80.

PROFILE ON PASTEURIZED MILK, BUTTER

AND CHEESE PRODUCTION
 80-2

TABLE OF CONTENTS
PAGE

I. SUMMARY 80-3

II. PRODCUT DESCRIPTION AND APPLICATION 80-3

III. MARKET STUDY AND PLANT CAPACITY 80-3

A. MARKET STUDY 80-3

B. PLANT CAPACITY AND PRODUCTION PROGRAMME 80-6

IV. MATERIALS AND INPUTS 80-6

A. MATERILAS 80-6
B. UTILITIES 80-7

V. TECHNOLOGY AND ENGINEERING 80-7

A. TECHNOLOGY 80-7
B. ENGINEERING 80-8

VI. MANPOWER AND TRAINING REQUIREMENT 80-9

A. MANPOWER REQUIREMENT 80-9
B. TRAINING REQUIREMENT 80-10

VII. FINANCIAL ANALYSIS 80-10

A. TOTAL INITITAL INVESTMENT COST 80-11
B. PRODUCTION COST 80-12
C. FINANCIAL EVALUATION 80-12
D. ECONOMIC BENEFITS 80-13
 80-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of 1.4 million litres of
pasteurized milk, 100 tonnes of butter and 1000 tonnes of cheese per annum.

The present demand for the proposed product is estimated at about 2,304,790 litres of milk
117 tonnes of butter and 2,208 tonnes of cheese. The demand is projected to reach 4,533,878
liters of milk, 231 tonnes of butter and 4,973 tonnes of cheese by the year 2012.

The plant will create employment opportunities for 29 persons.

The total investment requirement is estimated at Birr 4.25 million, out of which Birr 2.11
million is for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 25.49% and a net
present value (NPV) of Birr 3.55 million, discounted at 10.5%.

II PRODUCT DESCRIPTION AND APPLICATION

Cow milk is a 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, yorgot, cheese and butter. All
these products can be consumed by human being as part of diet on the daily feeding menu.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply & Present Demand

At present there is no plant which supplies pasteurized milk and milk products in the region.
Milk and milk products are supplied to the market by processing through traditional methods.
Milk and milk products produced during 1994/95 - 1997/98 in the region is given in Table 3.1.
 80-4

Table 3.1
MILK AND MILK PROUDCTS IN TIGRAY REGION

Milk (liter) Butter (kg) Cheese (kg)

Year
1994/95 79,823,528 2,057,451 38,253,427
1995/96 84,798,632 2,158,684 40,637,624
1996/97 91,448,200 2,357,077 43,824,264
1997/98 96,763,798 2,494,087 46,371,631

Source: Tigray National Regional Administration Bureau of Planning and Economic

Development. Estimates of Regional Income Accounts for Tigray Region (1994/95-
1997/98), May 1999, Mekelle.

As can be seen from Table 3.1 production of milk and milk products has been growing at an
annual average growth rate of about 7%. Assuming this annual average growth rate over in
the past four years, the present production level is estimated as follows:-

- Milk = 126,837,600 litre

- Butter = 3,269,239 kg
- Cheese = 60,783,748 kg

According to the 'Estimates of the Regional Income Account for Tigray Region', of the total
production of milk 50% is used for butter. Hence, the whole milk that is to be consumed is
63,418,800 litres per annum. By taking the forecasted population of Tigray for the year 2002
the per capita consumption of milk and milk products is given below.

- milk - 16.26 litres/annum

- butter - 0.83 kg/annum
- cheese- 15.58 kg/annum

Since a modern milk and milk products has to be established in an area where there is enough
market, the population of the major urban towns have been analyzed. According to CSA,
Statistical Abstract of March 2001, the total urban population of Tigray Region in July 2001
was 650,998. The major urban towns in the region and their population size is given Table
3.2.
Table 3.2
MAJOR URBAN TOWNS OF TIGRAY AND POPULATION SIZE

Population size (2001) % of the total urban

Town population
Mekelle 134,996 20.7
Endasellassie 35076 5.4
Adwa 34043 5.2
Axum 37751 5.8
Adigrat 52046 8.0
Maichew 27427 4.2
 80-5

The above data reveals that out of the total urban population of the region 20.7% reside in
Mekelle. The other towns population size share ranges from 4.2% to 5.8%. Hence, the
demand estimation in this profile will focus on Mekelle.

Based on the estimated average per capita consumption and population forecast the present
effective demand for milk and milk products for Mekelle is estimated as given in Table 3.3.

Table 3.3
ESTIMATED PRESENT EFFECTIVE DEMAND
FOR MILK & MILK PRODUCTS AT MEKELLE

Milk & Milk Per Capita Consumption Population Size Total Present Demand
Products (Mekelle) (Mekelle)
Milk 16.26 litres 141746 2,304,790 lit
Butter 0.83 kg 141746 117,649 kg
Cheese 15.58 kg 141746 2,208,402 kg

2. Demand Projection

The demand for milk and milk products is highly influenced by population growth, income
and consumption habit. By considering urban population growth rate of 5% and the
combined effect of other factors, an annual average growth rate of 7% is applied to forecast
the demand for milk and milk products in Mekelle. Accordingly the projected demand is
given in Table 3.4.

Table 3.4
PROJECTED DEMAND, FOR MILK AND MILK PRODUCTS

Year Milk (lit) Butter (kg) Cheese (kg)

2002 2,304,790 117649 2208,402
2003 2,466,125 125884 2362,990
2004 2,638,754 134696 2528,399
2005 2,823,467 144125 2705387
2006 3,021,110 154214 2894765
2007 3,232,587 165009 3097398
2008 3,458,868 176559 3314216
2009 3,700,989 188919 3546211
2010 3,960,058 202143 4060057
2011 4,237,262 216293 4344261
2012 4,533,878 231433 4973744
 80-6

3. Pricing and Distribution

The current ex-factory price of factory processed/pasteurized milk, butter and cheese in Addis
Ababa is Birr 3.00/lit, Birr 6.00 kg/ and Birr 5.60 kg. respectively. To be completive the ex-
factory price for the envisaged project is proposed to be Birr 2.25/lit. Birr 5.50/kg and Birr
4.75/kg for pasteurized milk, butter and cheese, respectively.

The products can find their market outlet through existing wholesale and retail channels for
food items.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The milk processing plant to be established will have a processing capacity of 2.5 million liter
per annum, out of which about 1.400 million liter will be pasteurized milk, while the
remaining will be processed for the production of butter and cheese as required.

2. Production Programme

The envisaged plant is expected to function in double shift system of 8 hrs each a day for a
total of 300 days a year. It will commence operation at 80% in the first year, 90% in the
second and 100% in the third. As the processing of raw milk facilitate alternative products
making of butter and cheese as well as other milk products, the production mix is shown as
follows.
Table 3.5
PRODUCTION PROGRAMME

Year 2005 2006 2007

Capacity 80% 90% 100%
Pasteurized milk (000lt) 1120 1260 1400
Butter ('000 kg) 80 90 100
Cheese ('000 kg) 800 900 1000

IV RAW MATERILS AND INPUTS

A. RAW 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.
Except glycine paper and coagulating enzymes, the other major raw materials can be obtained
from the vicinity of the town. The list and cost of the above mentioned materials are
indicated in Table 4.1.
 80-7

Table 4.1
RAW & AUXILIARY MATERIALS REQUIREMENT

Description Qty Cost ('000 Birr)

FC LC TC
1. Raw milk (lts) 3,100,000 - 4,650 4,650.00
2. Plastic bags (200cc), pcs 7,000,000 - 1,750 1,750.00
3. Glycine papers 40 gm 0.5 ton 60.00 60.00
4. Coagulating enzymes 16,000 kg 210.88 - 210.88

FOB 270.88 6,400 5,120.88

Various charges (5%) 13.50 - 13.50
Total 284.38 6,400.00 6,684.38

B. UTILITIES

The annual requirement of utilities is indicated in Table 4.2.

Table 4.2
ANNUAL REQUIREMENT OF UTILITIES

Description Qty Cost ('000 Birr)

FC LC TC
1. Electric power (kwh) 48,600 22.84 22.84
2. Water (m3) 8,400 12.60 12.60
3. Fuel Oil (liters) 60,000 138.00 138.00
Total 173.44

VI. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Processing of raw milk mainly involves heat treatment operation usually know 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 about 80 o C 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 pasterurized
instantly in about 2 seconds at high temperature of 135oC.
 80-8

Finally cooling achieved by means of chilled water to lower the temperature to 3oC, 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 product while the remaining
portion is further processed in the plant for the production of other milk products such as
butter and a cheese. The details of the production processes are stated as follows

 Butter Production:- Whole milk is partially or totally separated to produce

standardized whole milk, 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).

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 in to chunks. Finally a continuous ribbon of yellow butter streams
from the end of the continuous churn. Butter as product drops into a hopper, where it is
transferred to packing machinery.

 Cottage Cheese Production is made from pasteurized skim milk, and in inform
discrete particles classified as small or large curd. A curd forms when the increasing lactic
acid of milk during fermentation attains the isoelectric 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 126oF (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 creaming dressing to give 4.2% fat and 1% salt, and is
packaged.

2. Source of Technology

The under stated company could be the possible supplier

Pharmalab Engineering (I) 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

B. ENGINEERING

1. Machinery & Equipment

The list of machinery & equipment are indicated in Table 5.1. The total cost of machinery is
estimated at about Birr 2.115 million.
 80-9
Table 5.1
REQUIRED MACHINERY & EQUIPMENT

Item Qty
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 & 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 Work

Total land area required is about 1500 square meters. Its cost is estimated at a lease rate of 2
Birr per meter square and total cost is Birr 210,000. The built up area is estimated to be 600
m2 and its construction is about Birr 900,000 million. Thus, the over all cost of land ,
building and civil works is estimated at Birr 1.11 million.

3. Proposed Location

As indicated in the market study, the major consumers of milk and milk products are the
urban population of Mekelle. Thus, the plant is proposed to be established in the town of
Mekelle.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

Total number of manpower required is 29 persons. Details of the manpower requirement and
the corresponding annual salary cost are shown in Table 6.1 below.
 80-10

Table 6.1
MANPOWER REQUIREMENT

Title No Salary
Monthly Annually
1. Manager 1 1,500 18,000
2. Administration & Finance Head 1 1,200 14,400
3. Secretary 1 600 7,200
4. Storekeeper 1 600 7,200
5. Salesperson 1 600 7,200
6. Purchaser 1 600 7,200
7. Cleaner & Messenger 2 300 3,600
8. Gaurds 4 800 9,600
9. Production Head 1 1,300 15,600
10. Engineers 3 3,000 36,000
11. Operators 7 2,800 33,600
12. Assistant Operators 4 800 9,600
13. Technicians 2 800 9,600
Total 29 178,800
Benefit (25%) 44,700
Grand Total 29 223,500

B. TRAINING REQUIREMENT

As the technology is well known in the country, there is no need of training for the personnel's
employed.

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 2 years

Source of finance 30 % equity
70 % loan
Tax holidays 4 years
Bank interest 10.5%
Discount cashflow 10.5%
Land value Based on estimated lease rate of the region
 80-11

Repair and maintenance 2 % of the plant and machinery

Accounts receivable 30 days
Raw material local 10 days
Raw materials import 90 days
Work in progress 3 days
Finished products 15 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 about Birr
4.25 million, out of which 49 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
SUMMARY OF THE INITIAL INVESTMENT COST (‘000 BIRR)

Cost Items Foreign Local Total

Currency Currency
1 Land 210.00 210.00
2. Building and Civil Work 900.00 900.00
3. Plant Machinery and Equipment 2000.00 115.00 2,115.00
4. Office Furniture and Equipment 50.00 50.00
5. Vehicle 180.00 180.00
6. Pre-production Expenditure* 482.10 482.10
Total Investment cost 2000.00 1937.10 3937.10
7 Working Capital 96.26 220.39 316.65
Total 2096.26 2157.49 4253.75

-----
* Pre production expenditure include interest during construction ( Birr 382.10 thousand),
and cost of registration, licensing and formation of the company including legal fees,
commissioning expenses, etc.
 80-12

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 7.77 million (see
Table 7.2). The material and utility cost accounts for 88 per cent while repair and
maintenance take 1.12 per cent of the production cost.
Table 7.2
ANNUAL PRODUCTION COST (‘000 BIRR)

Year
Items 3 4 7 10
Raw Material and Inputs 4,949.87 6,628.50 6,684.38 6,684.38
Labour direct 79.44 95.26 107.28 107.28
Utilities 128.43 154.01 173.44 173.44
Energy and Power
Spare parts
Maintenance and repair 69.61 83.47 93.99 93.99
Factory overheads 33.10 39.69 44.70 44.70
Administration Overheads 71.52 71.52 71.52 71.52
Total Operating Costs 5,332.0 6,379.60 7,175.31 7,175.31
Depreciation 338.50 338.50 338.50 318.50
Cost of Finance 299.70 293.10 261.10 217.70
Total Production Cost 5970.20 7011.20 7774.60 7711.50

C. FINANCIAL EVALUATION

1. Profitability

According to the projected income statement, the project will start generating profit in the first
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.

2. Break-even Analysis
 80-13
The break-even point of the project is estimated by using income statement projection.

BE = Fixed Cost = 30 %
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 within 6 years.

4. Internal Rate of Return and Net Present Value

Based on the cashflow statement, the calculated IRR of the project is 25.49% and the net
present value at 10.5% discount rate is Birr 3.55 million.

D. ECONOMIC BENEFITS

The project can create employment for 29 persons. In addition to supply of the domestic
needs, the project will generate Birr 5.76 million, interms of tax revenue. The establishment
of such factory will have a foreign exchange saving effect to the country by substituting the
current imports.