PRE-FREASIBILITY STUDY FOR DAIRY PROCESSING PLANT docx

The rationale for setting up the plant is: • The market for processed milk is estimated at 200 million litres per annum while supply is 139 million litres per annum; in addition the mark

DISCLAIMER

The purpose and scope of this Pre Feasibility Study is to introduce the Project and

provide a general idea and information on the said Project including its marketing,

technical, locational and financial aspects All the information included in this

Pre-Feasibility is based on data/information gathered from various secondary and primary

sources and is based on certain assumptions Although, due care and diligence have been

taken in compiling this document, the contained information may vary due to any change

in the environment

The Planning & Development Division, Government of Pakistan, Mascon Associates

(Pvt.) Ltd who have prepared this Pre-feasibility study, or National Management

Consultants (Pvt.) Limited who have quality assured this document do not assume any

liability for any financial or other loss resulting from this Study

The prospective user of this document is encouraged to carry out his/ her own due

diligence and gather any information he/she considers necessary for making an informed

decision

TABLE OF CONTENTS

ACRONYMS iii

EXECUTIVE SUMMARY .iv

CHAPTER 1 – INTRODUCTION 1

1.1 OBJECTIVE AND SCOPE OF THE STUDY 3

1.2 METHODOLOGY 3

1.3 STUDY TEAM 4

CHAPTER 2 – MARKET/ NEEDS ASSESSSMENT 5

2.1 PROFILE OF PAKISTAN’S DAIRY SECTOR 5

2.2 MODERN MILK PROCESSING INPAKISTAN 7

2.3 PRODUCT PROFILE & MARKET SHARES OF THE PROCESSING SECTOR 8

2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND CONSUMPTION 9

2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT PROCESSED MILK 10

2.6 MARKETING OF MILK AND DAIRY PRODUCTS 13

2.7 MARKETING OF PROCESSED LIQUID MILK 17

2.8 MARKETING OF DAIRY PRODUCTS 18

CHAPTER 3 – TECHNICAL EVALUTION 21

3.1 LOCATION PREFERENCE 21

3.2 SPECIALIZED MANPOWER 23

3.3 REGULATORY FRAMEWORK 24

3.4 IN-HOUSE QUALITY ASSURANCE 25

3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT 25

3.6 PROPOSED UHT PROCESSING UNIT 26

3.7 THE UHT PROCESS FLOW 31

3.8 TECHNICAL REQUIREMENTS & THEIR AVAILABILITY 33

CHAPTER 4 – GOVERNANCE AND MANAGEMENT STRUCTURE 35

4.1 GOVERNANCE STRUCTURE 35

4.2 MANAGEMENT STRUCTURE 37

4.3 RAW MILK PROCURMENT & TRANSPORTATION 39

4.4 PLANT OPERATIONS AND QUALITY ASSURANCE 39

4.5 MARKETING AND SALES 39

4.6 FINANCE DEPARTMENT 40

4.7 HUMAN RESOURCE DEPARTMENT 41

CHAPTER 5 – FINANCIAL EVALUATION 42

5.1 CAPITAL COST OF THE PROJECT 42

5.2 PROJECTED PROFIT & LOSS ACCOUNTS 44

5.3 PROJECTED CASH FLOW 45

5.4 PROJECTED BALANCE SHEETS 46

5.5 INTERNAL FINANCIAL RATE OF RETURN 47

5.6 RATES OF RETURN 47

5.7 PAYBACK PERIOD 48

5.8 FUNDING OF THE PROJECT 48

CHAPTER 6 – CONCLUSION .49

LIST OF TABLES

TABLE 1 – MILK PRODUCTION IN SELECTED COUNTRIES 5

TABLE 2 – MILK PRODUCTION (REGION WISE) 6

TABLE 3 – PROCESSOR CAPACITY 8

TABLE 4 – MARKET SHARE AND SELLING PRICE OF MILK PROCESSED IN THE FORMALSECTOR 9

TABLE 5 – PROJECTION OF FRESH MILK PRODUCTION AND CONSUMPTION TO2010 10

TABLE 6 – MILK PRODUCTION (REGION WISE) 22

TABLE 7 – MILK PRODUCTION INPUNJAB 22

TABLE 8 – INTERNATIONAL MILK PRODUCTION COSTBENCHMARKS 23

TABLE 9 – UHT MILK PROCESSING PLANT PROJECTED CAPITALCOST 42

TABLE 10–PROJECTED PROFIT & LOSSACCOUNTS 45

TABLE 11–PROJECTED CASHFLOW 45

TABLE 12–PROJECTED BALANCESHEET 46

TABLE 13–PROJECTEDIFRR 47

TABLE 14–RATES OFRETURN 47

TABLE 15–PAYBACKPERIOD 48

ANNEXURE- 1 PAKISTAN – A PROFILE

ACRONYMS

ASEAN Association of South East Asian Nations

CAA Civil Aviation Authority

CMER Center for Management and Economic Research (of LUMS)

FAOSTAT Food & Agricultural Organization of UN Statistics

HDIP Hydrocarbon Development Institute of Pakistan

IFC International Finance Corporation

IFCN International Farm Comparison Network

km Kilometre

LUMS Lahore University of Management Sciences

MINFAL Ministry of Food, Agriculture and Livestock

PIA Pakistan International Airlines

PISDAC Pakistan Initiative for Strategic Development And Competitiveness PNSC Pakistan National Shipping Corporation

PTA Pakistan Telecommunication Authority

PTCL Pakistan Telecommunication Limited

SAARC South Asian Association for Regional Cooperation

SMEDA Small and Medium Enterprise Development Authority

UNICEF United Nations International Children’s Emergency Fund

EXECUTIVE SUMMARY

Pakistan is regarded as the fifth largest producer of milk in the world In 2004 it produced more than 28 million tonnes of milk, based on current projections it is expected to produce more than 33 million tonnes in 2006

In addition, Pakistan is a “milk surplus” country in a “milk deficient” region, despite this,

it had to import US$ 12 million worth of milk powder to even out seasonal supply imbalance This Pre-feasibility Study explores the possibility of setting up a 100,000 litres per day UHT milk processing unit near Lahore in the Punjab province of Pakistan The rationale for setting up the plant is:

• The market for processed milk is estimated at 200 million litres per annum while supply is 139 million litres per annum; in addition the market is growing at around 20% per annum

• The consumers have developed a taste for UHT milk and also for its variants like

“flavoured milk”, etc

• The location of the plant is proposed near Lahore, as the surrounding areas of Lahore produce 70% of the total milk produced in Pakistan

• The Government of Pakistan has launched a program to increase milk yield per animal from the current 6 litres per day to 13 by 2012, in addition the GoP is launching a mass consumer awareness program aimed at highlighting the dangers of consuming raw unprocessed milk

• The technology and the skills required for setting up a modern UHT plant and its milk collection infrastructure exists in the region The first UHT plant which was set up in

1977 is still operating and has seen continuous capacity increase over the years

• The aseptic packaging which increases the shelf life of the UHT processed milk is ideally suited for the local climate in Pakistan which is characterized by high summer temperatures

The total cost of the project is estimated at Rs.670 million with a pay back period of approximately 4 years

CHAPTER 1 INTRODUCTION

Agriculture is the largest sector of Pakistan’s economy, contributing nearly 22%

of the total output (GDP) and employing around 45% of the total labor force Livestock contributes nearly 50 percent to the value addition in the agricultural sector, and almost 11 percent to Pakistan’s GDP Livestock is the main supplier

of basic raw material to the Pakistani food processing industry, with milk being the most important sub-sector; the value of milk produced is higher than the value

of two major crops, i.e wheat and cotton

Pakistan is regarded as the fifth largest producer of milk in the world with a total production of about 28 million metric tons in 2004, despite such a huge volume the country is a net importer of milk and milk products The major reason for this

is that 12 – 15% of the milk produced is “lost” during transportation and storage due to lack of proper processing facilities

The Government of Pakistan (GoP) in cooperation with various multilateral donor agencies, apart from utilizing its own in-house capabilities, has prepared a comprehensive strategy for bringing about a “White Revolution” in Pakistan The main objective of the GoP is poverty alleviation in the rural areas by helping the subsistence farmer, who provides the bulk of the milk, to increase the yield of milk Currently, animal productivity is well behind other major dairy producers Pakistan has three times the animals that Germany has, but milk−yield per animal

is one fifth of Germany and one third of New Zealand representing a significant loss in economic potential

The strategy developed by the GoP will focus on raising productivity and to do

so, the dairy industry will:

• Establish model commercial dairy farms across full range of farm sizes to increase overall farm productivity by demonstrating new technologies and better practices;

• Upgrade rural and urban supply chains by facilitating investment in chilling tanks for purchase and collection of milk which will give farmers a guaranteed sale for quality milk;

• Investigate modern technologies, systems, and underlying seasonal economics

of dairy production to improve quality of investment decisions and to correct market distortions;

• Expand supply pockets to increase the milk supply and create new income earning opportunities; and

• Improve the quality of animal feed to ensure better quality of milk

As per the GoP strategy in order to improve the business and regulatory environment, workforce, and industry organization the milk processing industry will be duly supported to:

• Rseolve the health and safety problems associated with poor quality milk;

• Improve and enforce existing food safety standards in line with international standards;

• Promote policies which will support the development of an expanding export industry;

• Provide practical training to farmers on modern farming practices;

• Raise capacity of training institutions to provide required training and qualifications;

• Establish a permanent industry organization, “Dairy Pakistan”, representing farmers, processors, and government stakeholders with responsibility to carry out the Dairy Industry Strategic Plan

This Strategy for increasing productivity and quality of milk, is expected to deliver value to both the producers and consumers Conservative estimates show

an additional Rs.11million per day of income generated for farmers, with more optimistic scenarios showing over Rs.30million The average farm income per year stands to increase by a factor of four by 2015, significantly reducing rural poverty In addition, the Strategy aims at increasing average yield per animal from the current 6 liters per day to 13 liters by 2015 As a first step, the Government of Pakistan has established “Dairy Pakistan” to ensure that the targets set forth by the Strategy are achieved

The expected increased availability of milk will help Pakistan enter the export market, as it is located in a “dairy deficient” area where most of its neighbors to the west are net importers

1.1 OBJECTIVE AND SCOPE OF THE STUDY

The purpose of this Pre-Feasibility Study is to establish the need for setting up of

a milk processing plant to avail more than 20 percent growth per annum in the Sector Pakistan has got large quantities of raw milk which in 2004 was estimated

at close to 28 million tonnes per annum with only 2 – 3% actually being processed by the dairy industry

The scope of the study is to undertake, inter alia, need assessment, technical evaluation, assessment of governance and management structure and financial evaluation of the project, on the basis of which recommendations are to be developed for setting up the said project

1.2 METHODOLOGY

The methodology employed for this study consists of review of published data as well as exhaustive interviews of the stakeholders including farmers, dairy experts, dairy marketing companies, multilateral agencies and Government of Pakistan officials as well as those belonging to MINFAL and the Government of Punjab Lastly, we would like to bring on record the cooperation extended by those individuals and companies who though no longer associated with the Industry,

were willing to share their opinions and experiences to facilitate new entrants coming into the industry

The data collected has been analyzed using quantitative and qualitative techniques, where required necessary assumptions have been made which have been mentioned in the report

The study team comprised of experts in the fields of dairy and animal husbandry, economics, engineering, food processing, marketing and finance

CHAPTER 2 MARKET/ NEED ASSESSSMENT

2.1 PROFILE OF PAKISTAN’S DAIRY SECTOR

As stated earlier, agriculture is the largest sector of Pakistan’s economy, contributing nearly 22% of the total output (GDP) and employing around 45% of the total labor force Livestock contributes nearly 50 percent to the value addition

in the agricultural sector, and almost 11 percent to Pakistan’s GDP Livestock is the main supplier of basic raw material to the Pakistani food processing industry, with milk being the most important sub-sector; the value of milk produced is higher than the value of two major crops, i.e., wheat and cotton Pakistan is regarded as the fifth largest producer of milk in the world with a total production

of about 28 million metric tons in 2004

TABLE - 1 MILK PRODUCTION IN SELECTED COUNTRIES

milk production and number of dairy animals It produces over twenty million

metric tons of milk or about 70% of the country’s total

The production of milk in different provinces of Pakistan is given below:

TABLE -2 MILK PRODUCTION (REGION WISE)

Source: International Farm Comparison Network (IFCN), 2003

Dairy product mostly distributed and sold in Pakistan is still fresh milk

However, as per study conducted by Unilever Pakistan Ltd., processed milk

consumption is growing at above 20% per year Of the different types of

processed liquid milk, pasteurized milk and UHT milk in Tetrapacks are by far

the most popular products Yogurt, butter, cheese and ice cream represent a small

proportion of the processed dairy products The informal sector produces Lassi (a

drink from boiled and/or raw milk), which is very popular in the summer months

Other common indigenous milk products are boiled milk and sweet-meats

produced by condensing liquid milk, which is called Khoyia (condensed milk

with or without sugar)

Only 3-4% of total milk production is processed and marketed through formal

channels For the other 97%, an extensive, multilayered distribution system of

middlemen has evolved to supply milk produced for immediate consumption

“Katcha Dodhies” collect their milk from villages and either sell to the local

market or to “Pacca Dodhies” “Pacca Dodhies” then supply milk to distributors and retailers in urban areas, “Gawallas” and dairy processors The Gawalla supplies milk directly to urban and rural households The current value chain is illustrated below:

A long tradition of dairy consumption, a sizeable domestic market, high per capita rates, and yet underdeveloped processing and value-added products present significant potential to increase both the economic and social value of the industry

2.2 MODERN MILK PROCESSING IN PAKISTAN

Modern milk processing in Pakistan started in the early 1960s when the first modern milk sterilization plant was set up By the mid-1970’s 23 milk pasteurization and sterilization plants had been set up However, due to the logistic difficulties in setting up an efficient milk collection system, short shelf-life of the product and lack of skilled labor, all but one of these plants shut down The first UHT plant was set up in 1977 and proved quite successful With the exception of army and Idara-e-Kisan dairy plants, the production of liquid pasteurized milk has ceased since the first units producing UHT long-life milk went into operation Table 3 presents basic information on the UHT milk-

CHART -1 DAIRY VALUE CHAIN IN PAKISTAN

Farmer

(Rs 10)

Middleman (Rs 11)

Contractor (Rs 13)

Processors (Rs 15)

Milk-man (Rs 15)

Processed, Unpackaged Milk (Rs 23)

Loose Milk (Rs 20-28)

Packaged Milk (Rs 29)

Source: SWOG Estimates

Bacterial count>5 mio./ ml

processing plants that are operating currently The data in the table referring to installed daily capacity are based on shifts including preparation and cleaning

TABLE – 3 PROCESSING CAPACITY

Average Daily (million liters)

year, roughly equal to about 0.5% of total (raw) milk produced However, the

domestic market for packaged milk is estimated at about 200,000 metric tons a

year, or a bit more than US$100 million at prevailing price levels of Rs32/liter

(refer to Table 4 for details on market share of different types of milk in the formal

sector).1

TABLE – 4 MARKET SHARE AND SELLING PRICE OF MILK PROCESSED IN THE FORMAL SECTOR

Types of Milk Market Share in Volume Sale Price Rs/Liter

Open Gawalla

Open Milk Sold at Milk

Source: SMEDA (Small & Medium Enterprise Development Authority)

2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND

CONSUMPTION

The production (supply) and consumption (demand) for milk and milk products in

Pakistan is characterized by conflicting seasonal fluctuations Milk production is

at its maximum during the period between January and April and at its minimum

during May – August when fodder is limited Milk consumption is at its peak in

summer At this time, because of the warmer ambient temperatures, people

increase their milk intake and consume a greater range of dairy products including

ice cream and yogurt

1

The market share of industrially processed (sold) milk estimated by SMEDA at around 5% of milk

processed in the formal sector should not be confused with that share of 0.5% of milk produced in the

Milk supply from rural animal holders decreases by half in mid-summer In contrast, the peri-urban producers (13% of all producers) have better control over their contribution to supply, which fluctuates less through the months It is assumed that the overall supply reaches a low point in mid-June; at this point, supply is only 55% of what is supplied during the peak period in mid-February Based on preliminary results from several small surveys, the overall demand varies from its highest point in June to an estimated low of 60% in December

2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT

PROCESSED MILK

Although Pakistan is the 5th largest producer of milk in the world, it faces a shortage of milk primarily because not all of its production actually makes it to the market It is estimated that only 45% of the milk produced is actually available for sale Of the milk that is sold by farmers, an additional 15-19% is wasted enroute-to-market due to spoilage from lack of proper cooling, storage, and transport systems In total, 55-60% of current milk production is lost from potential income generation and value addition A study done by the Lahore University of Management Sciences shows Demand and Supply for milk as follows:

TABLE – 5 PROJECTION OF FRESH MILK PRODUCTION AND

Annual Deficit

1971- 2005

2004- 2006

2005- 2007

2006- 2008

2007- 2009

2008- 2010

2009-Avg.

2010

2005-Average Production Average Consumption Annual Deficit

Currently this gap is being filled by the import of powdered milk About 6,000 to 8,000 tons or between US$10 million and US$12 million worth of powdered milk

is imported on an annual basis to fill the mismatch between an ever increasing demand and local supply Powdered milk is imported in the form of Dry Whole Milk, Dry Skim Milk and to a lesser degree, Dry Whey Imports of Dry Skim Milk vary between 15% and 25% of the total powdered milk imports However, the trend reversed in 2003 with Dry Skim Milk imports comprising about 70% of total powder milk imports

Another factor that is contributing to this gap is the concentration of milk production in the Punjab where nearly 70% of the milk is produced and because

of its very perishable nature it cannot be transported over long distances unless it

is processed using UHT This has seen UHT milk being marketed in the remotest areas of Pakistan including Gilgit, Gawadar, Punjgur etc

With increased urbanization in the country and the movement of Dairy animals out of the city limits, farms which are in the peri-urban areas of large cities like Karachi and Lahore are unable to cater to the demands of the rapidly increasing population This leads to frequent price increases and chronic shortages It is

PROJECTION OF FRESH MILK PRODUCTION AND CONSUMPTION, TO 2010 (MILLION LITERS)

therefore no wonder that the main centers for UHT milk consumption are the urban areas like Karachi, Lahore, Islamabad etc

As stated earlier, there is greater awareness of the current milk handling processes

in the traditional system by the urban consumer and he is extremely reluctant to consume fresh milk that has been handled in the traditional manner Traditional milk is collected in an unhygienic manner and there is no enforcement of standards, resulting in poor quality product In order to keep milk temporarily fresh, middlemen commonly add ice to the milk, which results in dilution of milk solids by up to 30% and often micro contamination takes place due to poor quality water in the ice

Although consumers have a greater preference for fresh milk, it needs to be boiled before consumption Working women in the cities have realized the convenience

of using UHT milk as it can be consumed directly from the packaging as it has a greater storage life

Fresh milk has high fat content, with greater health consciousness among the population, consumers are shifting to the use of UHT milk that has got lower fat content

According to a report prepared by Unilever Pakistan Limited, titled: Modern

Dairy Technology and Prospects for Growth, “The packaged milk market is estimated at 200 million liters per annum, valued at over Rs.6 billion, with a yearly growth rate of close to 20 percent over the last few years.”

With the large investments that the Government of Pakistan is making in the milk production side of the supply chain, both the quantity as well as the quality of the milk available for processing is going to improve In addition, a comprehensive strategy is being prepared to increase consumer awareness about the current state

of the quality of milk that is being sold as well as strengthening implementation of

food laws to international levels These steps are expected to see a surge in the demand for UHT processed milk in Pakistan; also exportable surpluses are expected to be generated because of the increased supply of milk

2.6 MARKETING OF MILK AND DAIRY PRODUCTS

2.6.1 MARKETING OF RAW LIQUID MILK

Because of the various systems of milk production in Pakistan and the task of supplying fresh milk regularly to consumers and manufacturers in both rural and urban areas, different marketing systems have been developed that often involve several intermediaries who form the marketing chain Intermediaries are rural

milk traders (katcha dodhis), highway collectors (pacca dodhis), rural vendors /

processors, commission agents, urban wholesalers, shopkeepers/processors and street and door-to-door vendors The flow chart is shown below in chart 2

CHART - 2 SIMPLIFIED DIAGRAM OF FLOW CHANNELS FOR

MILK IN PAKISTAN

Source: Strategy Development in Milk Production and Distribution (SMEDA Report, 2000)

Dairy Farmer

Milk Collection Agency

Milk Processing Plant

Retailer

2.6.2 MARKETING THROUGH RURAL MILK TRADERS

Traditionally, the most important middlemen are the numerous rural milk traders,

commonly called katcha dodhis Equipped with a bicycle or horse cart, or in some

cases now with a motorcycle and two to four milk cans, they make daily visits to 15–20 small milk producers, collecting some 75–90 litres of raw milk This may

take three hours and the distance cycled can easily be 20 km Most of the katcha

dodhis are independent Larger highway collectors, however employ a few of

these katcha dodhis Under the traditional system, women sell the milk to the

middlemen

Where competition is strong, usually in production areas with good access, the

katcha dodhis often have contracts with the producers to secure milk supply for a

certain period Then the purchasing price may be fixed, interest free advances may be given or both mechanisms may be used The value of advances usually corresponds to the value of milk supplied within two to four weeks As most

katcha dodhis do not have sufficient resources to finance their suppliers, they in

turn get advances from the larger collectors and sometimes from rural shopkeepers If no advances are granted, payment is normally effected within one week after milk collection

With a few exceptions, milk is collected only in the morning, the evening milk being used mainly for home consumption Milk is always collected by volume, never by weight, using measures of varying types and sizes Milk producers normally supply pure, unadulterated milk; however, to prevent deterioration of the

milk during their collecting tour, especially in the hot season, the katcha dodhis

add certain quantities of ice to prevent the milk from turning sour

2.6.3 MARKETING THROUGH RURAL & HIGHWAY MILK COLLECTORS

The highway milk collectors, or pacca dodhis, obtain their supply of milk almost exclusively from the katcha dodhis The daily volume collected by a pacca dodhi often exceeds 2000 litres, especially in the Punjab The number of katcha dodhis

supplying a single pacca dodhi ranges from 8 to 500, with a maximum of about

70 per collection point

At their collection points along or near the main roads, most pacca dodhis check

the milk visually, test fat and solids-not-fat (SNF) contents and measure the volume by pouring the milk into their own cans If the quality meets requirements, the agreed price will be paid Collectors supplying to dairy plants all use fat testing equipment

The pacca dodhis do not own chilling facilities, but most of them have one or

more motor vehicles Only the smaller collectors send milk to town by public transport or join other collectors who own or hire a small pick-up truck One

pacca dodhi may supply between 1 and 40 clients, depending on the milk volume

marketed and the demand of the individual contractor, milk shop or manufacturer Advances from shopkeepers seem to be rare The rural collector has cash

expenses of about Rs 1/litre for ice and octroi (communal merchandise tax), the

highway collector pays a similar amount and eventually Rs 1/litre for hired transport The vendor increases his margin through the sale of sweetened milk and

the manufacture of dahi or sweetmeats

2.6.4 MILK COLLECTORS SUPPLYING DAIRY PROCESSORS

Since the establishment of milk processing plants, highway milk collectors have been their most important and effective suppliers Despite rigid quality testing and payment according to butterfat content, plants procure the major part of their raw milk through private milk collectors This leads to difficulties during the lean production season when the supply gap results in price increase, which the manufacturers are not generally willing or able to pay

2.6.5 MILK SALE TO COLLECTION CENTRES OF DAIRY PROCESSORS

Neither factory linked livestock farms nor dairy co-operatives have managed to become major suppliers to dairy processing plants Size and production of the

commercial farms have limited their contribution Of the milk marketed by the functioning co-operatives and Village Livestock Associations, created in some districts of Punjab to supply the Lahore Milk Plant (their designated long-term marketing partner), only a small proportion is channeled to the dairy plants

To improve the handling of raw milk and achieve a better quality for processing at the plant site, some dairy plants have started to equip milk collection centres with chilling units and to use insulated road tankers for bulk transport from the centres

to the plant This enables them to buy milk directly from the katcha dodhis Some

plants already collect 80% of their procurement themselves Large-scale collectors supply the balance milk

Milk collection is undertaken by dodhis or co-operative organizations, but the

milk producers may also deliver to the centres themselves and receive a higher price The farm-gate price in winter is Rs 8–10 and in summer Rs 10–12 per litre (6% fat basis) Some processing plants pay a bonus of Rs 1.00/litre, if the milk is put into chilling tanks provided by the plants but operated by the producers

2.6.6 DIRECT MARKETING & CONTRACT SALE

Some producers manage to market their milk without the help of dodhis

They produce quantities large enough to contract regular supplies with urban wholesalers/retailers or they sell straight to consumers (at the farm, in their own urban retail outlets or at the consumer’s door)

The peri-urban milk producers, especially in Sindh, sell most of their milk on a contract basis (one year, fixed price) to urban distributors, milk shops and institutional consumers (hotels and restaurants) Milk in excess of the contracted quantities is sold through commission agents in the ‘free’ wholesale market (auction sale) If a milk producer cannot supply the agreed quantity in full, he is obliged to make up the deficit from outside purchases (e.g in the wholesale market) Some of the milk producers at Landhi Cattle Colony near Karachi have

established an association Most peri-urban and rural commercial milk producers who market milk themselves do not maintain additional or better facilities than

the pacca dodhis Milk, with ice added, is transported in their own cans and

usually their own vehicles to the customers or the wholesale markets In general, milk is distributed in cans with volumes of 40–50 litres

Milk producers who own transport facilities usually deliver milk to their urban contractors receiving about Rs 14/litre of undiluted milk Contractors are often milk shops converting part of the milk into customary products In summer, the margins of intermediaries are much higher as more ice is added to cool the milk

part of the milk purchased

The major part of the raw milk reaching the milk shops is sold untreated within one to two hours after arrival Some shops, particularly those operated by commercial milk producers keep the milk in cooling tanks (500–1000 litres contents) or fill a certain proportion into plastic sachets, which after sealing are kept in a refrigerator Milk, which is not sold immediately, is boiled for sale later

or converted into dahi, khoa etc Nevertheless, the consumers boil all liquid milk

bought before consumption

2.7 MARKETING OF PROCESSED MILK

The only type of processed liquid milk that is found in markets all over the country is sterilised long-life (ultra heat treated; UHT) milk Standardised UHT milk is marketed in 250, 500, 1,000 and 1,500 ml packages, mostly as tetra briks

The 500-ml packages account for about 60% of the total quantity sold, 250ml packages for 20–25% and the 1,000 ml tetra briks for 15–20%

The marketing chain is short; from the factories, the milk is transported by truck

to regional distributors/wholesalers who in turn supply it to general stores and supermarkets in the big cities Regional distribution of sales demonstrates that the majority of milk is consumed within a limited area around the Regional Distributors

Ex-factory prices vary according to the destination of sales and freight costs involved The distributor–wholesaler receives commission of between Rs 1.00 and 2.00/litre, depending on brand and package size Most manufacturers refund

or replace damaged and expired packages

Compared with the margins in the retail marketing of raw liquid milk (especially the extra margins resulting from dilution), the margins on processed milk are much smaller and cannot be increased by adulteration However, retailers do not deal exclusively in UHT milk, it is just one of many items sold; this applies to most wholesalers as well

2.8 MARKETING OF DAIRY PRODUCTS

Traditional dairy products like dahi and khoa are manufactured and sold by most

milk shops across Pakistan On average, these shops convert about 20% of the raw

milk purchased into dahi and/or khoa During Ramadan and in summer, dahi

consumption increases considerably

Milk Farmers mainly produce butter or desi ghee in areas that are not penetrated

by milk collectors The major part of ghee is home consumed but an estimated annual volume of 34% is marketed through wholesalers, vendors and shopkeepers, both in rural and urban areas Because of its relatively high price (consumers have to pay between Rs 160 and 180/kg), it cannot compete with

vegetable ghee or oil, which costs only a third of the price and is used increasingly as a substitute

In contrast, desi butter seems to have a stable market, especially during the winter

months The quantity marketed may reach 60 thousand tonnes/year The larger dairy shops in the cities and special creameries are the principal manufacturers of

local butter They usually buy cream from wholesalers or pacca dodhis and

produce only what can be sold the same day

Some milk processing plants have introduced a number of new dairy products into the market like:

• Yogurt (natural and flavoured)

• Drinking yogurt (lassi)

• Sweetened, flavoured milk

• UHT and pasteurised cream

• Butter

• Ghee

• Cheese and

• Ice cream mix

The quantities sold, however, are very modest for most items; only yogurt and butter sales have reached significant volumes Three major yogurt manufacturers sell about 4000 tonnes annually Consumer prices of Rs 17–21 per 450 ml cup (3.5% fat) assure a good margin despite high packaging costs The modern butter manufacturers produce about 800 tonnes per year It is mainly packed and sold in portions of 200 g with ex-factory prices from Rs 30–35/pack and consumer prices from Rs 35–40/pack

The ice cream industry, producing 9–10 thousand tonnes of ice cream/annum, uses mainly dairy ingredients, especially fresh cream Fresh milk is mostly substituted by imported milk powder

As discussed above, in view of the growing acceptance by the consumers of UHT milk and the expected “white revolution” which should see milk production more than double in the medium term, it is proposed to set up a UHT milk processing plant of 100,000 liters per day capacity This is an economically viable sized plant, although the market demand justifies a larger capacity, it is suggested that the sponsors work with a smaller capacity till such time that they are able to organize the milk collection system to provide larger raw milk inputs Raw milk input for a 100,000 liters per day plant located in central Punjab should not be a problem with the existing milk supply chain

Milk Production by Region

CHAPTER 3 TECHNICAL EVALUATION

In view of the growing acceptance by the consumers of UHT milk and the expected “white revolution” which should see milk production and consumption

of processed milk more than double in the medium term, it is proposed to set up a UHT milk processing plant of 100,000 liters per day capacity This is an economically viable sized plant, although the market demand justifies a larger capacity, it is suggested that the sponsors work with a smaller capacity till such time that they are able to organize the milk collection system to provide larger raw milk inputs Raw milk input for 100,000 liters per day plant located in central Punjab should not be a problem with the existing milk supply chain

The technical assessment of the viability for setting up a 100,000 litres per day UHT milk processing plant depends on several major factors These are discussed below:

3.1 LOCATION PREFERENCE

The vicinity of the city of Lahore has been chosen for setting up the plant, the major reason being the availability of fresh milk in the region Punjab, of which Lahore is the capital, produces 70% of Pakistan’s milk;

PAKISTAN MILK PRODUCTION STATISTICS

Source: International Farm Comparison Network (IFCN) 2003

TABLE -6 MILK PRODUCTION (REGION WISE)

(million Tonnes)

Milk Production by Regions

in Punjab (MillionTons)

Composition of the Dairy Herd Punjab Milk Production Years

Center Souther Potohar Buffal Others Buffalo Others

As can be seen from the above Table, out of the approximately 24 million tonnes

of milk produced annually in the Punjab, 18 million tones or about 75% is produced in the Central Region of Punjab This region will be the milk catchment area for the proposed Plant In addition a supply chain has already been developed

in the area which ensures that milk from the smaller farmers who have among the lowest production costs in the world is made available to the milk processing plants:

TABLE – 8 INTERNATIONAL MILK PRODUCTION COST BENCHMARKS

Argentina 7-11

Pakistan 9-12

Australia 10-14 India 10-11 Austria 57 Switzerland 79

Source: IFCN, 2003

The setting up of the first UHT plant in 1977 in the area has ensured that the skill

levels of the workers have developed to the required level, in addition local

engineering expertise, transportation network, marketing channels and support

services for the plant as well as marketing have developed

Karachi, the main city of Pakistan and the largest market for UHT, is not

considered as a location for the plant because of the higher cost of raw milk Raw

milk prices in Karachi, because of the shortage of green fodder and greater

emphasis on higher priced concentrates as diet for the milch animals means that

prices of raw milk are approximately 30% higher in Karachi as compared to

Lahore

3.2 SPECIALIZED MANPOWER

The plant will require technically qualified and experienced professionals in the

areas of production management, operations and marketing These will include

dairy processing experts; food chemists; cold storage technologists; laboratory

technicians; milk collection experts; marketing, human resource, accounting and

finance experts; etc The presence of a large number of milk and food processors

including Nestle, Unilever, Cadbury, Shezan, Mitchells, and Haleeb etc ensures

the availability of a constant supply of trained and experienced professionals

As stated earlier, the Government of Pakistan has also accorded a high priority

to the Dairy Industry and has set up a company known as Dairy Pakistan on the

lines of Dairy Australia; among the areas in which Dairy Pakistan is concentrating includes human skill development of the professionals required for the Dairy industry

3.3 REGULATORY FRAMEWORK

The legislative framework that guides food markets in Pakistan is governed by the Pure Food Rules (PFR) of 1965(and Cantonment Pure Food Rules of 1967 for military areas), and the Pure Food Ordinance of 1960 The most important aspects of regulation that guides milk industry are to be found in PFR, and include

• Section 18: Containers for milk sales, distribution or storage must be labeled

Metallic containers (typically used by gawallas in the delivery of milk) must

have a clear and distinct label attached

• Section 19: Imperfect enameling and tinning of containers is illegal

• Section 20: Milk from diseased animals is illegal

• Section 21: Persons with contagious diseases are disallowed from milking animals, working at dairy farms, handling milk or any container meant to be used for storage or transportation of milk

• Section 22: Pasteurization and sterilization parameters are laid down

• Section 23: Equipment and processes needed for gaining approval by the government to operate milk processing plant have been specified

Sections 272 and 273 of the Pakistan Penal Code deal with the issues of penalties for adulteration of food and drinks The prescribed penalty for food adulteration

is six months in prison, and/or one thousand rupees fine PFR gives authority to provincial governments to appoint public analysts for investigation of quality and safety of food There is no federal structure of a food safety program in Pakistan Enforcement is done through health service delivery channels of provincial governments The District Health Officer and Deputy Health Officer function as food inspectors for sampling and inspection On the other hand, the concerned

Municipality Corporation may also appoint food inspectors and sanitary inspectors for sampling purposes Any other public servant can also be appointed

as inspector and can execute the power of food inspector The Sanitary and Phyto Sanitary (SPS) Agreement lays down certain requirements that aim to ensure transparency in the implementation of SPS measures in member countries Members are required to establish specific contact points to facilitate communication regarding SPS measures This involves firstly, a single national

‘enquiry point’, which is responsible for responding to queries from a single national ‘notification authority’, which is responsible for all procedures associated with notification of new or amended SPS measures These notifications and measures serve as guidelines for customs and health authorities

in importing countries in assessing risk – failure to notify and convince importing countries that SPS measures are up to date and implemented results most of the time in time-consuming inspections and quarantine measures which effectively hurts exporters by creating trade barriers

3.4 IN-HOUSE QUALITY ASSURANCE

Physical dispersal of gawallas and small dairy farms makes enforcement of quality standards difficult, but crucial One factor would be the tracking of milk that is largely collected through informal channels, from hundreds and thousands

of farmers and gawallas to the processing unit Other issues where control is expected to yield positive results include adequate testing/laboratory facilities and close monitoring of staff to ensure that necessary quality checks are made and standards enforced

3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING

PLANT

The rationale for setting up the proposed UHT milk processing plant of 100,000 litres per day capacity includes:

• Current availability of more than 33.0 million tonnes per day (projected figure

2006) of raw milk, out of which only 2 – 3% is actually being processed

• A current market size of more than 200 million litres per annum of processed

milk, market for processed milk growing at more than 20% per annum for the

past 3 years and projected to continue growing at the same rate for the next

5years

• The Government of Pakistan’s Strategic initiative for the milk processing

industry which includes; increasing milk yield per animal, stronger enforcement of laws relating to adulteration and hygiene, a media program

aimed at informing consumers about the dangers of consuming raw milk, a

concentrated program by the dairy industry promoting the use of UHT treated

milk

• Availability of requisite technology for setting up a UHT processing plant and

trained manpower for running the same

• Huge export potential for UHT treated milk in the Region, with Pakistan

being the only milk surplus country in the Region

In view of the above it is suggested to establish a UHT milk processing unit of

100,000 litres per day capacity with provision of expansion in the future

3.6 PROPOSED UHT PROCESSING UNIT

As already stated in Chapter 2, the demand for UHT milk is currently estimated at

200 million litres per annum which is increasing at an annual rate of 20% With

only 2 – 3% of the more than 33.0 million tonnes of milk produced annually,

(projected figure for 2006) being processed and the abundant availability of milk,

especially in central Punjab the case for setting up of a UHT milk processing plant

very strong

3.6.1 THE UHT PROCESS

Although pasteurization effectively eliminates potential pathogenic micro-organisms, it is not sufficient to inactivate the thermo resistant spores in

milk The term sterilization refers to the complete elimination of all micro organisms The food industry uses the more realistic term "commercial

sterilization"; a product is not necessarily free of all micro organisms, but those

that survive the sterilization process are unlikely to grow during storage causing product spoilage

Milk can be made commercially sterile by subjecting it to temperatures in excess

of 100° C, and packaging it in air-tight containers The milk may be packaged

either before or after sterilization The basis of UHT, or ultra-high temperature, is the sterilization of food before packaging, then filling into pre-sterilized

containers in a sterile atmosphere Milk that is processed in this way using temperatures exceeding 135° C, permits a decrease in the necessary holding time

(to 2-5 s) enabling a continuous flow operation

3.6.2 ADVANTAGES OF UHT

High quality:

The reduction in process time due to higher temperature (UHTST) and the minimal come-up and cool-down time leads to a high quality product

Long shelf life:

Shelf-life greater than 6 months, without refrigeration, can be expected

3.6.3 DIFFICULTIES WITH UHT

Sterility:

High performance equipment and plant are needed to maintain sterile atmosphere between processing and packaging (packaging materials, pipe works, tanks, pumps); sterility must be maintained through aseptic packaging; this would require higher skilled operators

Keeping Quality:

Heat stable lipases or proteases can lead to flavor deterioration, age gelation of the milk over time - nothing lasts forever! There is also a more pronounced cooked flavor to UHT milk

3.6.4 UHT METHODS

There are two principal methods of UHT treatment:

− Direct Heating

− Indirect Heating

Direct heating systems:

The product is heated by direct contact with steam of potable or culinary quality The main advantage of direct heating is that the product is held at the elevated temperature for a shorter period of time For a heat-sensitive product such as milk, this means less damage

There are two methods of direct heating:

1 injection

2 infusion

Injection: High pressure steam is injected into pre-heated liquid by a steam

injector leading to a rapid rise in temperature After holding, the product is cooled in a vacuum to remove water equivalent to amount of condensed steam

flash-used This method allows fast heating and cooling, and volatile removal, but is only suitable for some products It is energy intensive and because the product comes in contact with hot equipment, there is potential for flavour damage

Infusion: The milk product stream is pumped through a distributing nozzle into

a chamber of high pressure steam This system is characterized by a large steam volume and a small product volume, distributed in a large surface area of product Product temperature is accurately controlled via pressure Additional holding time may be accomplished through the use of plate or tubular heat exchangers, followed by flash cooling in vacuum chamber This method has several advantages:

• instantaneous heating and rapid cooling

• no localized overheating or burn-on

• suitable for low and higher viscosity products

Indirect heating systems

The heating medium and product are not in direct contact, but separated by equipment contact surfaces Several types of heat exchangers are applicable:

• plate

• tubular

• scraped surface

Plate Heat Exchangers: Similar to that used in HTST but operating pressures are

limited by gaskets Liquid velocities are low which could lead to uneven heating and burn-on This method is economical in floor space, easily inspected, and allows for potential regeneration

Tubular Heat Exchangers: There are several types:

• shell and tube

• shell and coil

• double tube

• triple tube

All of these tubular heat exchangers have fewer seals involved than with plates This allows for higher pressures, thus higher flow rates and higher temperatures The heating is more uniform but difficult to inspect

Scraped Surface Heat Exchangers: The product flows through a jacketed tube,

which contains the heating medium, and is scraped from the sides with a rotating knife This method is suitable for viscous products and particulates (< 1 cm) such

as fruit sauces, and can be adjusted for different products by changing configuration of rotor There is a problem with larger particulates; the long process time for particulates would mean long holding sections which is impractical This may lead to damaged solids and over processing of some liquids

3.6.5 PACKAGING OF UHT PROCESSED MILK

The most important point to remember is that packaging must be sterile! All

handling of post-process product must be within a sterile environment

There are 5 basic types of aseptic packaging lines which can be used for packaging UHT processed milk:

1 Fill and seal: preformed containers made of thermoformed plastic, glass or

metal are sterilized, filled in aseptic environment, and sealed

2 Form, fill and seal: roll of material is sterilized, formed in sterile

environment, filled and sealed e.g tetrapak

3 Erect, fill and seal: using knocked-down blanks, erected, sterilized, filled,

sealed e.g gable-top cartons, cambri-blocs

4 Thermoform, fill, sealed roll stock sterilized, thermoformed, filled, sealed

aseptically e.g creamers, plastic soup cans

5 Blow mold, fill, seal:

There are several different package forms that are used in aseptic UHT

processing:

• cans

• paperboard/plastic/foil/plastic laminates

• flexible pouches

• thermoformed plastic containers

• flow molded containers

• bag-in-box

• bulk totes

It is also worth mentioning that many products that are UHT heat treated are not aseptically packaged This gives them the advantage of a longer shelf life at refrigeration temperatures compared to pasteurization, but it does not produce a shelf-stable product at ambient temperatures, due to the possibility of recontamination post-processing

3.7 THE UHT PROCESS FLOW

The UHT Milk Production Flow Chart is shown in Figure 5 below, the basic functions performed are as follows:

CHART - 3 UHT PROCESSING AND PACKAGING PLANT

BASIC BLOCK DIAGRAM

Receipt and filtration of the raw milk: In this stage, raw milk which is received

from the farms is tested for quality and filtered before being stored at a temperature of 4oC This temperature reduces the formation of micro-organisms

Pasteurisation of Milk: This mild form of heat treatment kills pathogenic

bacteria that may be present without affecting the nutritional value or flavour It also extends the shelf life by reducing the spoilage bacteria Pasteurised milk can

be kept for up to five days The process involves heating milk to 71 oC for at least

15 seconds and then cooling it rapidly to less than 6oC The device used for heating and cooling is called a heat exchanger or pasteurizer

Homogenisation of Milk: Homogenization is a process that involves forcing

milk through a tiny hole under considerable pressure This breaks up the fat globules making them smaller and of a uniform size If large gat globules are left

in the milk, these will rise to the surface and form a layer of cream, but in homogenized milk, the fat stays evenly distributed throughout the bottle or carton

Milk pasteurisation,deaeration homogenisation & standardisation

Raw milk cooling

Past Milk storage

Distribution & Warehousing

Standardization of Milk: UHT Milk is ‘toned’ to a butter fat content of 3.5%

and solid-not-fat content of 8.9% (standardized milk) Assuming the supply of pure milk (either from buffalo or cows), the only adjustment needed before processing should be a reduction of the butter fat content, this is usually done by either removing cream or adding 800 litres of water to every 1,000 litres of raw milk, this reduces fat to 3,5% but also reduces the SNF content to less than that allowed under the law, to make up for this we add 83Kgs of Skim Powder Milk to the 1,800 litres of milk

UHT: This form of heat treatment kills all bacteria in milk and it practically

becomes sterile The UHT process involves sterilising homogenised milk by

a continuous process using direct or indirect heating With direct heating the temperature reaches 140 – 150oC either by injecting steam directly into the milk

or by forcing milk through a fine nozzle into a tank filled with steam The milk

is then cooled in a sterile vacuum chamber, where added steam or excess water is evaporated

3.8 TECHNICAL REQUIREMENTS & THEIR AVAILABILITY

3.8.1 LAND:

A plot of land having an area of around 10 acres near Lahore has been proposed The present value of land near Lahore is estimated at Rs.0.45 million per acre

3.8.2 BUILDING & CONSTRUCTION:

The total constructed area has been envisaged at 7,000 square meters to house the main production facility and storage of the packaged milk, UHT milk needs to stay in the factory warehouse for a minimum of 3 days to allow for stabilization before it can be transported The total cost of the building and civil works has been estimated at Rs.70.0 million