96.

PROFILE ON DAIRY FARM

 96-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 96-3

II. PROJECT DESCRIPTION 96-3

III. MARKET STUDY AND FARM CAPACITY 96-4

A. MARKET STUDY 96-4
B. FARM CAPACITY & PRODUCTION PROGRAMME 96-7

IV. FARM INPUTS AND UTILITIES 96-8

A. FARM INPUTS 96-8
B. UTILITIES 96-10

V. TECHNOLOGY & ENGINEERING 96-11

A. TECHNOLOGY 96-11
B. ENGINEERING 96-12

VI. MANPOWER & TRAINING REQUIREMENT 96-17

A. MANPOWER REQUIREMENT 96-17
B. TRAINING REQUIREMENT 96-18

VII. FINANCIAL ANLYSIS 96-18

A. TOTAL INITIAL INVESTMENT COST 96-18
B. PRODUCTION COST 96-19
C. FINANCIAL EVALUATION 96-20
D. ECONOMIC BENEFITS 96-22
 96-3

I. SUMMARY

This profile envisages the establishment of dairy farm for the production of milk with a
capacity of 152,500 litters per annum.

The present demand for the proposed product is estimated at 8,420 tonnes per annum.
The demand is expected to reach at 66,545 tonnes by the year 2020.

The total investment requirement is estimated at about Birr 5.88 million, out of which
Birr 2.52 million is required for farm machinery and equipment . The farm will create
employment opportunities for 16 persons.

The project is financially viable with an internal rate of return (IRR) of 19.24 % and a
net present value (NPV) of Birr 3.60 million discounted at 8.5%.

The project has a forward linkage effect with food industries.

II. PRODJECT DESCRIPTION

The project is going to produce milk and supply it as whole milk to the consumers or
retail sellers. This product i.e. milk, is a liquid secreted by the mammary glands of
mammals to nourish their young. The milk of domesticated animals to a great extent
cows is the major food source for humans of all ages, although milk from sheep, goats,
water buffalos and camels are also consumed in different parts of the world.

Milk is essentially an emulsion of fat and protein along with dissolves sugar, minerals
including calcium and phosphorus and vitamins (vit B complex).

Commercial cows’ milk is commonly rich in vitamins A and D. Many countries require
pasteurization to control zoonotic diseases (transmitted from animals to humans and vice
 96-4

versa). Fat content of milk in cows varies with breeds and it is usually higher in low
milking cows and low in a higher milking cows.

Milk can be consumed in a different form like cream, butter, cheese, yoghurt. It is the
only food that contains all the nutrients that human beings require living healthy and due
to this it is classified as “Perfect Food”.

III. MARKET STUDY AND FARM CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Ethiopia's Livestock population is among the largest in Africa. However, despite large
cattle population, the diary industry in Ethiopia is not yet developed. According to
International Livestock Research Institute’s “ Dairy Development In Ethiopia” 2003,
milk production system in Ethiopia can be broadly categorized into urban, peri-urban
and rural milk production systems, based on location . Both the urban and peri-urban
systems are located near or in proximity of Addis Ababa and regional towns and take the
advantage of the urban markets.

The urban milk system consists of 5,167 small, medium and large dairy farms producing
about 35 million liters of milk annually. Of the total urban milk production, 73 % is sold,
10% is left for household consumption, 9.4 % goes to calves and 7.6 % is processed into
butter and ayib (cheese). In terms of marketing, 71% of the producers sell milk directly to
consumers . The peri-urban milk system includes smallholder and commercial dairy
farmers in the proximity of Addis Ababa and other regional towns. This sector controls
most of the country’s improved dairy stock. The rural dairy system is part of the
subsistence farming system and includes pastoralists, agropastoralist, and mixed crop-
livestock producers mainly in the highland areas. The system is non-market oriented and
most of the milk produced in this system is retained for home consumption.
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Regarding Addis Ababa during the year 2005 a total of 64,415 tonnes of milk is supplied
to the city of which cross-bred and locals contribute about 71 per cent of the total and the
remaining 29 per cent is supplied by Dairy Development Enterprise (DDE), Mama Agro-
Industry, Genesis, Lemma and milk collectors from the Regional State of Oromia ( see
Table 3.1).

Table 3.1
ANNUAL MILK SUPPLY BY SOURCE IN ADDIS ABABA

Sr. Source Of Milk Supply ( Ton) Total Supply %

No. (Tonnes)
1 Urban and periurban cattle 45,655 71
2 Dairy Development Enterprise 4,000 6
3 Sebeta Agro- Industry 8,760 14
4 Others (Genesis, Lemma) 2,000 3
5 Milk collectors and suppliers (from Oromia ) 4,000 6
Total 64,615 100

Source: - Urban Agricultural Department 2006.

As of 2005, the population of Addis Ababa is estimated at about 3.2 million. This shows
that per capita consumption of milk is about 20 Kg/ year which is much less than the
world per capita average of about 100 Kg/ annum.

Considering the city’s population size in 2008 which is 3,651,732 and a per capita
consumption of 20 Kg/ year the demand for milk in 2008 is estimated at 73,035 tonnes
Therefore, the present supply demand gap is estimated at 8,420 tonnes.

2. Projected Demand
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The demand for milk depends on many factors including consumer preference,
consumer’s income, population size, price of the product, price of substitutes and other
factors. In general, increasing population growth and rising real income are expected to
expand the demand for milk and milk products. Population in Ethiopia is estimated to
grow at 2.9% per year while the urban population increases at a rate of 4.4 %. Therefore,
increase in population growth and consumer income in the future is expected to increase
milk consumption.

A growth rate of 5% is, hence, assumed to be reasonable to execute demand projection

for milk in Addis Ababa and the result is shown in Table 3.2.

Table 3.2
DEMAND PROJECTION FOR MILK (TONNES)

Year Projected Existing Demand

Demand Supply Supply Gap
2009 76,686 64,615 12,071
2010 80,521 64,615 15,906
2011 84,547 64,615 19,932
2012 88,774 64,615 24,159
2013 93,213 64,615 28,598
2014 97,873 64,615 33,258
2015 102,767 64,615 38,152
2016 107,905 64,615 43,290
2017 113,301 64,615 48,686
2018 118,966 64,615 54,351
2019 124,914 64,615 60,299
2020 131,160 64,615 66,545

3. Pricing and Distribution

The price of raw milk varies between Birr 4 and 5 per liter. For the envisaged dairy farm
a farm-gate price of Birr 4 per liter is recommended. Intra - urban producers mostly sell
 96-7

liquid milk directly to consumers, except the small percentage sell to caterers ( hotels,
bars, etc.).

The envisaged farm, however, should use a combination of different options; including
such outlets as milk processing plants which produce pasteurized milk, butter, cheese and
other dairy products.

B. FARM CAPACITY AND PRODUCTION PROGRAMME

1. Farm Capacity

The project will start with 20 calf heifers or cows and at its full capacity will reach 50 in
the fourth year and thereafter. Each cow is expected to produce 3,050 liters per lactation
(305 days). At full capacity, the total milk production is expected to be 152,500 liters per
lactation period.

2. Production Programme

Cows/heifers cows could be supplied by dairy farms in and around the city. The project
commences with 20 dairy cows and in the second and third year 10 cows per year will be
purchased and through natural increase the project will hold 50 cows at full capacity
starting from forth year and there after. For details see Table 3.3.

Table 3.3
PRODUCTION PROGRAM

Year Cows Milk

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Unit Quantity Unit Quantity

1 No 20 liters 61,000
2 ,, 30 ,, 91,500
3 ,, 40 ,, 122.000
4 ,, 50 ,, 152,500

IV. FARM INPUTS AND UTILITIES

A. FARM INPUTS

All farm inputs needed for the project could be purchased from local sources in Addis
Ababa and its surrounding areas of Oromia Regional State. The required farm inputs are
briefly discussed below.

1. Hay and Concentrate( Feed)

Hay can be purchased from Oromia Regional State woredas like Sululta, Betch,
Alemagena and Akaki.

Concentrate is a type of feed which is indispensable for specialized dairy farms to get
attractive yield from cows. This concentrate will be purchased from known feed
processing plants in Addis Ababa and its surroundings.

The total cost of hay and concentrate when the farm operates at full capacity will be Birr
225,680.

2. Medicament

Regarding medicament the project will allocate Birr 30, Birr 20 and Birr 5 for cows,
heifers and calves respectively. All animal drugs are available in drug shops in Addis
Ababa. Annual cost of medicament during full capacity operation is estimated at Birr
1,665.
 96-9

3. Ear Tag

It is one of the inputs required for the dairy farm and the cost of one ear tag is expected to
be Birr 10 per head. It could be supplied by any black smith operating in Addis Ababa. In
the first year 20 ear tags are required and additional 10 each for year two, year there and
year five respectively.

4. Cows /heifers

Cows are expected to be .purchased from diary farms in and around the city. The project
commences with 20 diary cows and in the second and third year 10 cows/year will be
purchased and through natural increase the project will hold 50 cows at full capacity
staring the fifth year and continue with this capacity thereafter. The purchasing price of
one cow will be Birr 7,000.

A summery of farm input requirement as per the farm production programme is shown in
Table 4.1.

Table 4.1
TOTAL INPUTS REQUIREMENT

Description Years

I II III IV V
Feed ( hay and concentrate) 87,096 134,881 204,838 214,182 225,680
 96-10

Medicament 635 1,030 1,565 1,635 1,665

Ear tag 270 200 250 160 170

Cows 140,000 75,000 75,000 Own Own
Total 225,001 211,061 281,653 215,977 227,515

C. UTILITIES

The utilities required by the dairy farm are water and electricity and annual requirement
is estimated as follows;

1. Electricity

Since no machinery will be used in the farm, the consumption will be only for obtaining
light and some office work. Thus the consumption is estimated at 3 kWh, and the total
energy requirement for 8 hours a day is estimated at 24 kWh per day. Hence, in 365 days
the total annual consumption will be 8,760 kwh.

2. Water

Water is used for cleaning and drinking in the project. The total water consumption will
about 425 m3 annually.

The annual requirement unit price and total cost of utilities is shown in Table 4.2.

Table 4.2
COST OF UTILITIES

Sr. No. Description Unit Qty Unit Cost Total Cost

(Birr) (Birr)
1 Electricity kWh 8,760 0.4736 4,149
2 Water M3 425 3.25 1,380
 96-11

Total 5,529

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

In dairy farm, procurement of heifers with 75 per cent of exotic blood from reliable
source is the initial production process. Generally, after procurement of heifers, the dairy
farm will have the following process. Heifers feeding with different feeds and treating
against diseases and parasites, isolating of diseased heifers, milking, processing of milk
and marketing are the main activities of the production process. Feeding includes
supplying of roughages and concentrates, while treatment is protection of heifers against
contagious diseases and internal and external parasites. After milking, the whole milk will
be taken from the milking parlor with pipe line to a cooling tank for temporarily storage
and the separation of one per cent fat will be immediately carried out and stored in cold
store. Then, the separated cream is either churned to butter or sold as it is depending on
the availability of local market. After cream separation, the milk will be filtered and
sealed with plastic bags or bottled and distributed to market.

The disposal of dung and urine are one of the major problem associated with dairying
since it is the breeding place for most flies which can transmit disease.

Thus it is advisable to use technologies that can help mitigate the problems. With this
regard composting the manure and use it for vegetable production could be one option to
mitigate the environmental pollution problem. In addition, the use of bio digesters to
produce biogas could also be one of the solutions to minimize the risk and optimize the
contribution of the dairy farm in generating additional income.

2. Source of Technology
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The required machinery and equipment can be supplied by Hagbes PLC, Ries
Engineering, etc operating in Addis Ababa.

B. ENGINEERING

1. Machinery and Equipment

The machinery and equipment required for the envisaged dairy farm are listed in Table
5.1. The total costs is estimated at Birr 2.53 million, out of which Birr 1.72 million is
required in foreign currency.
 96-13

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Description Qty. Unit Total Costs in 000 Birr

No. (No.) Price
(Birr) LC FC Total
1 Tractor 110-125 HP 2 270,000 - 540 540

2 Trailer 4 90,000 180 - 180

5 Deeping Vat 1 30,000 30 - 30
6 Water pump 3 64,000 - 64 64

7 Generator 1 125,000 - 125 125

8 Water tank (20m3) 1 50,000 50 - 50
9 Tools (set) 1 25,000 - 25 25

10 Workshop equipment 1 100,000 - 100 100

11 Veterinary equipment (set) 1 LS 12.6 62.4 75
12 Bore hall/ water well 1 150,000 150 - 150

13 Milk processing equip 1 LS 170 683 853

13.1 Insulated tank 1 80,000 80 - 80
13.2 External reservoir 1 80,000 80 - 80

13.3 Parallel filters (set) 1 40,000 40 - 40

13.4 Regulator 1 20,000 - 20 20
13.5 Compact plate pasteurize 1 15,000 - 15 15

13.6 Butter mola 4 5,000 - 20 20

13.7 Butter churn 1 12,000 - 12 12
13.8 Spiral air compressor 1 20,000 - 20 20

13.9 Centrifugal pump 1 25,000 - 25 25

13.1 Connecting pipes 1 10,000 10 - 10
13.11 Milking can 24 600 - 14.4 14.4

13.12 Plastic pails 35 20 0.7 - 0.7

Grand Total 803.3 1,725.8 2,529.1
2. Land, Building and Civil Works
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Total site area for the envisaged plan is 600 square meters. Total built-up of the project is
289 square meters. 150 m2 will be used for production facility, 80m2 for product store and
59m2 will be used for office building. Total cost of building at the rate of Birr 1,800 per
square meter is estimated to be Birr 520,200.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. Regarding the manufacturing
sector, industrial zone preparation is one of the strategic intervention measures adopted
by the City Administration for the promotion of the sector and all manufacturing projects
are assumed to be located in the developed industrial zones.

However, the project under consideration is an urban agriculture project. Therefore, it is

assumed that the project will be located outside the industrial zones. Accordingly, the
initial land lease rate in Addis Ababa set by the City’s Land Administration and
Development Authority based on the location of land is as shown in Table 5.1.

Table 5.1
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INITIAL LAND LEASE RATE IN ADDIS ABABA

Sr. Land Initial Price in

No Location of the land Grade m2
1 Central Business zones 1 1167.3
2 1062.9
3 916.2
4 751.5
5 619.2
Places That are Under
2 Transit 1 716.4
2 647.1
3 559.8
4 472.5
5 384.3
3 Expansion Zones 1 245.7
2 207.0
3 150.3
4 132.3

Source; Addis Ababa City Land Administration Authority

As can be seen from Table 5.2 the initial land lease rate ranges from Birr 1,167.3 to
132.3 per m2 .

Considering the nature of the project the expansion zones of the city are recommended
as the best locations. Accordingly, the highest land lease rates in the expansion zones of
the city which is Birr 245.7/ m2 is adopted.

The Federal Legislation on the Lease Holding of Urban Land legislation has also set the
maximum on lease period and the payment of lease prices ( See Table 5.2 and Table 5.3.)

Table 5.2
LEASE PERIOD
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Lease Period
Type of Service ( Years)
Residential area 99
Industry 80

Education, cultural research health, sport,

NGO and religious 99
Trade 70
Urban Agriculture 15
Other service 70

Table 5.3
LEASE PAYMENT PERIOD

Period of Payment
Sr. According to the Grade of
No. Service Type Towns
Private residential are obtained
1 through tender or negotiation 50 - 60 years
2 Trade 40 - 50 years
3 Industry 40 - 50 years
4 Real estate 40 -50 years
5 Urban Agriculture 8 - 10 years
6 Trade and social service 40 - 50 years
7 Others 40 – 50 years

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%. For those that pay the entire amount of the lease will receive 0.5% discount from
the total lease value and those that pay in installments will be charged interest based on
the prevailing interest rate of banks. Moreover, based on the type of investment, two to
seven years grace period shall also be provided. The lease price is payable after the grace
period annually.

Regarding, the terms and conditions of land lease the Addis Ababa City Government have
adopted Article 6 of the Federal Legislation with very minimal changes. Therefore, for
 96-17

the purpose of this project profile since the project is urban agriculture , 15 years lease
period, 10 years lease payment completion period, 10% down payment and two years
grace period is used.

Accordingly, the land lease cost of the project, at rate of Birr 245.7 per m 2 for 15 years of
holding is estimated at Birr 2.21 million. Assuming 10% of the total cost ( Birr 221.130 )
will be paid in advance as down payment and the remaining Birr 1.99 million will be
paid in equal installments with in 10 years, the annual lease payment is estimated at Birr
199,017.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower required by the farm and associated cost are shown in Table 6.1.

Table 6.1
MANPOWER REQUIREMENT & LABOUR COST

Sr. Position No. of Monthly Annual Salary

No. Workers Salary(Birr) (Birr)
1 Manager 1 1200 14,000
2 Cleaners feeders and 12 4200 50,400
milkers
3 Guards 2 700 8,400
4 Driver (3rd grade license) 1 500 6000
Sub Total 16 79,200
Employees benefit (25% of
basic salary) 19800
Total 99,000

B. TRAINING REQUIREMENT
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No special training is required except on job orientation of one or two days to the
cleaners, feeders and milkier. However the manager needs to be a diploma holder in
animal science.

VII. FINANCIAL ANALYSIS

The financial analysis of the dairy farm project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 days
Finished products 1 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
5.88 million, of which 29 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.
Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)
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Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 1,990.00 - 1,990.00
2 Building and Civil Work 520.20 - 520.20
3 Plant Machinery and Equipment 803.30 1,725.80 2,529.10
4 Office Furniture and Equipment 75.00 - 75.00
5 Vehicle 275.00 - 275.00
6 Pre-production Expenditure* 477.78 - 477.78
7 Working Capital 22.00 - 22.00
Total Investment cost 4,163.28 1,725.80 5,889.08

* N.B Pre-production expenditure includes interest during construction ( Birr 377.78

thousand), and Birr 100 thousand costs of registration, licensing and formation of
the company including legal fees, commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 1.26 million
(see Table 7.2). The major components of the production cost are depreciation, financial
cost and farm input which account for 28.61%, 23.86% and 18.01% respectively. The
remaining 29.53 % is the share of utility, direct labour, land lease cost, repair and
maintenance and other administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
 96-20

Items Cost %
Farm Inputs
227.52 18.01
Utilities 5.53 0.44
Maintenance and repair
75.87 6.01
Labour direct 47.52 3.76
Labour overheads
19.80 1.57
Administration Costs 25.34 2.01
Land lease cost
199.02 15.75
Total Operating Costs 600.60 47.54
Depreciation 361.42 28.61
Cost of Finance 301.39 23.86
Total Production Cost
1,263.41 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit
beginning from second year of operation. Annual net profit after tax will grow from Birr
364.48 thousand to Birr 975.9 thousand during the life of the project. Moreover, at the
end of the project life the accumulated cash flow amounts to Birr 8.07 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
 96-21

plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the break-
even point of the project including cost of finance when it starts to operate at full capacity
( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 21 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 19.24 %
indicating the vaiability of the project.

6. Net Present Value

 96-22

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 3.60 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 16 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.56 million in terms of tax revenue. The project has
a forward linkage effect with food industries.