Dairy processors cry for funds to stay afloat

The Covid-19 pandemic has put the country's dairy processors in a severe cash crisis, as production and sales have fallen, and sales money is stuck in the distribution channel of the companies.

Their profits have also dropped as they provided face masks and other personal protective equipment, food, and residence for their workers during the pandemic.

Product sales dropped by 38-40% during the pandemic, which would lead to a 10-15% decrease in revenues throughout 2020 compared to the previous year, businesses said.

Dairy producers are now seeking funds to provide cash for their distributors and suppliers of raw materials (milk). They also require more money to boost storage capacity of raw materials and final products to sustain business.

Pran Dairy Limited, a vibrant subsidiary of Pran-RFL Group, anticipates revenue losses worth $24 million, equivalent to Tk203.3 crore, due to the impacts of Covid-19.

As the stimulus packages announced by the government have lots of formalities and limitations, Pran-RFL Group has sought $10 million, equivalent to Tk85.41 crore, in loans from the Asian Development Bank (ADB) to address the crisis of working capital and to meet regular expenses for Pran Dairy, company officials told The Business Standard.

The ADB has prepared a concept paper based on the proposal of the conglomerate, which said due to disruption in supply chain during the lockdown and lower demand, dairy product processors did not buy milk.

It said small dairy firms sold their milk for half the price even though they were compelled to dump their product, and increasing production and storage capacity of Pran Dairy would reduce their losses.

Uzma Chowdhury, director (finance) of PRAN-RFL Group, told The Business Standard Pran Dairy is expecting lesser profit as it lost revenues due to the pandemic.

"Cost of operation has increased during the pandemic. The additional working capital will help continue operation smoothly and protect the previous investment."

"Dairy goods are perishable with the least shelf life among all kinds of agricultural products. Sales of dairy products have gone down, and there have been lots of damage due to cold chain maintenance and short shelf life," Uzma said. 

Consumers are moving towards imported milk powders instead of choosing ultra-high temperature (UHT) milk products, and increased consumption of local products will help solve the crisis, she added.

The Emergency Working Capital Support to Dairy Value Chain project under which the $10 million loan has been sought will help Pran Dairy buy milk from an additional 12,000 small dairy farmers, 10% of whom are bound to sell their milk for half the price due to absence of buyers.

The company is also expecting creation of 6,150 more jobs in its factory.

Lower revenues and increased operating expenses will further squeeze the company's immediate liquidity position, said the ADB report. It projected that there will be a recovery within two years as latent demand will boost revenues, inventories will liquidate, and trade terms will normalise.

The liquidity support will also help finance longer accounts receivable periods and advance payments to farmers, increase in working capital, and continuation of timely payments to farmers, employees, and agents.

The ADB said in the paper that disruptions are delaying the receipt of Pran Dairy's payments from its trade channel, leading to an increase in accounts receivable days from 33 to 40.

It said stepping up its production volumes will increase inventory capacity to from 68 days to 80 days. As a result, the overall operating cycle is expected to increase by 20–30 days, which would cause an incremental liquidity gap of an additional $14.1 million.

While banks will continue to provide credit lines, these may not be sufficiently available because of tight liquidity in the Bangladeshi banking system, the paper said.

It also said the Emergency Working Capital Support to Dairy Value Chain project is the ADB's first non-sovereign assistance for an agribusiness company in Bangladesh during the Covid-19 crisis.

The project will protect one of the most well-established franchises in the packaged food supply chain of Bangladesh from the impacts of Covid-19, preserving livelihoods of both the existing dairy farmers and those who have recently signed contracts, and protecting the supply of milk products to the market.

ADB officials told The Business Standard that their president has recommended the loan from Ordinary Capital Resources (OCR). Pran Dairy will repay the loan in three years, and there is also a one-year grace period.

The ADB approved $25.1 million in loans for Pran-RFL Group in 2012, which the conglomerate fully repaid in January this year. The lender also approved another $14.2 million in loan in 2018 for the company.

This $10 million is the ADB's third loan support for Pran-RFL Group.

When asked why the company is seeking a loan from the ADB instead of the government's stimulus fund, Uzma said the ADB is providing the loan at 3% interest while it is 4.5% for the government package.

She said stimulus funds have lots of formalities. "It has not been disbursed yet and there is no deadline for disbursement."

"As Pran Dairy has export earnings, the ADB's loan offers natural hedging against any foreign exchange loss. Regardless of the currency, any amount injected into the economy will help push the circulation of money," added Uzma.

The loan will secure jobs for 3,000 production workers, 20,000 farmers supplying raw materials, and 3,000 packagers, reflecting a situation like the pre-Covid-19 period.

Everyone in crisis

As Covid-19 slashed people's earnings, sales of processed milk have decreased. Production has also decreased due to lower sales volume and limited storage capacity. 

However, operating costs of companies have increased in this period. They are facing a cash crunch for these reasons, officials told The Business Standard.

Chief Operating Officer of Akij Food and Beverage Limited (Dairy) Mosleh Uddin told The Business Standard, 'Normally, we would give distributors a fixed capital for a year. Now, we are bound to provide cash on a regular basis as they are selling products at deferred price."

"Sales were down by more than 40% at the beginning of lockdown, and later recovered by only 1 or 2%," he said, explaining that the reason for drop in sales is that people do not have jobs and income.

Aftab Milk and Milk Products Limited resumed production in late June after a long vacation due to the pandemic, but sales are below half of what it was during normal time.

Gazi Md Nur Uddin, chief operating officer of the company, said, "We are operating below our production capacity."