Sarfaraz Rehman, a Chartered Accountant by training, has more than three decades of experience in the FMCG industry, starting his career with Unilever Pakistan, moving on to Smithkline Beecham, Jardine Matheson/Olayan and Pepsi. Later he launched Engro Foods and served as its CEO for nine years, during which time the company launched ten brands and won the G20 Global Top15 Company award.

Although he has led finance, management, and logistics of various projects, he wears several other hats as well, including as an executive coach, consultant to leading corporate clients, motivational speaker to young executives, and an environmental and water activist.

In this interview, BR Research tapped on Sarfaraz’s dairy sector expertise to find out what he thinks are some of the biggest problems in the sector and how should Pakistan solve them.

BR Research: What is your reading of some of the structural problems in Pakistan’s dairy sector?

Sarfaraz Rehman: Over the last two decades Pakistan’s dairy sector has tried to take a few steps into the 21st century but I still think the country is in the 1950s or 60s in international benchmark terms.

Dairy is a technical field for many reasons, the biggest of which is perhaps because at room temperature milk barely lasts four hours. By the time it reaches the market, there is countless bacteria, and the structure of the milk is spoilt. Working around in terms of how to preserve it for longer is what drives the industry because only when milk is preserved, value addition can take place such as ice cream, desserts, yogurt, lassi, nutrition powders etc.

In the more structured world, importance is also given to the health of the animal, how to maximize production, and the entire process of preserving it from milk collection to retail. In Pakistan, this structure is absent.

So, for example, a variation of two degrees from an optimum temperature for milk production inside the cow's stomach, can lead to under production or health hazards. Then there are other technicalities regarding cow’s health, nutrition, calf's nutrition, etc, which poor and uneducated farmers who have few animals are unaware of.

BRR: Some argue that deregulation of milk prices is a solution to these problems?

SR: The rationale for deputy commissioners to regulate milk prices is to set it at an affordable level. In commercial terms, it is a flawed policy. What does the commissioner know of the costs of the milk? Even if deregulation is taken out of the equation, the fact is that Pakistan is one of the most expensive milk-producing countries. This then goes back to the yields and pedigree of the animal, the processes of taking care of an animal, which means educating the farmer about it.

The benefit of farmer training is not limited to improvements in livestock or yields, but the entire economics of the household would improve. There needs to be a very concentrated educational program. Unfortunately, however, social setup and traditions are stronger than the individual who wants to try differently.

BRR: In other words, you think livestock departments of provincial government or their development partners should allocate funds for specific training programs?

SR: It is already happening at small scale, but implementation is also key. Secondly, and the bigger problem is that of the animal breed. The Sahiwal cattle has all but disappeared from Pakistan; you will not find even 150 Sahiwal animals in Pakistan even in a year whereas you can order perhaps 500 animals from Australia at any given time. Or Kenya or Thailand for that matter.

Red Sindhi is also very few in numbers. Buffalo is present in Pakistan, but its yields are comparatively low because it is not a milk-producing animal, per se. However, this is gradually changing; farmers are learning that cows are better for milk yield, but that change will only take place when the government implements a policy to reduce the use of buffaloes for milk production, or at least isolate that milk.

BRR: Yields are low in the case of buffaloes, but their input cost is also substantially low as it consumes agricultural residues as against cows that demand costlier feed. Doesn’t this make the ratio favorable?

SR: It depends on the breed. There are about 10 percent buffaloes for which this holds true. If this number is to be increased, then a lot of work needs to be done in terms of identifying these breeds, creating a pedigree, before yields gradually increases in future generations.

The other way is to import high-yielding animals. But that is also a costly option as the animal is not used to the local environment. Artificial insemination and embryo planting exercises are expensive and time-consuming processes. The Chinese were able to import breeds in wholesale, but Pakistan does not boast such affordability or clout.

There is another way of going about it and that is building cooperatives. At Engro Foods we ran a cooperative of farmers for about two and half years along with another partner from the corporate sector. But when we pulled out, hoping that the community will now run it themselves, the cooperative crashed; it failed because of lack of trust among the people.

BRR: While livestock and dairy industry is a provincial subject, import of animal, fodder, its vaccines, etc. fall into the federal domain. What do you think is the biggest coordination issues that must be addressed on priority basis?

SR: There are four provincial food authorities; that means, four stocks, four warehouses, four formulations, etc. That is a big problem. There needs to be one common law, and implementation can be left to the respective food authorities.

Second is the need for a Minimum Pasteurization Law. There are a lot of benefits attached to this. Firstly, everything will be documented. Secondly, quality milk can be better tested across the supply chain. And thirdly, documentation will lead to taxation. Private sector companies did it in a limited capacity, but a game-changing move can only come from the government. And it must be a long-term policy, not something that changes with every new government.

It will also create a multiplier effect as lots of businesses will emerge. It will not just be limited to good quality consumption of milk but also creation of high-end milk related products such as desserts and then exports of the same. Similar changes and developments happened in Turkey some two decades ago and today they stand as one of the top dairy countries in the world. India went for the Minimum Pasteurization Law in early 60s.

Karachi alone consumes around 5.5 million liters of milk. If all of this is processed under Minimum Pasteurization Law, lots of new businesses will emerge; it would be a bonanza for economic growth.

BRR: Has there been a study on consumer preferences when it comes to dairy products? If yes, what are some of the key findings?

SR: People prefer sweetish milk, in which case pasteurized milk would work, but the infrastructure needed for that is absent. Consumers also prefer buffalo milk due to its taste, white color, and creamier texture.

As far as milk consumption is concerned, the biggest number of occasions of milk usage is tea drinking; it is almost 60 percent. The second biggest occasion is to drink milk, and third is to use it in making of yogurt, desserts, etc.

BRR: Lately there was a row over imported milk powder which is reconstituted to produce UHT milk. Why cannot we set up plants locally to convert milk into milk powder to ensure adequate supply during the months when milk yields are low?

SR: In Pakistan, some companies have the capacity to convert fresh milk into milk powder, some of which do not even have UHT brands of their own. But powder requires space since it is fluffy. This raises warehousing cost so companies only do it out of need. This is also why powder milk is imported. However, since the imposition of regulatory duty on imported powder milk, its imports have reduced, which is good to maximize local usage.

BRR: What is the ballpark capex for setting up a milk powder plant?

SR: It will cost Rs4 billion to put up a 12,000 tons/year plant, including land, plant, machineries, warehousing etc. At the time of duty imposition on imported powder milk, about 65,000 tons was imported; 12,000 tons is one-fifth of that. But investors can be encouraged to come into this business if provincial governments improve coordination and focus on making laws, such as Minimum Pasteurization Law. It can create a developmental spill over across the entire supply chain.