Factors determining aggregate demand for dairy products

Demographic trends

14. When estimating milk consumption in West Africa, it is important to take account of the regional distribution and growth of human populations. Population growth tends to increase the potential demand for milk. Similarly, since urban consumption is often supplied through imports rather than domestic production, urbanisation can be expected to boost the demand for imported dairy products, provided that incomes increase.

15. Based on UN population statistics, on Jahnke (1982) and on a review of "the allocation of urban populations in West Africa to different ecological zones" (ILCA 1987), Table 1 presents projected 1988 estimates of rural and urban populations living in different ecological zones of West Africa.

16. Thus, in 1988 about 190 million people were living in West Africa. While West Africa as a whole was experiencing a major transformation from a largely rural to an urban area, urban populations predominated in the sub-humid and humid zones where most of the countries with relatively high incomes are located. Nigeria alone accounted for 100% of the highland urban population, for almost 80% of the urban population in the sub-humid zone, and for over 55% of the urban population in the humid zone. Compared with these areas, arid and semi-arid zones remained very much rural.

Table 1. Aggregate distribution of West African human populations in 1988 by ecological zone and rural/urban category (thousands and percentages)

		Population living in:
		Arid zone	Semi-arid zone	Sub-humid zone	Humid zone	Highlands	Total
Rural population	'000	11898	51514	27023	45645	3165	139245
	(%)	(91%)	(82%)	(65%)	(66%)	(92%)	(73%)
Urban population	'000	1177	11150	14905	23498	260	50990
	(%)	(9%)	(18%)	(35%)	(34%)	(8%)	(27%)
Total population	'000	13075	62664	41928	69143	3425	190235
	(%)	(7%)	(33%)	(22%)	(36%)	(2%)	(100%)

Source: Own calculations based on data from the UN (1986), Jahnke (1982) and ILCA (1987).

17. Between 1980 and 1985, human populations increased by an average rate of 2.6% in drier areas and by 3.2% in moister areas of West Africa, while urban population growth rates in these areas approached 5 and 6% respectively (UN 1986). Over the 1974/76-1983/85 period, aggregate dairy consumption in West Africa increased at an annual rate of 4% in drier areas and 6% in moister areas (FAO 1976a, 1976b, 1985a and 1985b). Part of this increase in dairy consumption can be attributed to population growth and to rapid urbanisation, especially in the case of moister areas.

Changes in incomes

18. Changes in income can be expected to cause significant shifts in the nature, scale and location of demand for milk. One indicator of differences in expenditure patterns of various income groups is provided by the calculation of the ratio of the value of food and milk expenditures to total household consumption expenditure. Available information from consumer surveys for selected West African countries indicates that the proportion of total household expenditure spent on food declines as income rises.

19. Though variable among countries and income groups located in differing areas, the average share of expenditure on dairy products by urban households in West Africa appears to be low, approximating 2% (within a range of 0.3% and 4%) as against 44% for the proportion spent on all food items. The findings also suggest that, up to certain income levels, increasing incomes do not necessarily result in increased expenditure on dairy products.

20. To give but a few examples, the FAO/ISCDD (1975) reports that the income elasticity of demand for all milk in Zaria (Nigeria) was 0.6 which implies that a 10% rise in income in this area will result in a less than proportionate increase in milk consumption of 6%. Household survey information for urban Chad (Enquête budget 1972) also shows that, at very low income levels (< 10,000 FCFA/month), relative expenditure on milk actually falls as income rises, suggesting that there are other food and/or household priorities to fulfill. For income levels exceeding 10,000 FCFA/month, the proportion of expenditure on milk increases consistently with income while at the same time there appears to be a switch from curd towards more fresh milk consumption, and supplementation with condensed milk as income goes up.

21. Thus, available evidence from consumer surveys in West Africa, though not providing a definite picture about the exact relationship between income and milk consumption, suggests that dairy consumption patterns are influenced by income growth and its distribution between differing regions and consumer groups. Furthermore, past trends in milk consumption and aggregate statistics for West Africa indicate that the demand for dairy products rises with income. According to FAO 1975-2000 projections, income elasticities of demand for milk are positive and appear to lie between 0.50 and 1.20 in most of West Africa (Jahnke 1982). From 1965 to 1980 the average annual growth rate in GDP approximated 3.3% in sub-Saharan Africa though this sharply declined to 0.4% between 1980 and 1987 (World Bank 1989). Part of these increases in incomes would have occurred in West Africa, especially in the 1960s and 1970s when coastal countries of the region were very prosperous. Purely in terms of these income developments, it can thus be assumed that dairy demand in West Africa has increased in the last two decades.

22. But even if one accepts this general conclusion, there is a need to take account of the differential response of dairy demand to income growth and its distribution, and to changes in supply and demand situations. In many West African countries, purchasing power is concentrated in urban areas and government income policies have largely been unsuccessful in significantly narrowing inter-sectoral income gaps. Under such circumstances, one would hardly expect dairy demand to increase without any disparities.

23. In fact, evidence for West Africa suggests that, except for traditionally milk consuming areas, dairy demand is strongly biased towards urban areas and relatively high income consumers. For instance, consumer survey data for Nigeria suggest that self employed households with lower incomes, spend more on food than wage earners but less on dairy products (Nigeria 1983). In Mali, those employed in the private sector appear to be the main consumers of milk (OMBEVI 1976). In Côte d'Ivoire, civil servants and qualified employees were found to be the major consumers of yoghurt, cheese and fresh milk although consumption of packed milk was common among all occupational groups in Abidjan (Enquête budget consommation 1979).

24. It is also important to note that income changes in West Africa have often been accompanied by changes in the actual structure and composition of milk demand. With rapid urbanisation and income growth, a certain attraction has taken form for imported dairy products like dry, evaporated and condensed milk, which are now quite widely consumed in urban areas. And there would appear to be good reasons for the preference accorded such items. For one thing, they are more readily and regularly available than the often small and seasonal volumes of milk supplied by the domestic sector. For another, they can be processed into forms which can be purchased easily, with the added advantages of better hygiene and preservation. But it seems unlikely that their spread would have been so rapid had more regular, plentiful and better quality local supplies been available or had past developments in income and policy not been as favourable to their consumption.

25. On the whole, in the last two decades, West Africa's dairy demand has been characterized by a virtual stagnation of rural milk consumption, even in the traditionally milk producing areas, and by changes in the structure of demand which have taken place in urban areas where incomes are higher. The 1970s was a period of relative prosperity for some West African countries and most of urban demand was then met through dairy imports which were mainly consumed by middle and high income groups. In recent years, income growth has slowed down and the prosperous oil-producing countries and primary commodity exporters of the 70s are now facing sharp falls in world prices for their exports, the build-up of external debts and foreign exchange shortages. It is thus highly likely that large reductions in dairy imports will occur in the future despite the fact that populations are large and urbanisation increasing in West Africa. This will probably have a more negative impact on milk consumption by lower income groups who have come to be used to imported dairy products and who have no local milk supplies to fall back on.

Prices

26. Prices reflect not only underlying market forces but also qualitative differences in consumption and in policy interventions, the effects of which are hard to quantify. In the particular context of West Africa, differences in consumption habits, in milk quality, in marketing and in price policies, render the measurement of milk consumer price response a difficult task. An additional problem is the lack of reliable cross-country price data over a sufficient period of time. The following discussion is therefore more indicative rather than in any Way conclusive and will look, very generally, at domestic and international dairy prices and at related developments which might have influenced dairy demand in West Africa.

(i) Consumer prices

27. Prices are an important determinant of dairy demand. The little evidence that is available on milk consumer prices in West Africa does not allow to discern a particular direction to generalize for the region as a whole. Table 2 gives a few examples of consumer and border equivalent prices per kg of LME ³ for some dairy products in a number of West African countries. For convenience, all prices in the table are expressed in US dollars converted at the official exchange rates prevailing in the countries and years in question (FAO 1985b). Border price equivalents are unit c.i.f import values calculated from FAO trade yearbooks (various years). For reconstituted milk and yoghurt, the calculation of border prices takes into account the c.i.f price of dry milk and the international f.o.b price of butter-oil in the corresponding years, and the costs of marketing, processing and recombining milk ⁴. No adjustments are made for overvaluation of currencies and inflation.

28. Table 2 highlights the difficulties involved in an assessment of milk prices in West Africa. In all four of the countries considered, the domestic retail prices of imported dairy products were higher than their border price equivalents, implying that the consumption of these products has been taxed. However, given the inadequacy of the data on which the calculations in Table 2 are based, it is difficult to accept this conclusion without reservations. The actual price situation may for instance be different if more accurate, product and country specific, figures on processing and marketing costs were used.

Table 2. Consumer and border equivalent prices of milk products in some West African countries (in US $ per kg of LME).

Country nature of milk product		Year	Consumer prices on: a>		Border equivalent prices
			Local market	Official market
Niger
	- Local fresh milk	1982/83	0.46	0.65	-
	- Yoghurt b>	1982/83	0.59-0.68	0.79	0.59
Mali
	- Local fresh milk	1984	0.52	0.46	-
	- Reconstituted milk	1983	-	0.41	0.33
	- Dry milk in cans	1983	-	0.17	0.14
Côte d'Ivoire c>
	- Local fresh milk	1985	0.39	-	-
	- Pasteurised and reconst.	1985	0.33	-	0.26
	- Sterilised milk	1985	0.58	-	0.47
	- Yoghurt	1985	0.54-0.73	-	0.41-54
Nigeria
	- Local fresh milk d>	1981	0.75	1.07	-
	- Local sour milk e>	1986	0.60	-	-
	- Evaporated milk f>	1985	1.53	1.27	0.77

a> Urban retail prices of milk sold by traders direct to consumers (local market) or by government dairies (official market).

b> Women in Niamey buy milk powder to manufacture yoghurt at home. Yoghurt of this type is sold on a per ladle basis or in gourds (Sidibe 1982).

c> Average retail prices of various brands of pasteurised, reconstituted and sterilised milk in different department stores. For yoghurt, the minimum and maximum of observed prices are given (Atse-Atse 1987).

d> For fresh milk, the local market price is an average of retail prices in Funtua, Gusau Gombe, Abet and Kurimin Biri; the official market price is an average of factory gate prices for milk processed by six government dairies (Nwoko 1986).

e> For sour milk, the 1986 litre price in Zonkwa rural town is indicated (Waters-Bayer 1986).

f> For evaporated milk, the local market price is the 1985 retail price of unsweetened evaporated milk in Lagos (World Bank 1987); the official market price is the 1984 government subsidised price of "Peak" evaporated milk to public institutions in Anambra State (Nwoko 1986).

Sources: (i) von Massow (1985); (ii) Sidibe (1982); (iii) Atse-Atse (1987); (iv) Nwoko (1986); (v) World Bank (1987); (vi) Waters-Bayer (1986).

29. In spite of their limitations, the data in Table 2 indicate that milk consumer prices have varied widely across countries, markets and types of dairy products and over time. In the cases of Mali and Côte d'Ivoire, the prices of reconstituted and pasteurised milk were lower than those of local fresh milk. On the other hand, sterilised milk and yoghurt in Côte d'Ivoire were expensive products while in Mali, dry milk in cans was the cheapest form of dairy consumption. In Niger and Nigeria, prices of processed local, and even imported dry milk, on the official market were also higher than prices charged on the local market. In fact, the price of dry milk-based yoghurt sold on the local market in Niamey was not only lower than its official market price but also close to its border price equivalent. It is also to be noted that in some localities of Nigeria, sour milk appears to be cheaper than fresh milk. But evaporated milk was, in all cases, the most expensive product in Nigeria even if its price was lower on the official market.

30. These data can be supplemented with other information which show that the absolute price of milk has often been high in West Africa. For example, Bachmann (1979) reports that the production price of a litre of milk varied from 12% to 111% of the 1978 average daily wages of skilled and unskilled labourers in the urban areas of Chad and Niger. Instances where powdered milk for infant feeding was overdiluted in order to make it last longer have been observed in Côte d'Ivoire and Ghana (FAO 1979), von Massow (1989) also maintains that consumer welfare gains, resulting from the Malian government's dairy import policy (e.g. subsidized retail prices on some imported items), have been relatively small and have mainly been captured by higher income urban consumers. Thus, it would appear that milk consumer prices in most of West Africa are beyond the reach of the Vast majority of urban, let alone rural, consumers.

31. Furthermore, the price of milk has been high relative to other food staples. As an example, rough estimates by ILCA (1979) show that milk/cereals price ratios in Ghana, Senegal and Mali ranged from 8.3 to 4.5 in 1975-76. Given the growing importance of cereals in West African food diets, it is unlikely that this situation has been reversed in recent years. However, it is worth noting that these price ratios were more favourable for traditionally milk producing/consuming countries.

32. To a large extent, such prices are the result of West African governments' market, trade and exchange rate policies. A number of studies have shown that government policies, which result in subsidizing urban milk consumption with low priced imported milk and in overvaluing exchange rates, have stimulated the demand for imported dairy products in West Africa. According to von Massow (1989), as much as a third of the changes in commercial dairy imports in sub-Saharan Africa during the 1970s could be explained by factors other than increases in human population and per capita income. These other factors were mainly related to import prices and government policies. For the period 1984-86, Williams (1989) calculated average nominal protection coefficients (NPCs) ⁵ of 0.59 and 3.27 for milk consumers in Mali and Nigeria respectively, suggesting that consumers were subsidized in Mali. In Nigeria, consumers were taxed in spite of the provision of milk at subsidized prices to public institutions like schools, cooperatives and department stores (Nwoko 1986).

33. Trade and exchange rate policies pursued by West African governments should also have favoured the consumption of imported dairy products, often at the expense of locally produced milk products. For instance, explicit or implicit tariffs on imports, though variable between countries and categories of milk products, have been kept low on items like condensed and evaporated milk in Côte d'Ivoire (Atse-Atse 1987), in Mali (von Massow 1989) and in Nigeria (Nwoko 1986). At the same time, the overvaluation of exchange rates, prevalent in several West African countries, will have reduced the costs of dairy imports relative to domestically produced milk. The failure of some West African countries to raise prices of dairy products in line with their high inflation rates may also have contributed to declines in real domestic prices and to increases in dairy imports.

34. While the foregoing implies that West African government policies have generally favoured low consumer prices for imported milk products, it does not Say much about their actual effects on dairy consumption. The exact extent to which policy interventions have influenced dairy prices, and subsequently consumption, has in fact not been sufficiently analyzed. Only a few empirical studies, and these dealing mostly with imports in a few West African countries, are available on these issues.

35. Despite the above, the evidence appears conclusive that government policies in West Africa have, in the past, generated patterns of urban milk consumption which have proved to be incompatible with domestic capacity to supply milk. In many cases, dairy imports have enabled governments to keep prices to urban consumers relatively low, without in any way improving the efficiency of local marketing channels or increasing local milk supply.

36. AH this underlines the need for considering differences in consumer preferences, in the share of milk in consumption baskets, in the constraints to existing dairy production systems, in marketing channels etc. when designing and implementing policies that aim to influence dairy consumption through prices.

(ii) International prices

37. Changes in international prices for dairy products can be expected to affect dairy import levels. As indicated earlier, a major feature of West African dairy consumption has been a widespread tendency to import dairy products from developed countries. World trade in dairy products is dominated by the EEC which, in 1985, accounted for over 50% of world dairy exports, this proportion rising to as much as 70% for skim milk powder (Raikes 1986).

38. In such a context, an important determinant of the pattern of world dairy trade relates to EEC dairy policies. Thus, OECD (1987) simulation models showed that the impact of reducing EEC assistance to the dairy sector by a modest 10% would be a 2.81% rise in the world price of milk in 1979-1981. It is notable that the expected rise in world prices in this study was greatest for milk among all other subsidized animal products considered.

39. In the late 1970s and early 1980s, the world dairy market was characterised by heavy EEC export surpluses and depressed prices for dairy products. As a case in point, the world price of skim milk powder declined from US$ 800/t in 1976 to US$ 600/t in 1985 (Atse-Atse 1987). The late 1980s saw substantial changes in the world dairy market; total world milk supplies decreased and in the first half of 1988 the price of skim milk powder rose to a level approaching double the GATT minimum export price of US$ 900/t (IDF 1988). In this period, EEC policies had acted to restrain dairy production and to restore market balance through lower production quotas and reduced stocks of butter, cheese and particularly skimmed milk powder.

40. Such developments appear to have influenced import demand in West Africa where the aggregate volume of dairy imports more than doubled between 1974/76 and 1983/84 and fell sharply after 1983/85 as prices of dairy products rose on the world market (FAO 1976b, 1985b and 1987b). Thus, in terms of international prices, the overall outlook for West Africa is one of declining dairy imports, with the likelihood that domestic milk production will grow in some countries to meet part of the unfulfilled demand that will arise from reduced imports. Whether increased domestic production will succeed in achieving this will largely depend on West African governments' commitment and ability to design, adopt and implement appropriate policies.