26.

PROFILE ON POWDERED MILK

 26-2

TABLE OF CONTENTS

PAGE

A. I. SUMMARY 26-3

B. II. PRODCUT DESCRIPTION AND APPLICATION 26-3

C. III. MARKET STUDY AND PLANT CAPACITY 26-4

A. MARKET STUDY 26-4

B. PLANT CAPACITY AND PRODUCTION PROGRAMME26-8

D. IV. MATERIALS AND INPUTS 26-8

A. MATERILAS 26-8
B. UTILITIES 26-9

E. V. TECHNOLOGY AND ENGINEERING 26-9

A. TECHNOLOGY 26-9
B. ENGINEERING 26-11

F. VI. MANPOWER AND TRAINING REQUIREMENT 26-

12

A. MANPOWER REQUIREMENT 26-12

B. TRAINING REQUIREMENT 26-14
G.
H. VII. FINANCIAL ANALYSIS 26-
14

A. TOTAL INITITAL INVESTMENT COST 26-15

B. PRODUCTION COST 26-16
C. FINANCIAL EVALUATION 26-16
D. ECONOMIC BENEFITS 26-17
 26-3

I. I. SUMMARY

This profile envisages the establishment of a plant for the production of 400 tonnes of
powdered milk per annum.

The present demand for the proposed product is estimated to 470 tonnes per annum and it is
projected to reach 1212 tonnes by the year 2015.

The plant will create employment opportunities for 43 persons.

The total investment requirement is estimated at about Birr 25.2 million, out of which Birr 17.9
million is for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 18.49% and a net
present value (NPV) of Birr 10.6 million, discounted at 10.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Cow milk naturally contains about 87% water. The remaining 13% is comprised of fat, protein,
sugar and ash.

Powdered milk (or milk powder) is then cow milk with the water removed by industrial
processes. The processed milk powder, after some vitamins are added, is packed in fully
galvanized metal cans or plastic bags. The sizes of the packing materials are 240 grams, 500
grams, 1000 grams and 3000 grams.

The most important property of milk powder is its solubility measured by proportion, which
can be reconstituted in solution or colloidal suspension in water.

Cow milk is converted to powder form inorder to provide longer shelf life create favourable
conditions for ease of handling. It would be much easier to transport and distribute powdered
milk than liquid cow milk.

Powdered milk has wide application at home, restaurants, hotels, hospitals, community
entertainment areas, in the army and in schools.
 26-4

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past and Present Demand

Although Ethiopia is known for its large cattle population the dairy industry is still in its
infancy. In addition to its extreme perishability, a number of factors have contributed to the
very low level of commercialization of dairying in the country. Among these, the most
important one is absence of adequate procurement and marketing infrastructure, including
transport, refrigeration facilities, collection centers and processing plants.

Various studies conducted in the past 10 years 1990-1999) reveal that per capita consumption
of milk in Ethiopia is only about 20 kg, which is lower than the average for Sub-Saharan Africa.
The total amount of Milk available to Addis Ababa, for instance, is estimated to be about 45
million liter per annum, according to studies referred herein. Considering the current total
population of 2.4 million, the per capita milk consumption of Addis Ababa would be 18.75
liters.

The country’s deficiency in dairy products has dictated that the balance between demand and
supply be met by imports i.e. commercial imports and food aid. Among these, powdered milk
ranks first, its major consumers being households and catering institutions like hotels and
cafeterias. Table 3.1 shows the quantity and value of powdered milk imported in the years
1990-1999.

Given the absence of local production and enhanced availability of foreign currency in the
recent past, import figures could serve as reasonable approximation of demand. A glance at
table 3.1 easily reveals that the highest imported amount, i.e. 7965 tonnes, was registered in
1990. However, this figure is an outliner that it becomes quiet evident when one examines the
data set, and such uncharacteristically high import in that year should have an explanation of its
own. Moreover, the fact that imports declined to a very low figure of 60 tonnes in the
following year gives an indication that some amount of the 1990 import is carried over to 1991,
being in excess of the demand.
 26-5

Table 3.1
IMPORT OF POWDERED MILK (1990 - 1999)

Year Quantity Value (Birr)

(Tonnes)

1990 7965 9,564,953

1991 60 1,913,155
1992 391 4,192,033
1993 246 4,933,513
1994 225 1,343,242
1995 228 3,768,471
1996 123 4,536,235
1997 564 9,952,359
1998 691 10,059,253
1999 962 17882062

SOURCE: Customs and Excise Authority, External Trade Statistics, annual issues

Having considered the foregoing nature of the historical data set, the average of the eight years,
i.e., excluding those two abnormal years of 1990 and 1991, is deemed to reflect the current
effective demand for powdered milk. Accordingly, the present demand for powdered milk is
estimated to be about 430 tonnes per annum as per indications of the historical import data.

As an alternative approach, data from the 1995/96 Household Income, Consumption and
Expenditure Survey, published in 1998 by CSA, was analyzed inorder to determine the present
consumption requirement by households. Table 3.2 depicts the average quantity of powdered
milk consumed by successive expenditure groups in urban areas according to the survey
findings.

Table 3.2
POWDERED MILK CONSUMPTION IN URBAN AREAS

Expenditure Group Average Quantity

(annual expenditure Number of Consumed Annually Total Consumption
in birr Individuals % (Gm) (Tonne)
< 600 7724 0.1 - -
600-3399 1,160,725 15.2 - -
3400-4199 617,717 8.10 3 1.85
4200-5399 905,687 11.9 2 1.81
5400-6599 890,040 11.6 21 18.69
6600-8999 1,316,567 17.3 140 184.3
9000-12599 1,204,810 15.8 12 14.45
12600-16199 590,977 7.75 15 8.86
16200-19999 351,600 4.61 247 86.8
> 20000 577,737 7.85 114 65.86
Total 7,623,584 100 382.6
26-6

As shown in Table 3.2, the total powdered milk consumption requirement of the urban
population in Ethiopia was 382.6 tonnes per annum. The urban per capita requirement is thus
estimated to be about 50 gms, given the total urban population of 7.62 million at the time the
survey was undertaken. Using the urban population growth rate of 4% per annum, the present
household powdered milk requirement would amount to about 430 tonnes. Assuming further
that requirements of catering institutions to be 10% of that of households, demand is estimated
to be in the order of 470 tonnes per annum with this approach.

Although the results derived from the two approaches do not differ widely, the second
approach is deemed to be more plausible as it avoids some suppression of demand which the
import data may conceal. Hence, the present demand for powdered milk is estimated to be
about 470 tonnes. Based on the population census the share of Tigray Region out of the total
national demand is estimated to be about 6%.

2. Demand Projection

Both economic and non-economic factors are potentially important in explaining the demand
for dairy products in general, and powdered milk in particular. Economic factors such as
income and price affect dairy products demand; non-economic (scio-demographic) factors have
also impact on the demand.

Four important factors which determine the increase in powdered milk consumption are,
therefore, population size, income, price and consumption habit.

With increasing income or purchasing power, people demand more diversified dairy products
like powdered milk, particularly in urban centers. The large demand-supply variance in fluid
milk also indicates the potential market for powdered milk. But, the product must not be
perceived by consumers as too expensive vis-a-vis fluid milk, as it presently appears to be the
case in this country.

The demand projection of powdered milk must also consider whether the item fits into
traditional eating habits and taste preference of the population. On this score, it should be
realized that most Ethiopians are biased against powdered milk, which they consider only fit for
infants. Many people, including educated urbanites, believe that powdered milk is not genuine
milk at all, suspecting that it is not derived from animals; and also think it is inferior to fluid
cow milk nutritionally. Such biases and misconceptions are, however, bound to change with
time, though perhaps slowly.

The long fasting periods (March-April) and the weekly fasting days (Wednesday and Friday)
also affect the demand for dairy products negatively.

After considering all the above factors, the demand for powdered milk is forecasted to grow at
a rate higher than the growth of the urban population inorder to take account of
effects of growth income and change in consumption habits of the population.
Accordingly, an annual growth rate of 7% is deemed to be a reasonable growth rate to

26-7

project future demand, and the result is as shown in Table 3.3. Scrutiny of data obtained from
the Ethiopian Investment Authority has revealed that there are a number of applications for
production of processed milk, though it is not clear whether this includes powdered milk or
not. The new plant may nevertheless, safely aspire to supply about 50% of the market demand.
As a first entrant, the new plant faces only foreign competition. Therefore, to assume a 50%
market share is not farfetched.
 Table 3.3
DEMAND PROJECTION OF POWDERED MILK

Year Projected
Demand (Tonnes)
2002 502
2003 538
2004 576
2005 616
2006 659
2007 705
2008 755
2009 807
2010 864
2011 924
2012 989
2013 1058
2014 1133
2015 1212

3. Pricing and Distribution

Although different brands of powdered milk are available in the market, Nido and Gigoz are the
dominant ones. The products are sold in variously sized cans with corresponding prices. For
this study, however, the current price of Nido, which is Birr 45 per pack of 1 kg is taken as
reference. Allowing a margin of 40% for retailers and wholesalers, the factory gate price is
proposed to be Birr 27 per pack of 1 kg. If the envisaged factory earns sufficient profit with
this price, it can still go for a lower price in order to be competitive in the market and attract a
greater number of people to buy powdered milk.

The envisaged plant should use the existing wholesale and retail channels, which include
supermarkets, groceries and small shops, to reach consumers.

26-8

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Although the word milk processing encompasses the production of quite a number of milk
products, the plant under consideration will focus fully on processing of cow milk for
powdered milk production. The envisaged milk powder manufacturing plant will thus have a
capacity of 400 tonnes per annum.

2. Production Programme

The plant is expected to operate in single shift system a day of 8 hours for 270 days in a year.
Production will grow in three years time starting with 75% of full capacity in the first year and
then 90% in the second. Full capacity production will be attained from the third year on-
wards. Product output could be increased by introducing a third shift in the daily production
programme depending upon the market demand.

IV. MATERIALS AND INPUTS

A. MATERIALS

Cow milk is the basic and the major raw material preferred for the powdered milk production
plant. Other raw and auxiliary materials such as additives and packing materials are also
required. The Western Zone of the region is the leading zone in cattle population when
compared to the others. The yield of milk per cow per day is also reasonably high. Annual
requirement of these items and their corresponding costs are presented in Table 4.1

26-9
Table 4.1
ANNUAL REQUIREMENT OF RAW & AUXILIARY MATERIALS

Qty Cost (‘OOO Birr)

Description (tons) F L Total
1 Cow milk, ton 404 - 808 808
2 Additives, ton 0.003 806 - 806
3 Packing Materials, pcs 0.912 2736 - 2736
Total 3,542.00 808 4350
B. UTILITIES

The total annual requirements of the three utilities i.e. electricity, water and fuel oil/furnace oil
is presented in the Table 4.2 below.
Table 4.2
ANNUAL CONSUMPTION OF UTILITIES
Qty. Unit Cost Cost (‘000 Birr)
Items (Birr) F L Total
1 Electricity, kwh 19950 0.47 9.377 9.377
2 Fuel Oil, liters 3990 2.30 9.177 9.177
3 Water, m3 99.75 1.50 0.150 0.150
Total 18.704

J. V TECHNOLOGY AND ENGINEERING

K. A. TECHNOLOGY

1. Production Process

Two types of technological processes are available for the production of milk powder namely
the roller driers, and spray driers.
 26-10

Of the two processes, the spray driers is considered to be the best interms of product quality
than that of the roller driers method. However, the investment cost of the former is relatively
higher than the later. As the product is a food item, quality is a prime factor for marketability.
Thus, for the purpose of this study, a plant with a spray drying process is envisaged. The
process description of the method is presented as follows:-

The production method involves a number of major unit operation which are complex in
nature. These includes:-

Reception:- Raw milk is first collected by milk cans/truck tankers from different localities and
then transported to the plant where it is charged into a reception unit.

Clarification/filtration:- Is the process by which the raw milk is separated from possible
foreign, undesired materials that might affect the test and nature of
raw milk.

Cooling:- As the term implies, filtered milk is cooled and stored in at specified temperature i.e.
6oc.

Preheating:- Is an important operation in powdered milk production. The cooled milk is

heated upto 190oc F for a relatively shorter period of time inorder to destroy
bacteria, especially yeasts and moulds, which are causes to milk spoilage.

Precondensing:- It is an operation conducted at a vacuum of 25 to 27 inches mercury, and at

temperature of 130oF to 140o F. This is one of the core operation by which
the milk is solidified to about 47% total solids. The solidified milk is further
allowed to entry the evaporator where evaporation takes place until a striking
– point is reached.

26-11
Atomizing:- This is an operation which immediately follows the evaporation. In the
atomizing chamber, hot and pre-condensed milk is sprayed and directed into a
current of hot air, resulting in a dried milk. The product is then cooled and
packed in standard containers, and then stored or delivered,

2. Source of Technology

The above stated machinery and equipments can be obtained as a package from Italian
companies with reasonably fair price. A company known as Industiral Macchine Automatiche
IMA, S.P.A, Italy, can manufacture core machines.

B. ENGINEERING

1. Machinery and equipment

The machinery and equipments required for the production of powder milk by spray driers
process is as indicated in Table 5.1. The total cost of these machinery and equipment is
estimated at about Birr 17.9 million, out of which about Birr 16.0 million will be in foreign
currency.
Table 5.1
LIST OF MACHINERY AND EQUIPMENT

No Description Qty.
1 Milk Receiving & Filtration Eqmts. 1
2 Skimming Machine 1
3 Pasteurizer 1
4 Evaporator 1
5 Spray Drier 1
6 Shaking fluid bed 1
7 Packing machine 1
8 Boiler 1
9 Compressor -
10 Piping and Insulation 2
11 Cooling plant/fruit

26-12

2. Land, Building and Civil Works

The total land space requirement for the powdered milk production plant is about 3000 m2.
The built-up area of 1200 m2 incorporates, production hall, storage, utilities room, and offices.
The production hall will be a conventional type made of hollow blocks and partially plastered
walls with ceramic tiles. The estimated cost of construction is about Birr 2.16 million. Lease
value of land considering Birr 2.0 per m2 for 70 years is about Birr 420,000. Total land
building and civil works cost at the rate of Birr 1,200/ m2 is about Birr 2.580,000 million.

3. Proposed Location

Shire Endaselassie town would be the appropriate location for the establishment of milk
powder manufacturing plant because of its proximity to the raw material source.

VI MANPOWER AND TRIANIGN REQUIREMENT

A. MANPOWER REQURIEMENT

The manpower requirement and the corresponding labour costs for the envisaged plant are as
shown in Table 6.1.

26-13

Table 6.1
MANPOWER REQUIREMENT AND LABOUR COST
 No. of Persons Salary (Birr)
Description Monthly Annually
A. ADMINISTRATION
A. Manager 1 1,800 21,600
B. Secretary 1 750 9,000
C. Quality Control Head 1 900 10,800
D. Administration & Finance Head 1 1,200 14,400
E. Market Researcher 1 900 10,800
F. Personnel Adm. 1 900 10,800
G. Accountant 1 900 10,800
H. Cashier 1 500 6,000
I. Salesman 2 1,000 12,000
J. Store man 2 1,000 12,000
K. Purchaser 1 500 6,000
L. General Service workers 5 750 9,000
M. Guards 6 900 10,800
Sub – Total (A) 24 144,000
B. PRODUCTION
N. Head, Production & Technical 1 1,300 15,600
O. Secretary 1 500 6,000
P. Production Supervisor 1 750 9,000
Q. Technologist 1 900 9,000
R. Chemist 1 850 10,200
S. Engineer 1 1,000 12,000
T. Technicians 1 1,000 12,000
U. Operators/Production) 2 2,000 24,000
V. Boiler Operator 5 600 7,200
W. Unskilled workers 2 600 7,200
4
Sub – Total (B) 19 114,000
Total (A+B) 43 258,000
Benefit 25% 64,500
Grand Total 43 322,500
 26-14

B. TRAINING REQUIREMENT

Special training is required for production personnel’s of all level engaged in the production
operation. The training shall be conducted by the personnel of machinery suppliers locally
during erection and commissioning period. The estimated cost of training is about Birr
150,000 for a duration of about one month.

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 2 years

Source of finance 30 % equity
70 % loan
Tax holidays 2 years
Bank interest 10.5%
Discount cashflow 10.5%
Land value Based on estimated lease rate of the region

Repair and maintenance 2% of the total plant and machinery

Accounts receivable 30 days
Raw material local 1 days
Raw materials import 60 days
Work in progress 3 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
 26-15

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the envisaged project including working capital is estimated at
about Birr 25.2 million, out of which 68 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
SUMMARY OF THE INITIAL INVESTMENT COST (‘000 BIRR)

Cost Items Foreign Local Total

Currency Currency
1 Land 420.00 420.00
2. Building and Civil Work 2160.00 2160.00
3. Plant Machinery and Equipment 16,000.00 1,900.00 17,900.00
4. Office Furniture and Equipment 80.00 80.00
5. Vehicle 900.00 900.00
6. Pre-production Expenditure* 2,455.49 2,455.49
Total Investment cost 16000.00 7,915.49 23,915.49
7 Working Capital 1,210.24 148.66 1,358.90
Total 17,210.24 8,064.15 25,274.39

---
* Pre-production expenditure include interest during construction (Birr 2,155.49 thousand)
training (Birr 150 thousand) and cost of registration, licensing and formation of the company
including legal fees, commissioning etc.

26-16
B. PRODUCTION COST
The annual production cost at full operation capacity is estimated at Birr 8.4 million (see
Table 7.2). The material and utility cost accounts for 52.7 per cent while repair and
maintenance take 4.2 per cent of the production cost.

Table 7.2
ANNUAL PRODUCTION COST ('000 BIRR)

Year
Items 3 4 7 10
Raw Material and Inputs 3,262.46 3,915.01 4,350.01 4,350.01
Labour direct 85.50 102.60 114.00 114.00
Utilities 14.03 16.83 18.70 18.70
Energy and Power
Spare parts
Maintenance and repair 268.95 322.74 358.60 358.60
Factory overheads 48.37 58.05 64.50 64.50
Administration Overheads 144.00 144.00 144.00 144.00
Total Operating Costs 3,823.31 4,559.23 5,049.81 5,049.81
Depreciation 1,972.00 1,972.00 1,972.00 1,972.00
Cost of Finance 1848.57 1756.14 1386.43 1016.71
Total Production Cost 7,643.88 8,287.38 8,408.24 8,038.52

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in the
second 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.
 26-17

The income statement and the other indicators of profitability show that the project is viable.

2. Break-even Analysis

The break-even point of the project is estimated by using income statement projection.

BE = Fixed Cost = 36 %
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 9 years.

4. Internal Rate of Return and Net Present Value

Based on the cashflow statement, the calculated IRR of the project is 18.49 % and the net
present value at 10.5% discount rate is Birr 10.6 million.

D. ECONOMIC BENEFITS

The project can create employment for 43 persons. In addition to supply of the domestic
needs, the project will generate Birr 14.3 million interms of tax revenue. The establishment of
such factory will have a foreign exchange saving effect to the country by substituting the
current imports.