ZADF PERSPECTIVE

1. A BRIEF OVERVIEW OF THE DAIRY SECTOR IN ZIMBABWE

The dairy sector comprise milk producers some under ZADF and some operating as individuals. In
addition, the is a supporting frame with 5 major processors and 9 small scale processors, Stock feed
Manufacture Association and the Dairy Services as the dairy regulator. All these form a Trust under a
name Zimbabwe Dairy Industry Trust (ZDIT).
Majority of medium and large scale producers supply their milk via formal while under small scale
sector some are supplying formally to processors while other small scale processors supply milk through
their Milk Collection Centres (MCC).
Under Dairy sector we have 17 MCCs were majority supply direct their milk to processors, while other
value add their milk to lacto, amasi, cultured and sell to the local community.
Currently, in terms of membership, dairy sector constitute approximately 4095 registered small scale,
large scale and medium scale milk producers under 5 regions.
In terms of production, Zimbabwe registered a 4% decline in aggregated milk production from 79
Million litres to 76.6 Million litres the last 2 subsequent years.
In terms of the aggregated demand dairy sector has an inelastic demand which is around 130 Million
litres on an annual basis. There is currently a deficit in terms of milk supply and demand and the demand
is met through importing free duty powders.
In terms of productivity, on average the national average output/cow/day stood at 13.6L/C/D and
working towards attaining at least 15L/C/D with increase in genetics and addressing all major
challenges in the dairy sector.

2. CHALLENGES FACING THE SECTOR

Dairy farming sect is not exculpated from the high cost of inputs such as stock feeds & raw materials
cumulatively constituting 85% of the Total Cost of Production (TCP) with specific reference to SI145
of 2019 (Which regulates marketing of Maize), Soyabeans import barn and recent SI97 of 2021(Which
regulates marketing of Soyabeans) in additional to other 11 regulatory costs levied directly and
indirectly to milk producers.
Low producer prices is another critical challenge which also contributed significantly towards decline
in aggregate milk production and reduced productivity. Distortions in the milk payment system under
SI185 of 2020 and Forex Retention Policy i.e. the processors have made effort to pay 10% milk price
in USD which is subjected to the 20% Forex Retention liquidated in the local FCAs of farmers
Lack of sustainable financing models for dairy – to support farm mechanization. In addition, there are
issues around Land Property Rights for stimulating investment and acquisition of credit – i.e. Offer
Letters and 99 year Leases
 High output per worker in terms of labour costs under constrained productivity. There is also high
labour turnover attributed from higher wages in other competing sectors like construction and mining.
Explicit Exemption of Dairy Farmers from With Holding Tax to avoid confusion with some ZIMRA
Officials e.g. Chipinge Farmers
Covid-19 Pandemic – Dairy Supported as Essential Services

3. NATURE AND EXTENT OF COMPETITION IN THE DAIRY SECTOR

Dairy sectors is subdivided into 3 marketing structures of which one informal is more of oligopoly and the
other 2 formal markets are oligopoly in nature:

i. At producer level –
Informal market which is more inclined towards oligopsony which more buyers of milk than the
suppliers. In this case the milk producers as price setters are enjoying $US1.50 as farm gate price.
The only major challenge in this marketing strategy is that it is not building a value chain relation which
is effective and key for acquiring financial, social and physical sustainable livelihood capital assets i.e.
financial power to acquire assets, good dairy breeds, access to dairy extension services outside ZADF
among other services farmers are getting if supplying milk via a formal market system.
ii. Formal input market (feed and vet medics suppliers) –
More of Cournot oligopoly model and under this model stock feed companies are price setters
(Currently ranging from $USD16 – Ice Feeds up to $USD18 – Feed mix and National Foods) and in
terms of competition, they compete for prices of bag of stock feed regardless of quantity and quality.
Currently in terms of production ratios of dairy feed to other livestock feeds like poultry, pig, etc. as a
percentage, Ice Feeds produce 76% of its total feeds as dairy feeds while Profeeds only produce 2%. In
addition, National feeds produce 26% as Dairy feeds while Country Feeds produce 32% as dairy feeds.
Therefore, the type of competition in the feed companies is more complex as our research has shown
that as much as there is more like an oligopoly with few feed suppliers, there is also an internal
competition within each company as dairy feed is competing with other livestock feed and in this case
poultry is always major priority due to high demand of meat over dairy on the agricultural market.
In terms of Entry to this Market: The market of the raw materials is regulated by AMA; National
Biotechnology Authority which to some extend pose a threat to new players. Cartels between feed
suppliers and milk processors as one of the Merger strategy has sustained the feed companies although
to a greater extent, farmers always suffer “the cartel effect”. There is rumour that Delta Corporation in
Zimbabwe is also trying to enter the feed marketing sector. However, from a policy-marketing analysis
point of view this might either alter the nature of the marketing system or if Delta is not powerful to
influence the strategic position of this market system it might continue with the same Cournot oligopoly
depending on the expected payoff in this game. This is one of the prisoner’s dilemma.
iii. Formal output processor level –
 More of Bertrand oligopoly model. Under this milk processing market Processors who produce a
homogeneous good for example UHT (Dairibord), takes the price of competitors (Dendairy and
Prodairy) fixed when deciding what price to charge.
Intention/Rationale behind this Marketing Model/Strategy: The marketing model allow processors to
keep a stationary producer price per given period, most often a month hindering competitiveness. For
instance the variance in the producer prices across the processor is so small around 0.02 implying that
deviation from the milk price/litre charged by each processor is close to the mean. Currently mean is
around $54ZWD/Litre which is almost what every processor is paying.
However, on the other hand a more constraining market structure has emerged due to MERGERS in
the processor sub-sect where Dairibord which mainly produce UHT among other high value products
i.e. yoghurts has some arrangements whether formal or informal with Nestle and some other processors
like Dendairy to establish a Nash equilibrium and operate more like a monopoly thus enjoying
supernormal profits, suppressing the producer prices, sharing their raw milk to share the profits since
processors are not competing for prices but competing for quantities.

4. IN TERMS OF PRODUCTION AND MARKETING INTEGRATIONS –

The milk processing sector has dual integration system where some have adopted a horizontal while
others make use of the vertical integration system. Kefalos has a vertical integration and controls its
production from farm up to the retail level. Kefalos has mergers and owners have control over one of
the vet medics supplier (Red Dane), controls one of the stock feed supplier (Ice Feeds) and also sales
directly a significant portion to retailers and direct to consumers.
Closely similar to Kefalos’ integration system is Prodairy, who also has a vertical integration and
owners have influence on Prob rands, Profeeds, National Foods. Dendairy have a similar arrangement
from farm level also the magnitude is very low under this company compared to Kefalos and Prodairy.
However, small scale processors have a vertical integration also.
Contrary to that Dairibord and Nestle use a horizontal integration but in critical times as their dominant
strategy is to MERGER and share their raw materials to influence the market system (Influence Pricing)
over those with vertical integration.

5. TOP 5 DAIRY FARMERS AND THEIR PROSPECTIVE MARKET SHARES

Farmer Name Market Shares in % of Total Aggregate Milk

Production Zimbabwe
Carol Smith 3%
Lieben Berg 4%
Delan Kotze 4%
Stoff Howg 4%
Berry Gareth 5%
Ajs Kirk 6%
 6. ZADF’S VIEWS ON THE MERGER WITH REGARDS TO ITS LIKELY EFFECT ON
COMPETITION

In terms of the positive effects of the mergers

Mergers under Kefalos has a positive effects in terms of ensuring product availability and smooth
flow operations. Currently, one of our major milk producer MCC (Marirangwe with close to 776
000 Milk supplied by small scale producers) benefits vet medicines from Red Dane; Stock feed in
time and adequate feed from Ice feeds; and reliable market of milk to Kefalos.
Kefalos provides farmers with tractor for silage making. On the same note, Dendairy merger with
farmers is benefiting them in terms of lucerne among other feeds provided via a cartel system with
feed companies.

In terms of the negative effects of the mergers

Such mergers and intergation under Kefalos inhibit competition to a greater extent as the power to
control market must be distributed across different players instead of controlling the whole value
chain from farmers perspective. Such power dynamics influence prices, improvement in feed quality
parameters. For instance, just because Kefalos controls has such megers he is the lowest milk payer,
although appearing as cheapest feed supplier as Ice Feeds but with 12-13%CP.
Mergers under Prodairy, and Profeeds have no significant benefit since profeeds only has dedicated
2% towards dairy yet buying most of our milk. The greatest efforts of profeeds as a merger to
Prodairy is poulty.
The merger between Dairibord and Nestle creates a monopoly crisis which create distortion in the
marketing system enjoys supernormal profits even above the oligopoly pricing. This type of merger
is one of the greatest inhibitor to dairy sector if continue to be adopted among processors as it
destroys competition within the whole milk processing sector.
Merger between processor and feed manufacturer, has proved not to be a viable strategy as both
players are oligopolists who seek to maximize profits although with different dominant strategies.
Mergers between farmer and processor depends on the degree of concentration of farmers under
such a merger, influence of the milk processor in the market, the integration adopted by the
processor as well. In terms of the concentration of farmers the more the farmers under merger, the
more the power is inclined towards the milk processor in the marketing system. The more the power,
the processor may acquire under their current Bertrand oligopoly the higher the influence on price
determination from “This processor” will have inhibiting growth and competition.
Therefore, relating to Dairibord farmer issue, if the farmer has a capacity to produce more volume
(close to 50% of what all other farmers are supplying) which significantly outpace other processors
in such a case the merger will have a ripple effect on the competition within the milk processor
sector. However, since Dairibord has a separate merger with Nestle this will as well worsen the
situation if Dairibord is to increase milk production via such farmer mergers. The likelihood of
producer prices to continue suppressed, UHT milk shortages to persist and cartels to continue is
high.
On another point if the merger is coming with a processor with vertical integration like Kefalos, a
different behaviour in the market is expected from the input side (feed, vet medics), but same
behaviour is expected from the milk market side due to the nature of the market.

7. Any other information deemed relevant for the Commission’s analysis

If anyone is to enter the dairy sector as a unique entity, the following are specific areas to address
gaps in the dairy sector which can promote sustained growth:
1. Provision of dairy specific long term at low interest rate financial portfolios
2. Promoting investment in dairy equipment and green technology at subsidized cost or dairy
specific credit terms
3. Increase in the number of firms producing feed, and create cheap access to raw materials for
feed to Stock feed companies.