bags.

74-4 III. MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY 1. Past Supply and Present Demand Ethiopia is well known for its tremendous livestock potential. Yet its dairy industry still remains undeveloped. Among other things, livestock disease, low production breed and feed shortage has contributed to low milk production in the country. Moreover, the perishable nature of the product, poor marketing infrastructure, lack of refrigeration and preserving facilities are mentioned as the major impediments for the development of the dairy industry. Consequently, the milk consumption in the country has remained very low. According to some studies, the per capita consumption of milk in the country is about 0 kg. which is below the average for Sub-Sahara Africa. Consequent upon the low level of milk production in the country, the gap between demand for and the supply of milk is bridged through imports of powdered milk. Besides commercial imports, food aid has also been another source of milk supply in the country. However, food aid is frequently associated with famine and emergency so that it is not considered as a regular source of supply. In the absence of domestic production of powdered milk, imports are considered as a proxy for demand. To estimate the present (007) demand for the product exponential smoothing method is, applied to the import data. Table 3.1 shows the commercial import of powdered milk during the period 000-006 and exponentially smoothed forecast.

74-5 The Exponential smoothing Model is given by: Y 1+k = L 1 + KT 1 Where, L 1 = alpha* Y 1 +(1-alpha) (L 1-1+T 1 ) T 1 = beta (L 1 -L 1 01)+ (1-beta )T 1-1 Where Y 1+K stands for forecasted value, L 1 indicated the long-term level or based value for the time-series data, i.e. the level term, T 1 indicated the expected increase or decrease per year, i.e. the trend term, K stands for the number of time periods we want to forecast, t represents time, and alpha and beta are smoothing parameters. Table 3.1 EXPONENTIALLY SMOOTHED FORECAST OF THE DEMAND FOR POWDERED MILK (BASED ON IMPORT DATA ) Level Trend Year Import Term Term Forecast 000 1,08.37 1,08.37 - - 001 1,016.53 103.11-18 - 00 1,631.16 1568.58 08 1005 003 1,41.35 194.8 15 1776 004 1,149.49 1165.5-43 1310 005 1,15.3 106.07-9 113 006 1,887.79 1818.67 39 1197 007 058 Source : Customs Authority, External Trade Statistics.

74-6 On the basis of exponential smoothing approach, the demand for powdered milk for the year 007 is estimated at 058 tonne.. Projected Demand The demand for powdered milk is influenced by population size, income and consumption habit. Considering the total and urban population growth rates of.9% and 4%, respectively, and assuming growing income, nutritional awareness and change in altitude towards powdered milk on the part of the public, a growth rate of 3.45% (i.e. an average of the total and the urban population growth rates) is considered in projecting demand for powdered milk (Table 3.). Table 3. PROJECTED DEMAND FOR POWDERED MILK ( IN TONNES ) Year Projected Demand 008,19 009,0 010,78 011,357 01,438 013,5 014,610 015,700 016,793 017,889 018,989 019 3,09 00 3,198

74-7 3. Pricing and Distribution Different brands of powdered milk are available in the market. Most of them are packed in different size and sold at different prices. The current retail price of powdered milk ranges from Birr 40 to 50 per a pack of 900 gm. However, the envisaged product, as a new entrant needs to penetrate the market thus to be competitive the factory gate price is proposed to be Birr 31/kg. Regarding distribution, the envisaged plant can use the existing wholesale and retail channels, which include trading houses, department stores, supermarkets, groceries and small shops. B. PLANT CAPACITY AND PRODUCTION PROGRAMME 1. Plant Capacity The production capacity for the envisaged plant is scheduled to be,000 tons of powder milk and 00 tons of fresh butter. The production capacity is based on single shift a day and 300 working days a year. The remaining days are provided for annual maintenance and unexpected down times.. Production Programme 75% of plant capacity during the 1 st year 85% of plant capacity during the nd year 100% of plant capacity starting from the third year The production programme is set considering Sundays and public holidays and assuming that maintenance works will be carried out during off-working hours.

74-8 IV. MATERIALS AND INPUTS A. RAW MATERIALS The basic raw material in the production of milk powder and fresh butter is cow milk. The annual raw material requirement of the plant is an indicated in Table 4.1. Table 4.1 RAW MATERIAL REQUIREMENT AND COST Material Qty. Total Price ( 000 Birr) L.C F.C T.C Cow Milk 1,000 6,149 6,149 Additives 0 tons - 4,570 4,571 130 Packing Material 130 - Total 48,850 B. UTILITIES The annual utility requirement and the corresponding costs are indicated in Table 4..

74-9 Table 4. ANNUAL UTILITY REQUIREMENT AND COST Utility Annual Requirement Total cost (Birr) Electric Furnace oil Water 7,000 kwh 60,000 lit 600 cubic meter 34,66 34,600 1,980 Total 361,06 V. TECHNOLOGY AND ENGINEERING A. TECHNOLOGY 1. Production Process Raw milk from the locality is first collected either by milk cans or road tankers. It is then stored and filtered. The filtered milk is then cooled to 6 o c. The product is then pasteurized and sugar is added after cooling. Then regeneration and evaporation takes place where the skimmed milk is concentrated to 47% of total solid. It is then spray dried and cooled. Finally it is packed in standard containers and stored or delivered.. Source of Technology The technical data and information are compiled from the document of National Research Development Center of India.

74-10 B. ENGINEERING 1. Machinery and Equipment The principal machinery and equipment required for processing milk powder are as indicated in Table 5.1 below. The total machinery and equipments cost is estimated Birr,500,000 out of which Birr 19,15,000 will be required in foreign currency. Table 5.1 MACHINERY AND EQUIPMENT REQUIRED Machinery Milk reception Skimming machine Pasteurizing Evaporator Spray drier Shaking fluid bed CIP center Packing machine Boiler Compressor Piping and insulation Cooling plant Qty. 1 1 1 L.S

74-11. Land, Building and Civil Works The overall site area for the proposed plant is envisaged to be 5,000 m. The production hall and stores occupy 4,000 m. The administration building shall occupy 300 m. The total cost of buildings and civil works shall be Birr 10,750,000. The annual leased land rent shall be Birr,500 per annum. 3. Proposed Location The envisaged plant shall be located in Jinka town in Bakogazer Woreda of South Omo Zone. VI. MANPOWER AND TRAINING REQUIREMENTS A. MANPOWER REQUIREMENT Manpower requirements for the proposed plant are as indicated in Table 6.1 below. Table 6.1 MANPOWER REQUIREMENTS AND LABOUR COST Description Plant manager Technologist Chemist Engineer Mechanic Operators Clerks Sales person Gauds Req. No. 1 1 1 6 5 1 6 Salary/Month (Birr) 3,000,500 3,000,000 4,800 3,500 1,000 1,000 1,500 Annual Salary Expenditure (Birr) 36,000 30,000 36,000 4,000 57,600 4,000 1,000 1,000 18,000 Total 5,300 67,600

74-1 B. TRAINING REQUIREMENT Training of operations and technicians shall be given a special attention. Since milk powder processing is one of the sectors in the beverage and food industries, its personnel should be acquainted to cleaning in place (CIP) scheme. Hence, such training shall be conducted in one of the beverage, food or pharmaceutical industries. The total cost of the envisaged training is estimated at Birr 75,000. VII. FINANCIAL ANALYSIS The financial analysis of the milk powder project is based on the data presented in the previous chapters and the following assumptions:- Construction period 1 year Source of finance 30 % equity 70 % loan Tax holidays 3 years Bank interest 8% Discount cash flow 8.5% Accounts receivable 30 days Raw material local 30 days Raw material, import 90 days Work in progress 5 days Finished products 30 days Cash in hand 5 days Accounts payable 30 days

74-13 A. TOTAL INITIAL INVESTMENT COST The total investment cost of the project including working capital is estimated at Birr 45.04 million, of which 31 per cent will be required in foreign currency. The major breakdown of the total initial investment cost is shown in Table 7.1. Table 7.1 INITIAL INVESTMENT COST Sr. No. Cost Items Total Cost ( 000 Birr) 1 Land lease value 0.0 Building and Civil Work 10,750.0 3 Plant Machinery and Equipment,500.0 4 Office Furniture and Equipment 15.0 5 Vehicle 450.0 6 Pre-production Expenditure*,13. 7 Working Capital 8,984.3 Total Investment cost 45,04.4 Foreign Share 31 * N.B Pre-production expenditure includes interest during construction ( Birr.06 million ) training (Birr 75 thousand ) and Birr 75 thousand costs of registration, licensing and formation of the company including legal fees, commissioning expenses, etc. B. PRODUCTION COST The annual production cost at full operation capacity is estimated at Birr 54.35 million (see Table 7.). The material and utility cost accounts for 90.55 per cent, while repair and maintenance take 0.46 per cent of the production cost.

74-14 Table 7. ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR) Items Cost % Raw Material and Inputs 48,850.00 89.88 Utilities 361.1 0.66 Maintenance and repair 50 0.46 Labour direct 107.04 0.0 Factory overheads 53.5 0.10 Administration Costs 160.56 0.30 Total Operating Costs 49,78.33 91.60 Depreciation 90 5.37 Cost of Finance 1645.97 3.03 Total Production Cost 54,348.30 100 C. FINANCIAL EVALUATION 1. Profitability According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity (Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project. The income statement and the other indicators of profitability show that the project is viable.

74-15. Break-even Analysis The break-even point of the project including cost of finance when it starts to operate at full capacity ( year 3) is estimated by using income statement projection. BE = Fixed Cost = 16 % Sales Variable Cost 3. Pay Back Period The investment cost and income statement projection are used to project the pay-back period. The project s initial investment will be fully recovered within 5 years. 4. Internal Rate of Return and Net Present Value Based on the cash flow statement, the calculated IRR of the project is % and the net present value at 8.5% discount rate is Birr 3.85 million. D. ECONOMIC BENEFITS The project can create employment for 5 persons. In addition to supply of the domestic needs, the project will generate Birr 17.97 million in terms of tax revenue. The establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports.