11. Smallholder dairy development should be seen as an enterprise-driven approach to livelihood enhancement as well as an instrument of rural poverty reduction. It is not an end in itself and should be considered as part of the rural poverty reduction agenda, recently reinvigorated in the 2008 World Development Report (WDR),11 which adopts agricultural development as its theme for the first time in 25 years. The title of the report is “Agriculture for Development” and focuses on ways to generate rural jobs by diversifying into labour-intensive, high-value agriculture linked to a dynamic rural, non-farm sector. Smallholder dairy development is an ideal way to achieve this outcome. It is consistent with the concept of a “new agriculture” of high-value products, entrepreneurship and jobs in the emerging rural, non-farm economy.
12. WDR 2008 recognizes that agriculture operates in three distinct worlds: (i) subsistence, (ii) transforming and (iii) urbanized. In each, the agenda differs in pursuing sustainable growth and reducing poverty. Most of the countries involved in this strategic process are in the transforming category, but also have sub national regions in the other two categories. In transforming countries, rapidly rising rural-urban income disparities side by side with extreme rural poverty and rising food prices are major sources of social and political tensions. Addressing these disparities requires a comprehensive approach that pursues multiple pathways out of poverty – shifting to high value agriculture, decentralising non-farm economic activities to rural areas, and providing assistance to help move some people out of agriculture. Dairy development is one of the attractive options for this. In urbanized regions SDD can help reduce remaining pockets of rural poverty if smallholders become direct suppliers in modern food markets and good jobs are created in agriculture and agro-industry. Like “Agriculture for Development”, “SDD-Dairy for Development” – should be focused on people, not just milk and milk animals.
13. That said, SDD can not be introduced in isolation, and should recognize how formal (processed) and informal dairy markets coexist and are complementary, serving all levels of producers, traders, processors and consumers, small and large, poor and rich.
14. The timing for developing the SDD strategy could not be better. After more than half a century of declining real prices for dairy products, there are strong signs of a structural change in the global dairy sector. This change may overcome one of the long-standing constraints to smallholder dairy development – low prices and profitability, resulting in part from competition from subsidized milk from the industrialized countries – and stimulate commercial incentives to connect farmers to markets. Of course it is not known whether the recent upsurge in prices will persist, but the signs are certainly more encouraging than they have been for many years.
15. There are other reasons for optimism too. Asia is home to a large and rapidly growing population of affluent consumers with either a strong tradition of dairy consumption, or changing food preferences in favour of high value animal products, including dairy products. In most countries there is plenty of room for import substitution provided that local products are competitive in quality, safety and price. There is a vibrant private sector ready to capture commercial opportunities to intermediate in dairy food chains. Moreover, while SDD must be enterprise-driven for sustainability, it also provides opportunities to address the persistent problem of rural poverty by transferring income from affluent urban households to their poorer rural counterparts, and improving food and nutritional security for poor rural and urban households, as highlighted in box 1.
16. Opportunities for SDD in Asia are strongest in the countries, or parts of countries, which are in the transformational stage. With growing political attention to widening income disparities, there are many opportunities to use dairying as a better instrument for development. Because of demographic pressures and land constraints, the agenda for transforming countries for mobilizing pathways out of poverty should include dairy farming and employment in non-farm dairy enterprises. Prospects are good in view of expanding markets for high-value food products, offering an opportunity to diversify farming systems and develop a competitive and labour-intensive smallholder dairy sector. However, it needs to be recognized that there are also some locations where dairying is not the best option. Available resources should therefore be concentrated in situations where the prospects for success are best.
17. The most noteworthy opportunity and challenge for smallholder dairy producers is to share in opportunities afforded by rising demand in the region for milk and dairy products over the next decade. According to recent OECD/FAO projections, milk production in Asia over the next decade is expected to rise by over 60 million tonnes to 277 million tonnes by 2017, an annual increase of 3 percent.12 Most of the production gain is estimated to be a result of rising cow numbers, rather than yield growth which at less than 1 tonne/animal is one-fifth the levels in developed countries.
18. However, if history is a useful indicator, it is helpful to assess the validity of previous demand projections. Milk consumption projections in 2020 were calculated by FAO in 1999.13 These estimated that by 2020 consumption in the Asia-Pacific region would almost double to 231 billion litres of liquid milk equivalent. However, this projection was actually exceeded in half the time, with milk production estimated at 240 billion litres LME in 2007.
19. According to OECD/FAO projections, regional imports of both whole milk and skim milk powder (aggregated) will increase by about 30 percent to 1.25 and 0.9 million tonnes respectively, more than 50 percent of global totals. Rising regional demand, combined with opportunities for import substitution in a market where global prices are expected to average nearly 50 percent higher than the previous decade, affords an unprecedented opportunity for income generation for smallholder milk producers and the entire dairy sector in the region.
20. The future viability of the smallholder dairy sector, however, hinges on its ability to compete with other forms of milk supplies available in-country, in particular from larger national operations and imports. In developed countries, particularly those with land and feed resources, it has been shown that there may be significant economies of scale in dairy production, in the form of cost advantages accruing to increased herd sizes. In parts of Asia, on the other hand, it has been shown that dairy smallholders have cost advantages in producing milk when compared to large-scale producers. Studies in India14 show higher profits/lt of milk and more efficiencies for dairy operations with less than 10 cows (both including and excluding cost of family labor).15 To ensure competition with large commercial dairy farms over the long term, however, smallholders will need to increase their efficiency, using best practice production methods to enhance productivity.
21. While each dairy market and milk production system has unique elements, there are a number of successful SDD business models in the region that can be adapted and improved upon for local situations. The nine country “lessons learned” studies and the three value chain analysis studies identified many best practices – the dos and don’ts of SDD dairying in terms of competitiveness and market access.16 While the SDD analytical framework developed by FAO under the project is still a work in progress, it helped to understand the ability of SDD models: to (i) respond to market opportunities, (ii) adapt to evolving market requirements, (iii) address challenges posed by international competition, (iv) provide sustainable livelihoods to value chain participants, and (v) understand the competitiveness of the smallholder dairy enterprise.
22. Selected successful smallholder dairy chain business models in the countries studied include:
(1) | Cooperative dairying model: world renowned Anand Pattern model from India and more recent cooperative company models, e.g. Bangladesh, India, Thailand (box 5). |
(2) | Contract farming model: private sector-smallholder incentive model, e.g. Pakistan (Halla and Haleeb models), Sri Lanka, Viet Nam. |
(3) | China dairy park model: collective/community dairy cow raising in an investment-driven growth environment (box 6). |
(4) | Philippines dairy zone model: public-private sector equity partnership (box 7). |
(5) | Mongolia dairy chain models: comprising six enterprise modules for liquid milk and cheese for each link in the farm-to-consumer food chain. |
(6) | Bangladesh social and community dairying models (box 2): |
| Grameen Bank poor people’s community livestock and dairying model, part of the environmentally sustainable, |
| Bangladesh: Grameen-Danone Foods NGO-private sector social model. |
(7) | School milk models: where local school milk programmes feature strongly in the above models, e.g. Mongolia, Philippines, Thailand (box 3). |
23. The appropriateness of a specific model is largely contextual. However, in general, smallholder dairy chain models have not been so successful: (i) where centrally planned approaches are used; (ii) when governments intervene by establishing large public-sector managed dairy processing enterprises; and (iii) where low tariffs facilitated the importation of cheap dairy commodities used as raw materials rather than fresh local milk. More details on the SDD models and competiveness framework may be found in annex 6.17
24. The major factors influencing SDD and smallholder dairy chain models drawn from the studies, are summarised below:
(1) | Smallholder participation in dairy value chains is straightforward in concept but complex in execution. |
(2) | Smallholder milk producers must be competitive in order to access markets, i.e. produce top quality milk at affordable prices. In achieving this status, most subsistence smallholder milk producers have progressed to become small commercial dairy farmers. |
(3) | A strategy of including smallholders requires a deliberate and creative development vehicle that is sensitive to the impact of policies, programmes and activities to smallholders. |
(4) | Appropriate technical interventions, either on-farm or post-farm, need to be supported by an enabling environment characterised by pro-smallholder policies and institutional support as well as a market structure which ensures fair pricing for quality products. |
(5) | Smallholder dairy action plans are the vehicles to transform the SDD regional strategy into national action, recognising that the impact of appropriate policies, programmes and activities depends on the local context and, most importantly, the people involved. |
(6) | The private sector must be fully engaged in development of the regional SDD strategy and in actioning the strategy at country level. |
25. As regular earnings from selling milk enhance rural livelihoods appreciably, through: (i) better nutrition, (ii) higher disposable income, (iii) asset accumulation, and (iv) enhanced social standing, the majority of subsistence smallholder milk producers aspire to become more intensive small dairy famers. This graduation process will be fundamental to actioning the strategy and sustaining SDD at country level.
26. The value chain studies tend to confirm that one of the key factors affecting smallholder competitiveness is the evolution of rural wages.18 Smallholder dairying is labour-intensive and reported to be most profitable when other remunerative options for labour are limited. Dairy competitiveness in developing countries is significantly dependent on the low opportunity cost for labour, with herd sizes tending to rise with rising rural wage rates. This supports the SDD strategy rationale (section 3) that subsistence smallholder milk producers in many areas, particularly those with high wages and land values, will have to scale up to more commercial small dairy farming to remain competitive.
27. The distinctions in regional dairy production systems, structures, markets, as well as consumption patterns necessitate different dairy development ladders and diverse approaches to scaling up. This is particularly in the case in South Asia, a region with a long tradition of smallholder dairy and milk-based consumption patterns, and East Asia, where fluid milk consumption is only recent and dairying systems are a modern introduction. The prevalence of large informal milk sectors in South Asia provide an effective, functional link between farmers and consumers that responds to demand, both urban and rural, for locally produced indigenous products. Opportunities for up-scaling exist and should be explored but the approach doesn’t necessitate, as in many East Asian countries, the close and formal linkages with the modern processing sector.
28. The multiple social and environmental benefits of smallholder dairying are detailed in box 1 above. Subsistence smallholders and small commercial dairy farmers produce milk as part of mixed farming systems that are, or can be, adapted to optimise the use of locally available resources in an environmentally sustainable way. In traditional ruminant production systems there are opportunities for a reduction of greenhouse gas emissions – lowering the carbon footprint per litre of milk – in particular improved carbon sequestration through better management of pasture and soils, and reduction of methane emissions by improving dairy productivity, and reduction of nitrous oxides by improved manure management. Significant reductions in per unit output of methane emissions can be achieved from rather modest and simple improvements in productivity and underlying technological change.19
29. If milk is imported, or recombined from imported components, then the energy consumption is even higher because huge amounts of energy are required. Smallholders are low energy consumers in the production of milk compared with industrialized countries. Other comparative energy and resource-efficient advantages include: (i) the use of animal and human power for producing feed and fodder, (ii) the feeding of crop by-products that do not need additional energy to produce, (iii) relatively low consumption of energy intensive concentrate feed, (iv) the predominance of grazing over stall feeding, (v) keeping animals in low cost sheds or in the open, (vi) the use of human power for milking, and (vii) the use of manure for biogas production for cooking and lighting/heating and for fertilising crops.
30. Smallholder dairying can bring significant social as well as environmental benefits as indicated in section 1. For example the Grameen Bank and Danone social SDD dairy chain models recently piloted in Bangladesh link some of the poorest, landless families to remunerative urban markets using an innovative integrated fish-crop-livestock model. In the process 6 000 landless and assetless families have been lifted out of poverty and under-nutrition, with children being the major beneficiaries.
31. Though school lunch (milk) programmes are a well-tried and tested means of supplementing child nutrition, they are little used in Asia. Where they are practiced, results have been mixed for promoting SDD. There are three basic school milk models to ameliorate under-nutrition and micro-nutrient deficiency among children: (i) using locally produced milk in countries where milk is traditionally produced, e.g. Mongolia; (ii) using imported milk to establish the milk drinking habit in countries where milk is not traditionally consumed, then switching to local milk, e.g. Thailand; and (iii) using imported milk, e.g. Bangladesh. All three models are used with or without fortification with deficient micro-nutrients such as vitamins A and D and iron.
32. In Thailand, the recent rapid growth in milk consumption has been driven by a highly successful school milk programme that has changed the milk consumption habits of the nation. Begun in 1983, the programme was originally based on imported milk, but later switched to local milk to support domestic smallholder milk producers and processors. Today over six million pre- and primary school children get milk for 230 days a year and milk consumption has climbed from under 5 kg in 1983 to over 40 kg per year.
33. In Mongolia the Government launched a school lunch scheme in 2006. The scheme operates under a public-private sector partnership arrangement with food companies bidding for local authority school lunch contracts. The Government now insists that only domestic produce is used. As described in box 3, local dairy enterprises now distribute processed milk purchased from nomadic herders and local peri-urban households to over 200 000 children.
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Box 2 Grameen Bank integrated social dairy chain models in Bangladesh* In the late-1990s the Grameen Bank was looking for ways to raise the productivity of over 1 000 fish ponds it manages in partnership with 3 000 very poor landless and assetless families in the north-west of Bangladesh who were earning just 19 US cents a day from their share of fish sales. The solution was a pilot project intervention aimed at adding livestock to the fish farming system: (i) to produce more food available for home consumption and sale, (ii) to provide manure to fertilise fish ponds to improve productivity and (iii) to shift the focus to women. The resultant Grameen CLDD (Community Livestock and Dairy Development) model is a profitable dairy chain model that is part of an integrated, community-owned crop-fish-livestock cluster of family and joint-venture commercial enterprises. Following training and build up of savings, the families access small commercial loans for livestock and other income generating activities. Loans may be selected for in-calf heifers, cows with calves, store cattle for fattening, goats, pigs, poultry, ducks crops/fodder, milkshaws (rickshaws for transporting milk), and bio-digesters and, more recently, vegetables, fishing gear, social forestry. More than 70 percent of the loans selected are for dairy cows because they return the most in terms of profits, nutrition, asset accumulation and social standing. Once smallholders have four or five cattle, they have enough manure to take out a loan for a bio-digester to produce gas for cooking and lighting. The spent slurry from the bio-digester is then used to fertilise and increase the productivity of fish ponds. Every two or three years the ponds are emptied, the slurry dried and used as crop fertiliser. In this way smallholder dairying has become an important component of an integrated and environmentally sustainable poor peoples’ farming system. While in some ways the model is a social dairying model, it is commercial in operation. Over the seven-year life of the pilot project (2000-2006) benefits included:
The key lessons for SDD are that: (i) dairying can effectively result in the graduation of smallholder households out of poverty; (ii) community- based pro-poor initiatives provide an effective entry point for dairy development which can be replicated in similar conditions; (iii) these types of models should aim to be promoted and adopted under National Strategies for Accelerated Poverty Reduction and National Livestock Policies (as they are in Bangladesh). ____________________ |
34. The pilot Bangladesh school milk programme started in 2003 and is quite small. It is operated by an International NGO. Originally the milk was imported, pre-packed in UHT cartons; now imported milk powder is reconstituted in a joint venture with a local dairy. The recent National Strategy for Accelerated Poverty Reduction (2006) includes a plan to promote a School Lunch Programme to improve attendance, reduce under-nutrition and generate demand for local produce and catering services through backward and forward linkages. Community participation is to be a key driver and the Grameen SDD model is proposed for providing local milk for the programme.
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Box 3 School milk and nutrition in the Gobi Desert in Mongolia and in rural People’s Democratic Republic of Korea One-third of primary school children in Mongolia are reported to be under-nourished to some degree, especially during spring time following the long harsh Mongolian winter.* One daily 200 ml glass of milk would contribute significantly to a school child’s daily food needs in terms of body building protein, energy and key micro-nutrients and vitamins (see also box 1). With these nutritional objectives in mind, the Government of Mongolia launched a school lunch scheme for primary school children (5 to 10) in 2006. The scheme is operated under a public-private sector partnership arrangement with food companies bidding for local school lunch contracts. Following intense lobbying by the Mongolian Food Industry Association, the Government now insists that only domestic produce is used. Eighty percent of the meals are provided by local dairy enterprises, which purchase the milk from nomadic herders and peri-urban smallholders in the school’s locality. 200 g of different processed dairy products are provided on alternate days with bakery products. The scheme boosts cash flow and earnings for the concerned dairies and, in turn, milk producers. In some cases the milk is fortified with the micro-nutrients lacking from normal diets. For example, 21 percent of children under the age of ten are reported to be affected to some degree by nutritional stunting (aggravated by Vitamin D and zinc deficiency); 20 percent suffer from anaemia (iron deficiency); 14 percent from iodine deficiency (goitre).* One of the schools in the scheme, Bayenlig Primary School, is located in a very remote area of the Gobi Desert without electricity. Most of the children are weekly borders and travel to and from school by camel. The school lunch scheme is operated by the Bayenlig Camel Herder Group, which provides a variety of conserved and nutritious camel milk products for the children. The school lunch/milk scheme is linked to the generic Mongolia milk advertising and education campaign. In addition to supplying regular nutrition, the scheme also show-cases Mongolian milk and dairy products to tomorrow’s customers. The scheme currently covers about 200 000 primary school children across the country.** A similar scheme operates at Teajam in DPR Korea. Here school children benefit from drinking yoghurt produced and processed locally from goat’s milk.*** * Joint UN Food Security Assessment Mission to Mongolia (FAO/UNICEF/UNDP, April 2007) |
35. Approximately 100 million children in the region are underweight and affected by various kinds of under-nutrition and micro-nutrient deficiencies. Many are stunted, which affects their capacity to develop fully as active and healthy adults.20 While breast milk is, of course, best for infants, targeted school nutrition schemes for vulnerable children that include fortified milk can help alleviate many forms of under-nourishment and micro-nutrient deficiencies, including those described in box 3 above. Conversely, a small but growing number of children in the region suffer from obesity. A range of milk products can be helpful in tackling obesity and educating younger generations on healthy life choices.
11 World Bank: "World Development Report 2008: Agriculture for Development". Downloadable from www.worldbank.org
12 OECD/FAO Agricultural Outlook, 2008-2017.
13 Livestock to 2020: The Next Food Revolution (FAO-AGAL, 1999).
14 FAO's project on Livestock Industrialization, Trade and Social-Health Environment (http://www.fao.org/WAIRDOCS/LEAD/X6170E/X6170E00.HTM).
15 These calculations of profitability neglect the asset value of the animals, the value of manure, and the use of animals as for traction.
16 Unless otherwise stated, all figures quoted are from these studies.
17 The Bangladesh and Mongolia models form the basis for the FAO promoted MODE (Market-Oriented Dairy Enterprise) SDD model. MODE is a graduated approach to smallholder dairying based on lessons learned by FAO and other dairy development interventions. The approach is characterised by progressive movements towards becoming a successful dairy enterprise.
18 Dairy Development for the Resource Poor: A Comparison of Dairy Policies and Developments in South Asia and East Africa, International Livestock Research Institute (ILRI) (2008).
19 Livestock's Long Shadow. FAO-AGAL (2007).
20 ESCAP (2008). Economic and Social Survey of Asia and the Pacific 2008.
