India: Increasing demand challenges the dairy sector

Emerging situation

Dairy is currently the top-ranking commodity in India, with the value of output in 2004 at 1.179 billion rupees (US$39 million), which is almost equal to the combined output value of rice and wheat. Despite the importance of the dairy sector in overall GDP, it receives less government budgeting than the agriculture sector. Further, there has been no concentrated investment in the development of value-added or innovative products, nor any serious effort to support and modernize the informal sector.

In light of the increasing demand driven by the growing population, higher incomes and more health consciousness, the slowdown in dairy industry growth is severely worrisome. Based on estimates by the National Dairy Development Board (NDDB), the demand for milk is likely to reach 180 million tonnes by 2022. To supply the market, an average incremental increase of 5 million tonnes per annum over the next 15 years is required – a doubling of the average incremental rate achieved over the past 15 years. In the absence of sufficient increased production, India will need to rely on the world market for imports. And because of the huge volume required, it will affect global milk prices. Thus, focusing on areas for local dairy development is critical.

Traditionally, the policy environment has favoured the expansion of cooperatives, which ultimately crowded out the private sector. However, liberalization of the sector in recent years has encouraged private investment in dairying. In 2002, the Milk and Milk Products Order (MMPO) ushered in major policy changes friendly to the private sector and a momentum of activity that is likely to increase dramatically in the coming years. Large Indian and multinational corporations, such as Reliance, Pepsi and Coca-Cola, are planning significant investments.

Nowadays, both the private sector and the cooperatives drive the value chains. Because of the many unsuccessful cooperatives in the country, other models of dairy farmer organizations are being explored, such as mutually aided cooperative societies (MACS) and producer companies.

Millions of small and marginal farmers in dairying who own two to three animals and produce an average of 5 litres comprise a critical portion of India’s dairy industry. Livestock development in general and dairy development activities in particular are key components of pro-poor development strategies because livestock distribution is much more equitable than land distribution. Thus, changes in the dairying environment have important implications for the smallholder farmers and for poverty reduction.

The following characterizes India’s dairy farming and its relevance to inclusive growth:

• Small and marginal farmers own 33 percent of land and about 60 percent of female cattle and buffaloes.
• Some 75 percent of rural households own, on average, two to four animals.
• Dairying is a part of the farming system, not a separate enterprise. Feed is mostly residual from crops, whereas cow dung is important for manure.
• Dairying provides a source of regular income, whereas income from agriculture is seasonal. This regular source of income has a huge impact on minimizing risks to income. There is some indication that areas where dairy is well developed have less incidence of farmer suicide.
• About a third of rural incomes are dependent upon dairying.
• Livestock is a security asset to be sold in times of crisis.

Factors affecting the competitiveness of the dairy sector

Industry SWOT analysis

Within the framework of the competitiveness drivers and issues, the smallholder dairy sector’s strengths, weaknesses, opportunities and threats have been assessed. The strengths and weaknesses are factors that are directly controllable, while opportunities and threats derive from the external environment. As evident in Table 7, there are a large number of weaknesses in the sector, implying considerable scope for interventions. This SWOT analysis entailed matching each of these elements with an appropriate action.

Table 7: SWOT analysis of performance drivers

Four dairy enterprise models

The following section presents analysis and comparisons of four dairy enterprise models in India. Chosen for the analysis: i) a private dairy operating in Andhra Pradesh, ii) the Orissa State Cooperative as an example of a weak functioning cooperative, iii) the Gujarat Cooperative Milk Marketing Federation as an example of a strong functioning cooperative and iv) a mutually aided cooperative society as an alternative model. Models such as producer companies (emerging as a new generation cooperative) are still in a developing stage.

As previously noted, cooperatives have been successful only in some parts of the country. This is largely because the cooperative law falls under the state policy and is formulated differently in different states. In states such as Gujarat, where the model succeeds, the cooperative is headed by elected managers and managed by professionals. In many other states, civil servants manage the cooperative, which results in a lot of government interference in the day-to-day functioning and leads to a lack of democracy and hence no sense of ownership or responsibility at the village level.

Three key differences distinguish the Gujarat (GCMMF) cooperatives from the other states: i) an oversight board elected by farmer members; ii) professionals employed by the cooperatives to manage the cooperatives and iii) the cooperatives have autonomy and freedom in their operating policies from interference by government and politicians (Tushar Shah et al.).

To address the governance issues related to cooperative management, the MACS Act was passed in 1995. It de-linked the district level cooperative from the state level, giving autonomy to district and village mutually aided societies. However, only the state of Andhra Pradesh has implemented the legislation.

Changing from the cooperative model to the society model has many associated bureaucratic problems. To overcome the hassles, the concept of producer companies was introduced as a way of transforming cooperatives to work more efficiently as representatives of farmers. However, while promising, it is a relatively new idea that needs more time to develop. Meanwhile, with the liberalization of dairy sector, private sector dairies have emerged as prominent players in the dairy industry.

i) A private dairy

The private dairy selected for the comparative analysis is an ISO 9001-certified dairy headquartered in Andhra Pradesh. The company set up there in 1992 after the MMPO opened the door to private dairies, and it now trades on the Indian stock exchange. Milk collection is about 7 lakh litres per day from 150 000 households in 3 500 villages in 3 states, although the major operations are in Andhra Pradesh. The company serves three main metropolitan areas with fresh milk (Hyderabad, Chennai and Bangalore) and is about to enter Mumbai. It also markets a wide range of products, including milk, curd, butter milk, pedha and paneer as well as new items such as flavoured yoghurt and flavoured milk to cater to the changing tastes of the young generation. The company has several chilling and bulk cooling units across its collection region in Andhra Pradesh to ensure quality of milk through the chain.

The company obtains its milk supply through village agents who have personal relationships with the farmers; it does not get directly involved with farmers. Depending on the social structure of the village, there may be more than one agent per village. The agents collect the milk and deliver to the company. The two parties have negotiated a price, but the company is not involved with what price the agent pays the farmers (although it is slightly above what the cooperatives pay in the state). Agents often provide loans to farmers to maintain their loyalty; typically, the agent competes with agents of other private companies for a farmers’ milk supply. Company employees are previous dairy cooperative employees who have enormous experience in this area. Collection areas depend on milk density and areas in which the district cooperative is less active and access to markets is efficient.

ii) The Orissa State Cooperative

The state cooperative is a dairy cooperative society registered under the Cooperative Society Act (1962). Currently, milk collected from 3 800 village societies and 224 000 farmers within 12 district unions totals about 322 000 litres per day. There has not been much competition with the private sector in this region because of low productivity and little dairy development, although private sector investment in the dairy sector is on the rise.

iii) Gujarat Cooperative Milk Marketing Federation

The Anand Milk Union Limited (Amul) cooperative formed in 1946; but it has become a brand name managed by the Gujarat Cooperative Milk Marketing Federation (GCMMF). The GCMMF consists of 13 district unions, involving 13 141 village dairy cooperative societies and nearly 2.7 million farmer members. With an aggregate milk processing capacity of 10.2 million litres per day, it is Asia ’s biggest dairy business venture. The marketing network encompasses 3 000 wholesale distributors and over 500 000 retail outlets, giving GCMMF a national reach that very few fast-moving consumer goods companies can boast. GCMMF has been exporting UHT -processed milk, ghee, skimmed and whole milk powder, butter, cheese and indigenous milk products to the China , Hong Kong , Singapore and the USA , among others.

Structure

GCMMF’s Amul model of dairy development is a three-tiered structure, with the dairy cooperative societies at the village level federated under a milk union at the district level and a federation of member unions at the state level. Farmer members milk their cows twice daily (morning and evening). GCMMF collects the milk twice a day, makes regular payments to the farmer members and provides them with cattle feed, fodder, animal breeding and veterinarian services.

Anyone who owns a cow or a buffalo and makes a one time payment of 11 rupees (10 rupees for the share certificate and 1 rupee for registration) can become a member of the village cooperative society. The applicant must agree to provide a set minimum quantity of milk, generally between 600 and 700 litres, to the society each year. The farmer members elect a managing committee that then chooses a chairman. The managing committee appoints a secretary to discharge the society’s administrative functions.

At the second tier, there is a district level union that processes the milk procured from individual societies. Each of the 13 unions has a board of directors chosen by an electoral college drawn from the chairpersons of its affiliated societies. The union board in turn elects its chairman.

The final tier is constituted by the GCMMF, which is responsible for marketing the milk procured and processed into various value-added products at the union dairies. All the products are sold under the Sagar or Amul umbrella brands. The federation’s board consists of the chairpersons of all 13 district unions. They elect the federation chairperson and appoint the managing director, who is accountable to the nearly 2.7 million strong Amul dairy society members.

Elected representatives of the farmer members make policy decisions at all three levels, which are then implemented by professional managers and skilled personnel employed by the farmer members. This structure eliminates all middlemen. By placing the farmer members in command, in essence, of the dairy cooperative involves them in the development process.

This cooperative structure is democratic, and the farmers are in control, from the milking of their animals to the final marketing by the federation. For every rupee that GCMMF earns, roughly 75 paise goes to the farmers. The mandate is clear – production by the masses, for the masses, at its efficient best.

The farmer members democratically govern the entire cooperative structure to ensure that the higher tier organizations are geared to serve the purpose of the lower levels and that the gains at all levels flow ultimately back to the farmers in a significant measure. The core feature of this structure is farmer involvement in decision-making at all three stages – procurement, processing and marketing of milk and milk products. The value addition at procurement and processing stages can be realized only with effective marketing of products, thus making it an essential feature for success.

Services provided to farmer members

The dairy unions affiliated to GCMMF provide various inputs that contribute to enhancing the productivity and quality standards, such as:

• breed improvement and animal healthcare programmes;
• extension activities;
• supplies of balanced cattle feed on a no profit–no loss basis;
• quality fodder seed distribution at subsidized cost;
• a network of artificial insemination centres aimed at genetic upgrading of the animals using frozen semen of pedigree bulls; these centres are managed by educated unemployed rural youth who provide breeding services to the farmers;
• frozen semen, liquid nitrogen and other consumables;
• 24-hour mobile veterinary services for emergencies.

It is this integrated approach to dairying and addressing farmers’ needs at all levels that gives the Amul model its uniqueness. And it is why every third litre of milk from a cow or buffalo in Gujarat is processed in a GCMMF union dairy.

iv) MACS in Andhra Pradesh (AP)

Dairy activities started at the district level in 1971. The originally chosen district union was registered under the Andhra Pradesh Cooperative Societies Act (1964). After the introduction of the MACS Act (1995), the district union opted for registration as a MACS to acquire better functional autonomy for servicing its farmer members. The union is currently collecting 60 000 litres of milk per day from 650 villages, though it likely to increase up to 100 000 litres in the next two to three years.

The MACS have a two-tier operation: at the village and district levels. A village society with elected officers manages operations at the lower level; an elected board of directors managers the district society. The village and district societies each registered separately, and each has the freedom to use its own profits.

The union provides its members with a range of services required for dairy development activity:

• organizing thrift and credit cooperative society to facilitate the financial assistance for buying milch cattle;
• organizing AI services through an NGO;
• making cross-breed or graded animals for farmers to purchase;
• providing inputs such as concentrate feed, fodder seed, fodder slips and mineral mixtures at subsidized rates to members;
• supplying breeding bulls to societies;
• providing veterinary health facility, de-worming and vaccination to the animals of members;
• compensating members in the event of the death of an animal with either a grant or loan;
• providing insurance coverage to members.

Comparative analysis of the four value chains

The following compares performance criteria for the four dairy value chains to determine how they are likely to endure against future competition.

Demand conditions

The GCMMF has a wide range of traditional products as well as several new products catering to the demands of the new generation, such as sugar-free ice cream. It is one of the largest selling brands of dairy products, with a presence in all parts of the country. The private dairy also has a range of modern products catering to the young generation, such as flavoured yoghurt. The Andhra Pradesh MACS largely sells traditional products, such as milk, to urban consumers as well as rural markets through village societies (small packets, 250 ml). The Orissa State Cooperative also largely sells milk and a few traditional products.

Market structure and governance

The competitive structure for the four models varies. Dairy is a regional industry with regional dairies serving the local market, especially in the case of packaged milk. There is more scope for inter-regional trade.

The GCMMF competes with other multinational companies, such as Nestlé and Britannia, with certain products but leads among dairy products in India. The private dairy is a leading brand in the city of Hyderabad. However, the state of Andhra Pradesh has a well-developed dairy industry with several private dairies present in the state and rigorous competition among them. The Andhra Pradesh MACS largely sells packaged milk to the nearby areas and thus encounters less competition in marketing its products. And as mentioned earlier, Orissa finds very little competition to its packaged dairy products because there are hardly any private players in the state.

The supply chain is closely linked to the governance structure of the chain. For instance, the GCMMF network is very strong, with farmer involvement at all levels in the chain. Thus it is difficult for private players to procure milk directly from farmers. It is a similar situation within the Andhra Pradesh MACS. In Orissa, however, the cooperative network is not very strong and the president of the village society wields a lot of power; farmer involvement in decision-making at all levels is virtually non-existent. This has created keen competition from milk vendors in milk procurement in that area. The private dairy in Andhra Pradesh experiences intense competition from several private dairies in milk collection. But most of these companies do not deal directly with farmers. Milk is collected through village agents. There is no involvement of any company in any dairy development activity, and thus the companies compete with each other for milk collection.

The GCMMF collects its milk through village societies, with the cooperative setting the price. But it pays one of the highest prices in the country; milk collection is done in a transparent manner (based on testing fat and SNF content). The MACS society also has similar norms (for testing fat and SNF content) for milk collection. The MACS has the freedom to decide the price paid to farmers for their milk because they have autonomy in setting prices. Societies making profits through the sale of milk products can give higher returns to farmers because they do not have to follow the cooperative price. The prices paid that the Andhra Pradesh MACS declares at the district union are higher than the cooperative prices.

The Orissa State Cooperative collects its milk supply through a village society run by the president who wields a lot of power; its farmers’ price is relatively low compared with the GCMMF. In most cases, there is no testing for fat and SNF content on which prices should be based. Average prices are fixed for cow and buffalo milk; however, influential people in community get better prices. In the case of the private dairy, milk purchases are done through the agent, with prices based on competition with agents of other companies and the declared cooperative price. A large number of societies have electronic milk testing machines and more are acquiring them.

Factor conditions

Livestock assets are likely to be better where organizations serving the area are involved in dairy development activities. The GCMMF has been providing good AI services, which has enhanced the quality of buffalo in the area. The Andhra Pradesh MACS have created a good network of services by involving the State Department of Animal Husbandry, Dairying and Fisheries and NGOs working in its area. With efficient services and involvement in breed development, the quality of herd is likely to improve in the near future.

The GCMMF as well as the Andhra Pradesh MACS provide their farmers with feed, animal medicines and vaccines and breeding services. In the Orissa State Cooperative, feed is made available at a subsidized rate through the village society. The society is also involved in providing health and breeding services; however, the farmers still need to largely rely on the state government to provide health and breeding services, which are somewhat inadequate. There is no facility for loans; however, medicines are available at cost, although supply tends to be a problem. Because the private dairy collects milk through agents, it is not directly involved with the farmers for service provision. The agents sometimes extend loans to farmers, which ensures marketing commitment by producers. These are general loans not specifically used for dairy activities, and the interest rate typically is quite high.

Milk productivity depends on the level of extension support provided to farmers. The GCMMF provides ongoing extension activities, including training sessions and exposure visits for women. The Andhra Pradesh MACS are also involved in extension to some extent. The Orissa State Cooperative offers hardly any extension activity; the private dairy does not involve itself in extension services at all.

Related and supporting industries

The GCMMF has created good processing and primary processing infrastructure. Its plants are ISO certified and meet all the quality requirements. The private dairy processing plant also is ISO certified; however, the primary processing at the village level is not very strong. The Andhra Pradesh MACS have developed adequate processing facilities and plan to expand significantly in the coming years. Milk quality was an issue previously for the Orissa State Cooperative, but the situation has improved in recent years.

Prospects

The GCMMF is the most organized in meeting future growth because of its investing in dairy development activities, such as ensuring the availability of feed and fodder and veterinary services. It is in a position to increase its procurement in the coming years. Also, in terms of development, the GCMMF leads the country in modern products, such as sugar-free ice cream.

The private dairy is not involved in dairy development activity and is only focusing on milk procurement. Faced with increasing competition, it will have to move to newer areas for expansion. Because of low involvement of farmers in the Orissa Cooperative, the private sector will find it easy to move into milk procurement in its area. The lack of variety and quality of its products will make it difficult for Orissa to compete with the private sector.

If the MACS model becomes popular, procurement will be affected. MACS involvement in dairy development activity will help the model grow and expand the milk procurement. It is geared to face competition from the private sector because of close links with farmers at the village level.

Conclusions

Dairy has a lot of potential to improve rural incomes, nutrition and women empowerment, and hence is a very critical area for investment. A well-developed industry will enable millions of farmers to capitalize on the emerging opportunities and make a significant impact on rural incomes. On the flip side, weak efforts towards dairy development also can have a significant but negative impact on the dairy industry. The growth rate has been sluggish over the past few years. With an increase in demand on one hand and sluggish supply on the other, there is a likely shortfall in demand in the coming years.

Major areas of intervention in the dairy sector have been highlighted in this review. Carrying out interventions requires resources and commitment from key actors – government, NGOs, development agencies and the National Dairy Development Board – to partner and work together.

A comprehensive policy addressing the critical issues is required for the robust growth of the sector. The following highlights those issues:

1. The first issue is defining and implementing a policy for dairy development. Though a livestock policy has been established at the national level, its implementation is at the state level because agriculture is a state responsibility in India. But state policies addressing critical needs in dairy development have yet to be clearly defined across the country. Some progressive states have a well-defined policy, but it is lacking in most of the others. But even where a policy is clearly developed, oftentimes implementation is a problem.
2. Lack of clarity between the roles of the State Livestock Development Agency and the State Department of Animal Husbandry, Dairying and Fisheries is an issue for effective policy implementation. For example, the National Cattle and Buffalo Breeding programme has not been well implemented in several states. Further, availability of funds is a major issue in implementing livestock activities. The Livestock Department is within the Department of Agriculture and thus the resources are biased towards agriculture. There is need to emphasize the importance of dairying to smallholder incomes to direct more resources towards dairy development.

Two very significant factors for the growth of the dairy sector are dairy development activities and milk prices paid to farmers. In the liberated policy environment, any player can procure milk in any region. This is a very different situation from the earlier concept of milk sheds, which limited the agency or organization procuring milk to a particular area. Hence, earlier it made sense for agencies and organizations to invest in dairy development activities.

But the freedom for procurement has thwarted the incentive for private companies to invest in dairy development activities. However, private sector investment in procurement is increasing. What is clear is that while the number of buyers is increasing, little is being done to develop the sector. In this situation, farmer-owned organizations (such as cooperatives, producer companies, common interest groups and women’s self-help groups) have to be strengthened at the grassroots level and linked to service and input providers.

Dairy farmer organizations can be used as a platform to address issues regarding availability of all inputs, including feed, fodder, breeding, veterinarian services, medicines, vaccines, credit and insurance. As is evident from the examples presented previously, the GCMMF has been the most successful in meeting the input requirements of farmers. However, this model has not been successful in other states because of issues with the basic organization of cooperatives.

Dairy cooperatives in several states function as parastatals and lack the spirit of cooperative organization with farmer involvement in ownership and decision-making. Alternative models of dairy farmer organizations – such as the MACS, producer companies, women’s self-help groups – also need to be explored. International agencies and donor groups need to be directed towards creating political will to strengthen dairy cooperatives and to set them up.

A very important aspect of dairy development is the price paid to farmers. Currently in many states, the milk price is set by the cooperatives; this price is used by all other players to set their prices, typically by paying 50 paise or 1 rupee more than the cooperative price in that area. The farmer’s price for milk ranges from 9 to 11 rupees for cow milk and 13 to 14 rupees for buffalo milk (a key comparison is a litre of bottled water, which costs 10–12 rupees then why are milk prices so low? The GCMMF pays the highest prices in the country. In the areas where the Andhra Pradesh MACS have set up, their prices are higher than the cooperative prices (MACS have the freedom to declare their own prices). It is evident that where dairy farmer organizations are strong, farmer prices are higher.

Low productivity per animal is another factor hindering development of the dairy sector. Many issues related to low productivity have been discussed – an inadequate cattle and buffalo breeding programme, extension and management on dairy enterprise and feeding practices, and availability of quality feed and fodder. Another important aspect related to low productivity is the lack of quality animals for farmers to purchase. A major hindrance to the availability of quality animals in dairy developing areas is the policy regarding interstate movement of animals.

Finally, it is important to discuss the hygienic issues. Milk quality concerns go beyond the farm level and require assurance of safe milk at all stages, including within the informal sector. Through the formal channel, cooperatives, private dairies or any other form of dairy farmer organization, quality can be addressed through training and education on clean milk practices, including the use of bulk coolers. It is also important to develop diagnostic facilities for milk testing, including infrastructure and human resources, that enable constant monitoring for quality. At the processing level, plant certification will help to enhance consumer confidence.

Milk quality in the informal markets is an important issue. As noted, 70–85 percent (based on different estimates) of milk is obtained and sold through the informal channel. In recent years, initiatives have focused on working with and providing training to traders. In Kenya, for instance, licensing has been used to formalize the traditional sector. In India as well, the Capitalisation of Livestock Programme Experiences programme, along with the International Livestock Research Institute, have undertaken some initiatives in this direction.

In the current situation, traders collecting milk at the farm then deliver it and milk products to urban and peri-urban areas. Each trader buys only small amounts of milk. There is scope to organize the traders into groups and create joint facilities where they can test, process and store their milk supplies. These trader facilities could serve as wholesale or bulk suppliers for hotels, chaiwalas (tea sellers) and small sweetshops. These initiatives can help to address the quality issues in the informal sector and also create employment opportunities in the non-farm sector.

An argument against working with traders is that formal sector involvement in dairying is increasing and eventually there will be no room for informal players. However, looking at the current reality, it will be several years before this materializes. In the meantime, the informal sector should not be ignored and organizing informal traders should be pursued.

Annex I: Overview of dairy marketing channels in India

Annex II: Income from dairy enterprise

Income from dairy enterprise per month (two-animal farm)

Annex III: Milk price chart

Annex Table 1: Identifying critical issues in the dairy chain