The milk crisis has deepened with the reduction of producer prices by Sh7 per litre -- a move that will hurt the earnings of thousands of farmers whose output got a lift from the December heavy rains.

Consumers will also pay Sh28 for a half-litre packet, a Sh4 increase effected on Thursday, which suggests that processors will enjoy huge profit margins as farmers absorb losses.

The new producer pricing structure means farmers are now taking home between Sh14 and Sh17 for every litre, down from Sh22 in February.

The processors attribute the low producer prices to the heavy glut in the market, with some arguing that higher retail prices would benefit the producers in the long run.

"Consumer prices are up. We want to pass on the benefits of the higher pricing to the farmer," said Mr John Gethi, the general manager, milk procurement, at Brookside -- one of Kenya's top processors.

He, however, said the amount of benefits to trickle down to farmers were hinged on the consumption pattern over the next month -- a pointer that the producers might not reap from the higher retail prices if they failed to spur a spike in revenues.

"We will have to observe the consumer patterns. It will depend on the month- end consumer habits," added Mr Gethi.

Leading processors

Farmers in Nyandarua and Nakuru districts told Business Daily that two of the leading processors -- New Kenya Co-operative Creameries and Brookside -- were paying Sh17 and Sh14 respectively for every litre of milk delivered to their factories.

"Production costs are above Sh22 per litre yet processors are buying at less the production cost," said Mr Joseph Ngera, a large-scale farmer in Nyandarua.

Apart from concerns about poor pricing Mr Ngera , who is also a national official of the Kenya Dairy Keepers Association, said processors were inconsistent in buying the commodity.

Farmers fear that the pricing outlook could become even more subdued with the onset of the March to May long rains season, further hurting an industry that was emerging as a money-minting machine for the rural economy.

Already, farmers are raising concerns that the depressed earnings could hurt their ability to repay loans borrowed over the past two years to fund the expansion of dairy farms, egged on by then prevailing high producer prices.

Last year, the price of milk shot up to Sh24 a litre, up from Sh8 in 2003 -- an increment that fed brisk growth in the dairy sector over the past four years.

Milk production had risen from 2.8 billion litres in 2004 to 3.9 billion litres last year, giving a huge boost to a large fraction of the country's rural economy particularly in Central and Rift Valley provinces, which have been under pressure from narrowing profit margins from the tea and coffer industry -- hitherto the bedrock of the countryside economy.

The dairy sector is estimated to provide a livelihood for more than one million small householders as well as direct employment to 500,000 people directly and 750,000 indirectly.

Price fluctuations

According to industry regulator Kenya Dairy Board (KDB), the daily intake now stands at 1.5 million litres, 25 per cent higher than the milk processors' installed capacity of 1.2 million litres.

"Supply to the factories is still very high. Price fluctuations are due to market forces in a liberalised market. But we have asked processors to recheck the producer prices," said KDB managing director, Mr Machira Gichohi.

Estimates show that raw milk in excess of half a million litres has been lost due to the glut, which has been blamed on poor planning and failure to foresee an upsurge in production.

KDB statistics show that only 30 per cent of Kenya's milk produce is processed in factories, with the rest being sold raw to vendors, who have also cut their prices.

A State-driven project to set up a Sh600 million strategic milk reserve of 2,000 tonnes of powdered milk is yet to begin, four years after it was spelt out.

Under the programme, the government was to buy milk for the strategic reserve to counter deficits incase of drought.

The reserve was to be set up in mid 2007, but has been constrained by low milk supply.

The Livestock ministry has now floated a proposal to Treasury to set aside Sh300 million to buy excess milk from farmers.