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Higher prices of products, exchange rate volatility, and inflationary pressures, as well as rising operating costs will translate to significant headwinds for operators in the dairy industry, such as WAMCO, Promasidor and Chi according to analysts at Meristem Securities.
In a note to clients, analysts at Meristem Securities said that challenges surrounding their exchange rate illiquidity have remained significant.
“For manufacturers who have access to the official FX window, Importation of raw materials is restricted due to FX unavailability and or scarcity in the country,” said the analysts.
“Thus, we do not rule out the possibility of the approved manufacturers also having to resort to the parallel market rates, which translate to higher production costs for the firms in the industry.”
In an attempt to limit the amount spent on importation of dairy products, the CBN in 2020 restricted the sale of FOREX for the importation of milk and other dairy products to only six companies: NESTLE, TG Arla, Friesland Campina, Integrated Dairies Limited, Promasidor and Chi as they had keyed into the backward integration strategies of the Government.
The CBN Governor, Godwin Emefiele, has also hinted that Nigeria spends between $1.2 billion and $1.5 billion on milk importation annually.
FrieslandCampina WAMCO Nigeria Plc, the largest dairy company in Africa’s most populous nation, saw production costs climb significantly, from N111.94 billion as at December 2017, to N224.78 billion in 2021FY, on the back of weakening Naira, higher cost of dairy raw materials and disruptions to global supply chain.
The NBS report on selected food prices also revealed an uptick in the price of evaporated milk – a major dairy product – so far this year (+25.76%YtD).
The dairy industry and beverage producers like WAMCO are the hardest hit from a severe foreign exchange scarcity that is hindering them from importing raw materials and equipment to meet production.
And perhaps more worrisome is that some of them have been forced to source for foreign exchange at the parallel market, where the rate remains 1 above the official exchange rate.
The incessant devaluation of the currency by the central bank to protect the external reserve and stablilise the economy have stoked imported inflation as rising cost of production erodes profitability.
The Manufacturers Association of Nigeria (MAN) noted that rising price in diesel, raw materials, imports, high interest rate, forex shortage and inflation among others were reducing its production capacity.
“Feedbacks from manufacturers identified limited supply of electricity, high cost of local and imported raw materials, persisting acute shortage of forex for importation of machine, raw materials not available locally and persisting insecurity in the country as the first out of the challenges limiting the performance of the manufacturing sector in the period under review,” said MAN.