PROFILE ON MILK PROCESSING

Prepared by: Ashenafi Kejela

Email [email protected]
Phone number :+251920315160
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TABLE OF CONTENTS

PAGE

I. SUMMARY 12 -3

II. PRODUCT DESCRIPTION & APPLICATION 12 - 3

III. MARKET STUDY AND PLANT CAPACITY 12 - 4

A. MARKET STUDY 12 - 4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 12 - 7

IV. MATERIALS AND INPUTS 12 - 7

A. RAW & AUXILIARY MATERIALS 12 - 7
B. UTILITIES 12 - 8

V. TECHNOLOGY & ENGINEERING 12 - 9

A. TECHNOLOGY 12 - 9
B. ENGINEERING 12 - 11

VI. MANPOWER & TRAINING REQUIREMENT 12 - 12

A. MANPOWER REQUIREMENT 12 - 12
B. TRAINING REQUIREMENT 12 - 13

VII. FINANCIAL ANLYSIS 12 - 14

A. TOTAL INITIAL INVESTMENT COST 12 - 14
B. PRODUCTION COST 12 - 15
C. FINANCIAL EVALUATION 12 - 16
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D. ECONOMIC BENEFITS 12 - 17
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I. SUMMARY

This profile envisages the establishment of a plant for the production of pasteurized milk, butter
and cheese with a capacity of 60,000 litres, 5,000 kg, and 2,000 kg, respectively per annum.

The present demand for the proposed product is estimated at 600 hecto liter, 4 tonnes and 1.5
tonnes for pasteurized milk, butter and cheese respectively per annum. The demand is expected
to reach at 1,188 hecto liter, 8 tonnes and 3 tonnes for pasteurized milk, butter and cheese,
respectively by the year 2018.

The plant will create employment opportunities for 21 persons.

The total investment requirement is estimated at Birr 3.28 million, out of which Birr 2.2 million
is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 13% and a net present
value (NPV) of Birr 0.801 million, discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Cow milk is white liquid containing water, fats, protein, sugar and ash. Chemical analysis of
cow milk revealed that about 86-88% of it by weight is water. Cow milk processing results in
a number of dairy products such as processed milk, yogurt, cheese and butter. All these
products can be consumed by human beings as part of diet on the daily feeding menu. The
envisaged plant will produce pasteurized milk, butter and cheese.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The products considered as main outputs of milk collection and processing are pasteurized
milk, butter and cheese.

Table 3.1 shows the domestic production of these items in a ten years period of time:

Table 3.1
DOMESTIC PRODUCTION OF DIARY PRODUCTS
(1993-2002)
Year Pasteurized Butter Cheese
Milk (H.L) (tonnes) (tonnes)
1995 42,775 81 6
1996 45,229 45 5
1997 42,062 74 12
1998 42,447 78 15
1999 37,637 64 13
2000 38,291 60 11
2001 73,807 922 187
2002 89,382 384 166
2003 107,469 180 140
2004 121,739 339 189

Source: CSA, Survey of the Manufacturing and Electricity Industries, Annual Issues.
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The consumption of industrially processed dairy products is mostly limited to urban areas. The
largest market for these products is still Addis Ababa, though flourishing regional capitals and
growing urban centers will increasingly create demand for such items of food. It is also
noteworthy that, as one can easily infer from Table 3.1, production of processed diary products
has exhibited significant jump since 2001. The most plausible cause for this is proliferation of
private processing plants in peri - urban areas near Addis Ababa.

Although both economic and non-economic factors are important in explaining the demand for
industrially processed diary products, economic factors such as income and price are the major
determinants of demand. About 50% of households in Ethiopia are believed to be below
poverty line and it would not be unreasonable to assume that they will not consume any sort of
dairy product, let alone those that are industrially processed. Catering establishments which
consume these products are also mostly concentrated in big urban centers.

When Assessing demand for Industrially processed diary products, one has also to take into
account the socio-economic conditions of the region, which is highly urbanized with an
estimated total urban population of about 300,000.

Having considered all the above, with an assumption of 2 litre per capita urban consumption of
milk, the present demand is estimated at 600 hecto liter of pasteurized milk per annum and
about 4 tonnes of butter and 1.5 tonnes of cheese.

2. Projected Demand

The future demand for industrially processed diary products depends, as stated earlier, on
income, food habit of the population and expansion of catering establishments in urban areas.
It is assumed that a 5% annual growth rate will take care of these factors and the demand
projection is executed in the manner shown in Table. 3.2.
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Table 3.2
DEMAND PROJECTION OF INDUSTRIALLY PROCESSED
DIARY PRODUCTS
Projected demand
Year Pasteurized Butter Cheese
Milk (H.L) (tonnes) (tonnes)
2006 600 4 1.5
2007 630 4.2 1.6
2008 661 4.4 1.65
2009 695 4.6 1.7
2010 730 4.8 1.8
2011 765 5.1 1.9
2012 804 5.4 2.0
2013 844 5.6 2.1
2014 886 5.9 2.2
2015 930 6.2 2.3
2016 977 6.5 2.4
2017 1026 6.8 2.5
2018 1077 7.2 2.7
2019 1131 7.5 2.8
2020 1188 8 3.0

3. Pricing and Distribution

The current factory – gate price of pasteurized milk in Addis Ababa is 4 Birr/liter. The
price of processed butter varies between 4 and 5 birr/100 gm. The price of cheese is around
4.5 Birr/100 gm.

Distribution of the products could be undertaken through small retail outlets as well as
large wholesalers and catering establishments.
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B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The milk processing plant to be established will have a capacity of 90,000 liters of raw milk
per annum and producing 60,000 liters of pasteurized milk, 5, 000 kg of butter and 2,000 kg of
cheese at full operation capacity.

2. Production Programme

The envisaged plant is expected to operate in double shifts of 8 hours each a day for a total of
300 days a year. It will commence operation at 70% of its rated capacity in the first year, 85%
in the second and 100% in the third year considering the time necessary for market penetration
and production skill development. As the processing of raw milk facilitates alternative
products like butter and cheese as well as other milk products, the production programme
along with the product mix is shown in Table 3.3.

Table 3.3
PRODUCTION PROGRAMME

Year Year 1 Year 2 Year 3 and

onwards
Capacity 70% 85% 100%
Pasteurized milk, lt. 42,000 51,000 60,000
Butter, kg 3,500 4,250 5,000
Cheese, kg 1,400 1,700 2,000

IV. MATERIALS AND INPUTS

A. RAW AND AUXILARY MATERIALS

The basic raw material for milk, butter and cheese production is raw milk. Other materials
such as milk coagulating enzymes and salts are also required in relatively small quantity. In
addition to raw materials, auxiliary materials like containers and glycine papers are required.
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Except glycine paper and coagulating enzymes, the other major raw materials can be obtained
from the local market. The list and costs of the above mentioned materials are indicated in
Table 4.1. The total cost of raw material is estimated at Birr 283,015.

Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST

Sr. Description Qty Cost, Birr

No. FC LC Total
1. Raw milk, lt. 90,000 - 180,000 180,000
2. Plastic bags (200cc),pcs. 300,000 - 90,000 90,000
3. Glycine paper (40 g), Kg. 21.8 2316.25 408.75 2725
4. Coagulating enzymes, kg 686 8,746.5 1543.5 10,290
Grand Total - 11,062.75 271,952.25 283,015

B. UTILITIES

The major utilities required by the envisaged project are electric power, water & fuel oil. The
annual requirement of utilities and the corresponding cost is indicated in Table 4.2. The total
cost of utilities is estimated at Birr 36,277.1

Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST (BIRR)

Sr. Utilities Qty. Unit Total

No. price Cost
1. Electric power, kWh 7,068 0.4736 3347.405
2. Water, m3 1,222 3.10 3788.2
3. Fuel oil, lt. 8,725 3.34 29,141.5
Grand Total - 36,277.1
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V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Processing of raw milk mainly involves heat treatment operation usually known as
pasteurization and sterilization. These processes are discussed in detail as follows.

A weighed amount of raw milk is pumped to a clarifier by means of the milk pump, where it is
removed of microscopic impurities. Clarified milk is next sent to the cooler where it is cooled
to about 2-5oC, then pumped to the storage tank.

The milk is, then, preheated and pasteurized to a temperature of about 80 oC by heat exchange.
Further, by the effect of ultra-high temperature sterilizer, the fatty ingredients are homogenized
in the homogenizer and recycled to the ultra-high temperature sterilizer where it is pasteurized
instantly in about 2 seconds at high temperature of 135oC.

Finally, cooling is achieved by means of chilled water to lower the temperature to 3 oC, after
which the milk is stored in the surge tank for filling into suitable containers for various uses.
After such a process, a specified quantity of the milk is sold as a pasteurized product while the
remaining portion is further processed in the plant for the production of other milk products
such as butter and cheese. The details of the production processes are stated as follows.

a) Butter Production

Whole milk is partially or totally separated to produce standardized whole milk with 3.25%
milk fat, low fat milks, 1-2% milk fat, and skim milk. After separation, cream is held in
stainless steel tanks and refrigerated at (4-7oC).
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The separated cream is pasteurized in order to destroy bacteria. Following pasteurization, rapid
cooling is conducted to facilitate the formation of butter by a churning process. By continuous
churning, the entering will be pasteurized and tempered cream is agitated vigorously by beater
bars. This action causes stripping of the fat globule membrane and aggregation of the fat into
chunks. Finally, a continuous ribbon of yellow butter streams from the end of the continuous
churn. Butter as a product drops into a hopper, where it is transferred to packing machinery.

b) Cheese Production

Cheese is made from pasteurized skim milk, and in form of discrete particles classified as small
or large curd. A curd forms when the increasing lactic acid of milk during fermentation attains
the isoclectric point of casein at pH 4.6. This soft curd additionally contains lactose, salt and
water. Latter, the curd matrix is cut and cooked to about 126 oF (52oC). Separation of whey
from the curd is rapid, and is followed by two or three water washings at warm to chill
temperatures. Washing removes whey from residues and acts as a cooking medium. After
drainage of the last wash water, the chilled curd is blended with a viscous, salted cream
dressing to give 4.2% fat and 1% salt, and is packaged.

2. Source of Technology

The address of a possible suppliers of the technology and equipment is as given below.

1. Pharmalab Engineering (1) PVT. LTD.

Star Metal Compound, L.B.S Marg. Vikhroli
Bombay - 83 (India)
Tel. 5782559 (Hunting)
Telex 11-71934 - PL IN
Fax: 91-22-5785329

2. Sunita impex Pvt. Ltd.

36A Bentinck street, 1st floor, Kolkata 700069,
India, ph: 2248 1986/87, 2243 0102
Fax: 91-33-2248 3664
E-mail: Kolkata: [email protected], [email protected]
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3. PEC Limited
Hansalaya 15, Barakhamba Road
New Delhi – 110001
Tel: 331 – 2863
E-mail : pecdel@ pecdel.pecdel. cmc.net.m

B. ENGINEERING

1. Machinery and Equipment

The list of required machinery and equipment is indicated in Table 5.1. The total cost of
machinery and equipment is estimated at Birr 2.2million.

Table 5.1
REQUIRED MACHINERY AND EQUIPMENT

Sr. Item Qty

No.
1. Weighing tank 1
2. Receiving tank 1
3. Milk clarifier 1
4. Milk pump 1
5. Plate cooler 1
6. Storage tank 1
7. Milk pump 1
8. Pasteurizer 1
9. Surge tank 1
10. Filling and packing machine 1
11. Boiler 1
12. Chiller 1
13. Churning equipment 1
14. Hopper 1
15. Power facilities 1
16. Sterilizer 1
2. Land, Building and Civil Works
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Total land area required is about 500 square meters. The cost of land at a lease rate of 9.78 Birr
per square meter and for a period of 80 years holding is estimated at Birr 4890. The built-up
area is estimated to be 300 m2 and the cost of buildings and construction at a unit cost of Birr
1,500 per m2 is estimated at Birr 450,000. The total cost of land, building and civil work is
estimated at Birr 454,890.

3. Proposed Location

As indicated in the market study, the major consumers of milk and milk products are the urban
population of Dire Dawa and other neighboring towns . And also the major raw material, milk
is available in the nearby rural areas. Thus, the plant is proposed to be established in the town
of Dire Dawa. In addition the town has the basic infrastructure for the smooth operation of the
plant.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

Total number of manpower required is 21 persons. Details of the manpower requirement and
the corresponding annual labour cost including fringe benefits are shown in Table 6.1. The total
annual cost of man power is estimated at Birr 164,880.
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Table 6.1
MANPOWER REQUIREMENT AND ANNUAL LABOUR COST

Sr. No. of Salary, Birr

No. Description Persons Monthly Annually
1. Manager 1 1,500 18,000
2. Accountant 1 1,200 14,400
3. Cashier 1 450 5,400
3. Secretary 1 600 7,200
4. Storekeeper 1 600 7,200
5. Salesperson/Purchaser 1 600 7,200
6. Cleaner and Messenger 2 500 6,000
7. Guards 3 900 10,800
8. Production Head 1 1,200 14,400
9. Chemist 1 900 10,800
10. Operator technicians 4 1,800 21,600
11. Assistant Operators 4 1200 14,400
Total 21 11,450 137,400
Benefit (20% of Basic Salary) 2,290 27,480
Grand Total 13,740 164,880

B. TRAINING REQUIREMENT

Six operators and two technicians should be given a short-term on-site training during,
commissioning by machinery & equipment supplier and the training cost is estimated at Birr
30,000.
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VII. FINANCIAL ANALYSIS

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

Construction period 1 years

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 10days
Work in progress 2 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 3.28
million, of which 23.14 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
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Table 7.1
INITIAL INVESTMENT COST

Sr. Total Cost

No. Cost Items (‘000 Birr)
1. Land lease value 4.89
2. Building and Civil Work 450.0
3. Plant Machinery and Equipment 2200.0
4. Office Furniture and Equipment 50.0
5. Vehicle 225.0
6. Pre-production Expenditure* 246.15
7 Working Capital 104.76

Total Investment cost 3280.8

Foreign Share 23.14

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 0.950 million (see
Table 7.2). The material and utility cost accounts for 33.59 per cent, while repair and
maintenance take 5.26 per cent of the production cost.

* N.B Pre-production expenditure includes interest during construction ( Birr 171.15

million) training (Birr 30 thousand ) and Birr 45 thousand costs of registration, licensing
and formation of the company including legal fees, commissioning expenses, etc.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %

Raw Material and Inputs 283.01 29.77

Utilities 36.28 3.82
Maintenance and repair 50.0 5.26
Labour direct 82.44 8.67
Factory overheads * 34.35 3.61
Administration Costs** 54.96 5.78
Total Operating Costs 541.04 56.92
Depreciation 262.74 27.64
Cost of Finance 146.74 15.44
Total Production Cost 950.53 100

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in the
second year of operation. Important ratios such as profit to total sales, net profit to equity
(Return on equity) and net profit plus interest on total investment (return on total investment)
show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

* Factory overhead cost includes salaries and wages of supervisors, insurance of factory
workers social costs on salaries of direct labour, etc.

** Administrative cost includes salaries and wages, insurance, social costs, materials and
services used by administrative staff, etc.
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2. Break-even Analysis

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 = 67 %
Sales – Variable Cost

3. Pay-Back Period

The investment cost and income statement projection are used to project the pay-back period.
The project's initial investment will be fully recovered within7 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 13 % and the net present
value at 8% discount rate is Birr 0.801 million.

D. ECONOMIC BENEFITS

The project can create employment for 21 persons. In addition to supply of the domestic
needs, the project will generate Birr 44.38 thousand in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.