Investing in a sustainable dairy industry in Tanzania

Tanzania’s dairy market has enormous growth potential. Dairy 2025 is a pilot programme helping dairy farmers in the Tanga region adopt profitable, climate-smart methods and make the most of the country's most advanced processing hub. The programme is making credit available so that they can invest in their farms and buy services.

Attracting young people to dairy farming is essential to building a sustainable sector in Tanzania

Systemic change needed

Our story starts in 2017 when we published the World Bank-sponsored report: ‘Climate-Smart Dairy in Africa’. Solidaridad developed a unique value chain approach to professionalize the dairy industry in Africa and avoid rising carbon emissions as a result of increasing dairy production. The report built on a clear view of systemic change, as pictured below.

Systemic change of the dairy industry is achievable

The report included a feasibility study on the business case for dairy farmers and so-called dairy hubs or milk collection centres. Financial projections provided a clear view of the theoretical feasibility of the different business models and calculated credit needs. This allowed us to structure the most suitable financial package. See below an example of a financial package for a dairy hub. (1 Ethiopian birr equals approximately 3 euro cents.) Taking this experience as the starting point, we started to implement the model in Tanzania – the Dairy 2025 project was born.

An example of a five-year financial plan for a dairy hub

Dairy in demand

Livestock farming is part of the Tanzanian culture and dairy is potentially a high-value product in an upcoming market. Demand for packaged milk is significantly higher than supply. The combined milk supply of the country’s processing plants is less than 150,000 litres per day.

Compared to neighbouring Kenya, where 40% of milk is sold processed and packaged, Tanzania’s formal dairy market is small, with only 5% sold packaged. The country also lags behind in terms of consumption. It averages 50 litres per year per person, compared to 90 litres in Kenya.

Challenges to growth

An important reason is the complexity of milk as a perishable product. Dairy farming also requires capital, expertise, and different services such as feed, semen, and veterinary. And a high-quality approach to collection, cooling and quality control is needed to guarantee minimum standards in the formal market.

The high processing and sourcing costs, and a maximum commercial market price have led to a much lower milk price for farmers in the formal market than in the informal one: 700 Tanzanian shillings (38 euro cents) versus around 1,100 shillings. For many farmers, 700 shillings is the price for surplus milk. 

The country’s most advanced dairy plant

Tanga Fresh Ltd is the country’s most advanced dairy plant. It is based in Tanga, a region near the Kenyan border on the country’s north-eastern coast.  

The plant guarantees a market for milk and provides an opportunity for dairy farmers to increase their milk production. Initiated by a group of Dutch dairy farmers in 1996, the main shareholders are currently:

  • Tanga Dairy Cooperative Union (an association of the region’s 25 primary cooperative societies)
  • DOB Equity (an impact fund investing in socially responsible businesses in East Africa).

Tanga Fresh can process 120,000 litres of milk a day, making it the largest dairy hub in Tanzania

More milk needed

Tanga Fresh has secured a market, is able to process large quantities (120,000 litres a day), and can bring this to scale. However, local dairy farmers have not been producing enough milk (50,000 litres a day in February 2020).

The Tanga region is characterized by persistent rural poverty with a long history of drought, food shortages, and social and economic disruption. Though farmers have cultivated their land for generations, they struggle to supply adequate food for the (formal) Tanzanian market. 

Tanga’s smallholder dairy farming sector involves around 6,000 rural families in the production of milk. Most farmers have one or two cows and sell about eight litres of milk a day to Tanga Fresh.

With support, Tanga’s farmers could trigger exponential growth and bring socio-economic development to the region

How to transform Tanzania's dairy sector

With support, Tanga’s farmers could trigger exponential growth and bring socio-economic development to this remote region, generate the needed income for their families, and enhance their food security.

To transform subsistence dairy farming into a business-oriented and climate-smart approach, farmers require:

  • services

  • technology

  • credit

  • knowledge

  • management capacity.

These would increase milk production sustainably. Support and better access to services (feed, fodder, medicines, veterinary) along with credit facilities are important conditions for farmers to professionalize. 

Supporting frontrunners and newcomers

A challenge has been how to arrange continuous support, fodder and other services, preferably organized in improved structures. In particular, a smaller group of frontrunning dairy farmers (around 12%) require additional support in terms of knowledge, farm planning and data collection to access credit facilities for larger loans.

Another important group is potential young farmers with the ambition to develop professional dairy farms, but who lack land, skills and services. With intensive support, they and the frontrunners could reach the next level and stimulate other farmers to do the same.

Frontrunning dairy farmers (around 12%) require additional support in terms of knowledge, farm planning and data collection to access larger loans”

Credit needed to survive and thrive

Dairy farmers in developing countries often use milk payments to repay small loans for services. However, very few of Tanga’s milk collection centres provide this type of credit. For larger loans (e.g. to buy heifers or technology), farmers lack bankable farm plans or a track record, including detailed production data.

Credit could also help farmers survive the annual dry season, when there is a shortage of fodder. This not only leads to a drop in the milk supply, it causes reduced fertility among the stock, growth problems in young animals and high mortality rates. 

The Dairy 2025 vision

The Dairy 2025 programme aims to strengthen different business cases throughout an integrated value chain including: 

  • processing

  • farming and services, facilitated by organizational development

  • business development

  • finance opportunities

  • new services like fodder production, capacity building and innovation. 

This corresponds to sustainable value chains, part of UN Sustainable Development Goal 9: Industry, Innovation and Infrastructure, as well as contributing to other Goals. 

The next step for Tanga Fresh

Dairy 2025 includes seven work packages:

  • upgrade 25 milk collection centres in the Tanga region to dairy hubs providing services for 3,000 dairy farmers

  • train 4,000 dairy farmers

  • set up commercial fodder production by one or more larger farms and/or contractors

  • establish 50 new dairy farms

  • pilot silvo-pastoral farming to integrate trees for fodder, shade, fencing and timber

  • provide finance and investment opportunities: a) short-term loans for farmers, b) bankable farm development plans for 500 farmers, and c) a revolving fund through crowdsourcing platform Plus Plus

  • provide project management to ensure compliance to the donor, documentation and monitoring of results.

Most of Tanga's milk retails in plastic bags to make the highly perishable product easier to transport and store

Looking ahead five years

By 2025, the programme is expected to have the following impact:

  • 6,000 farmers (40% of whom are women) have doubled their milk production and income, indirectly benefiting 25,000 people in the Tanga region

  • there are 25 financially viable dairy hubs, all using the same methods for quality control, payment and services, generating 100 new jobs

  • half of 4,000 trained farmers have improved their farm management practices and 500 frontrunning farmers have farm development plans to grow to a professional level and access credit

  • there are 50 commercial dairy farms of 5-10 hectares as investment models, supported with knowledge and services, providing 100 to 200 jobs (farmers, employees, input suppliers), and with further scaling potential

  • commercial fodder production setup, creating 24 jobs, using a new business model for scaling potential

  • financially viable silvo-pastoral system operating on 25 farms

  • revolving fund created with at least 200,000 euros in credit, leveraged by a crowdfunding deal secured for an additional investment of 300,000 euros. 

Achmea Foundation and Rabobank Foundation are Dairy 2025’s main donors, while impact investor DOB Equity has been on Tanga’s board for 17 years”

Milk money: Tanga’s backers

Achmea Foundation and Rabobank Foundation are Dairy 2025’s main donors. Impact investor DOB Equity has been represented on Tanga’s board for 17 years. It recently injected another significant amount to strengthen the company and the sourcing structure.

Solidaridad is the convening neutral partner in Dairy 2025, ensuring accountability to the donors, and safeguarding positive impact on the lives of dairy farmers in Tanzania. 

Solidaridad: expertise plus boots on the ground

Thanks to 50 years of expertise in supply chains, Solidaridad has also been able to advise on where exactly money needs to be invested in order to improve operations.

It has local project managers and staff who speak the same language as the client. They have had a supportive role in building a relationship between the investor and the client.

Exit strategy in place

DOB aims to eventually sell its investment to a strategic partner in the following scenario:

  • Tanga remains a market leader
  • Tanga is able to produce 100,000 litres of milk a day
  • the sourcing process of the raw milk has improved
  • farmers sell twice as much milk to Tanga as they do now
  • the price difference between informal and formal markets has decreased.

Ideally, DOB will also sell part of the shares to farmers, but this will require a strong cooperative which is in a position to invest.

Stronger supply chains, improved livelihoods

Tanga Fresh already plays a crucial role as an intermediate organization for loans, collateral, and a payment system to support farmers with credits. This has had a positive impact on productivity and strengthened the relationship between the plant and farmers. Solidaridad can help further professionalize the company and strengthen the supply chain.

Innovation area:

  • Contact Information

    Frederik Claasen

    Impact Investment Specialist

    't Goylaan 15, 3525 AA Utrecht, The Netherlands