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Nigeria

Got Milk? CBN grants Nestle Nigeria and five others waiver on milk importation

    Nkemdilim Nwadialor
    Nkemdilim Nwadialor

    Equity Research Analyst, Financials

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    Tellimer Research
    14 February 2020
    Published byTellimer Research

    The Central Bank of Nigeria (CBN) in a circular published earlier this week has exempted six companies from its ban on the importation of milk, its derivatives and dairy products. The companies are Chi Ltd, FrieslandCampina WAMCO Nigeria, Integrated Dairies Ltd, Nestle Nigeria plc, Promasidor Nigeria Ltd and TG Arla Dairy Products Ltd. 

    This amendment follows the July 2019 circular banning commercial banks and other authorised dealers from accepting Form M for the importation of milk and other dairy products, which was based on the argument that the restriction would result in FX savings and that Nigeria could considerably ramp up its milk production within a 12-month period.

    The CBN noted that is revised decision came on the back of its efforts to stimulate local production of milk, which has remained weak despite the abundance of natural resources required for milk production. 

    Nestle Nigeria, which is the only one of the six names under our coverage, is particularly well positioned to benefit from this development, as its most recent results saw a single-digit decline in revenue from the food segment. Nestle’s performance in the past four quarters has been much stronger than the rest of our Nigerian consumer coverage universe, which we believe is due to the strength of the brand and its strong distribution network; as well as the company's efficiency in managing operating cost pressures. We discussed this in detail in our recent Nigerian consumer companies report .

    Nigerian milk and inflation

    Nigeria boasts c19.5mn cattle, of which 85% are owned and managed by nomadic herdsmen, leaving 15% to medium- and large-scale farmers.

    The country’s milk production is estimated at 600,000 metric tonnes (accounting for 13% of West Africa’s total production) as compared with demand, which is estimated at 1.3mn metric tonnes. This is a sizeable shortfall; hence imports cost cUS$1.2bn-1.5bn annually, according to the CBN governor. 

    In addition, the ability of local cattle to produce milk is undermined by the long distances they travel for grazing (characteristic of Nigeria’s nomadic herders) and the inadequate supply of feed and water, among other factors, all of which result in lower returns, creating a disincentive for local milk manufacturers and reducing the activity’s commercial viability. More recently, the conflict between herders and farmers over encroachment on land used for crop farming has deterred local producers from pursuing backward integration.

    The recent measure permitting these six companies to import milk and dairy derivatives is expected to increase local milk production by c50,000 metric tonnes within the next 12 months and ease the upward pressure on the prices of domestic dairy products, which have been rising. Over the past few months, milk and dairy products have been key drivers behind the acceleration of food price inflation, which came in at 14.7% in December, against an 11.9% core inflation figure.

    Chart: 2019 inflation composite yoy change

    Source: Bloomberg

    Similarly, this revision of the policy should help to facilitate easier access to funding for dairy investors, conserve FX reserves, contribute to economic growth and boost employment opportunities in the sector. The CBN in its press release highlighted that the six companies had showed willingness to participate in the apex bank’s backward integration programme aimed at scaling up capacity to improve local milk production.

    Positive for the six firms

    For the individual companies, this is a positive, as the recent policies around the FX ban on milk importation, the border closure and the newly implemented higher VAT rates have all exerted upward pressure on inflation, in turn resulting in the erosion of consumer purchasing power and hitting the companies’ earnings.  

    Nestle Nigeria, which is the only one of the six names under our coverage, is particularly well positioned to benefit from this development, as its most recent results saw a single-digit decline in revenue from the food segment. Nestle’s performance in the past four quarters has been much stronger than the rest of our Nigerian consumer coverage universe, which we believe is due to the strength of the brand and its strong distribution network; as well as the company's efficiency in managing operating cost pressures. We discussed this in detail in our recent Nigerian consumer companies report .

    Asides from these six players, there are other participants looking to boost local production of milk and other dairy products. They include L&Z Integrated Farms, a Kano-based dairy farming firm with capacity of 24,000 litres of milk daily (c8.7 metric tonnes per year).

    However, we believe the sector still requires sizeable capital expenditure and that the government can encourage this by complementing the efforts of the CBN through improving access to pasture and water, and improving critical infrastructure (feeder roads, milk collection centers, cargo trains, etc.) to encourage investment. More importantly, the government needs to establish a framework to resolve the long-standing herder-farmer conflict to enable local producers to increase production and create an incentive for the backward integration objective.