Based on synthesis of nine country lessons learned studies from
Bangladesh, China, India, Mongolia, Pakistan
the Philippines, Sri Lanka, Thailand and Viet Nam
Brian Dugdill, Dairy Development Specialist, FAO
Nancy Morgan, Livestock Policy Officer, FAO, Bangkok
Dairying is practiced by millions of dairy operators � smallholders and small traders � in many of the countries of the Asia-Pacific region, where milk and dairy products often fulfill important cultural and social functions as well as providing nutritional and economic benefits. Over the past two decades most countries in the region have been implementing economic reforms, leading to rapid growth and increasing urbanisation. The adoption of market liberalization policies, in addition to heavy farm subsidies in the industrialised countries, has resulted in the domestic markets of some countries in the region becoming increasingly dependent on highly competitive, but increasingly volatile global dairy commodity markets.
Dairying represents one of the fastest returns for livestock keepers in the developing world. It provides regular returns to farmers, especially to women, enhances household nutrition and food security and creates off-farm employment � as many as one job for each 20 litres of milk processed and marketed2. The highest growth in demand for milk and dairy products has been, and continues to be, in the Asia-Pacific region where dairy consumption has doubled since 1980, contributing more than 60 percent of global consumption gains. Though consumption has grown 4 percent annually, gains have been uneven across the region. Local production has not kept pace with demand and imports continue to grow.
Dairy Production in Asia
The price of internationally traded food staples increased significantly in 2007, i.e. since the project was formulated. Of all the staple foods, dairy prices grew the most with full cream milk powder and skimmed milk powder more than doubling to over USD 4,000 per metric tonne, or about 50 US cents per litre of liquid milk equivalent. It is clear is that consumer prices are also increasing; what is not so clear is how the dairy industries in the region, and smallholders in particular, are responding to the unprecedented opportunity of better milk prices. Innovative strategies and conducive policies will most certainly be needed to enhance the competitiveness and market access of smallholder milk producers to take advantage of the new market situation.
There are successful models where smallholder milk producers have gained sustainable access to markets, and some not-so-successful models. Given the current opportunities for dairying in Asia, the Animal Production and Health Commission for Asia (APHCA) asked FAO to develop a dairy development strategy for the Asia-Pacific region to lift the involvement of smallholder dairy farmers. The Common Fund for Commodities (CFC) agreed to fund a fast track project to develop the strategy. FAO is also providing funding from its regular programme budget.
The project started in June 2007 and will be completed in March 2008. The expected project results include: (i) a regional smallholder dairy development strategy for the Asia-Pacific Region (Asia DDS) and (ii) individual action plans for APHCA member countries, which promote the efficient and profitable involvement of smallholder milk producers in national dairy industries. More detailed information about the project and the workshop may be found in Opening Session 1 paper: The Project, the Context and the Workshop and the background APHCA Brief on Smallholder Dairy Development.
The project team has adopted a three-phased approach to implement the project:
1) | Phase 1 (July-September 2007): Nine rapid country lessons learned studies (LLS) in Bangladesh, China, India, Mongolia, Pakistan, Philippines, Sri Lanka, Thailand and Viet Nam |
2) | Phase 2 (October-February 2007): Based on the outcome of the rapid studies, three in-depth value chain analysis studies in India, the Philippines and Viet Nam. |
3) | Phase 3 (February-March 2008): A regional workshop to outline the strategy and country action plans, immediately followed by detailed finalisation of the strategy and the action plans. |
This paper aims to set the scene for the workshop by providing an overview of the nine studies prepared under the first phase of the project. The paper draws largely on the interim project report3 submitted to APHCA members at the 31st annual session held at Yangon in Myanmar from 29 October to 01 November, 2007, when the project implementation approach was endorsed. The phase 2 Value Chain Analysis studies are covered in other workshop papers and presentations, where specific linkages in the smallholder dairy value chain will be analysed.
Project implementation: participatory, dynamic, business-oriented strategy development process
The aim of the studies was: to identify models and factors that have influenced smallholder participation in dairy food chains � good and bad. They were produced by experienced national experts with hands-on dairying experience from the public, private and NGO sectors. To foster understanding and analysis, generic terms such as: (i) smallholder milk producer, (ii) small dairy farmer, (iii) informal and formal dairy markets and (iv) dairy value chains are defined in each study. The nine study countries have respectively, 65 percent, 85 percent and 29 percent of the Asia-Pacific regions cows, milk production and imports. The study countries represent three broad categories of smallholder access to dairy markets as indicated below.
1) | Good access: where smallholders milk producers have remunerative access to formal as well as informal milk markets (China, India, Thailand) |
2) | Limited access: where smallholder milk producers generally lack remunerative market access to formal markets, but where informal markets flourish (Bangladesh, Mongolia, Pakistan) |
3) | Marginal access: countries where smallholders contribute little or no milk to formal and informal markets (Philippines, Sri Lanka, Viet Nam) |
The more successful initiatives and models (best practices) identified in the studies are listed below. Three are looked at and analysed in more detail under the value chain analyses. While the models are grouped under six broad headings, each country mentioned has, of course, adapted the model to suit it own local needs. A seventh model adds school milk to existing models.
1) Cooperative dairying model: | ![]() | ||
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2) Dairy zone model (public-private sector equity partnership): | |||
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3) Chinese dairy park models (collective/community dairy cow keeping): | |||
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4) Contract farming model (private sector-smallholder incentive): | |||
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5) Mongolia Dairy chain models (comprising six cow to consumer modules for liquid milk and cheese): | |||
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6) Social/community dairying model: | |
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7) School milk programme: | |
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Which models and interventions did not perform well or were not supportive of smallholder dairy development initiatives?
1) | Centrally planned models and models where the Government intervened in milk pricing did not fair well in the longer term run (Pakistan, Viet Nam) | 2) | By and large government-owned dairies, especially large-scale ones where civil servants were deputed to run the business did not do well (Bangladesh, Pakistan, Viet Nam). Exceptions to this are the newer business model of centrally�owned, but market-oriented dairy companies (China). | 3) | Initially the private sector wanted to maximize profits and reduce risks by using cheap imported (subsidized) dairy commodities rather than setting up difficult to manage, local milk procurement systems. While the private sector is more nimble and less constrained by regulation, than for example, cooperative models, they were not fully engaged soon enough by interventions targeting smallholder milk producers. However, most of today�s successfully models are private sector-based models. |
To facilitate comparative analysis of the lessons drawn from the studies that are inclusive and exclusive of smallholder milk producers, five influencing factors were used, namely: (i) economic (ii) institutional (iii) role of Government (iv) socio-cultural-environment and (v) technical. For the purposes of this paper, the key lessons are grouped according to whether they are mainly influenced by: (i) the private sector or (ii) the public sector. Of course, some lessons embrace public and private sector experiences as well as those from the NGO sector.
Three lessons related to the public sector:
1) | Governments need to be cautious about interventions in the sector, especially pricing policies (Sri Lanka, Thailand, Sri Lanka) and dairy cow loan schemes (Bangladesh, Mongolia, Viet Nam) |
2) | Government investment in large state-run processing does not work (Pakistan, Philippines) and it is recognized that smallholder dairy development needs to be target based on selected criteria (Bangladesh, India, Mongolia, Philippines, Viet Nam) |
3) | Graduation: from subsistence to commercial smallholder and/or larger-scale milk production level occurs when the right policies and strategies are adopted (Bangladesh, India, Philippines, Thailand) |
Three lessons related to the private sector:
1) | The private sector was not engaged soon enough: creative and carefully thought out linkages by smallholders/smallholder groups with the private sector (including technical assistance, financial support) can enable smallholders to move up the marketing chain (Viet Nam, Bangladesh, Mongolia, Philippines, Pakistan). |
2) | Milk quality and attractive product branding/presentation: are pre-requisites for persuading modern urban consumers to switch from imports to milk produced by local smallholders (China, India, Mongolia, Philippines) |
3) | Value addition: to enhance returns to dairying, selected smallholders close both formal and informal markets should go into high value added ready-to-drink indigenous and niche products (China, Mongolia, Philippines) |
Three key lessons applying across the dairy sector as a whole, including NGOs and international donors:
1) | Support services: Smallholders need an accessible and affordable complete package of support services (animal health, AI/breeding etc) to produce milk competitively (Bangladesh, India, Mongolia). Not surprisingly, in those countries were dairy has no been a traditional agricultural activity, the key constraints are lack of; (i) feed and fodder, (ii) dairy breeding stock and (iii) training (Sri Lanka, Viet Nam Bangladesh) Technical know-how and skills delivered through vocational and outreach training are equally important (India, Mongolia). Industry institutions (Dairy Boards, Authorities, Associations) and smallholder dairy groups (associations, cooperatives etc) can have a pivotal role in supporting dairy development (India, Mongolia, Philippines). |
2) | Pro-poor or social smallholder dairying: The well-known but still important socio-economiccultural-environment benefits of smallholder dairying are: (i) improved household nutrition and food security, (ii) higher incomes, (iii) more jobs, as part of mixed and integrated farming systems to spread risks and sustain the environment (all countries). Pro-poor social programmes, including school milk programmes, need to be carefully targeted and are usually only sustainable if linked to remunerative markets (Bangladesh, Mongolia). |
3) | The myth of lactose intolerance: Urban populations in countries traditionally seen as non-milk drinkers and/or lactose intolerant are increasing consumption of ready-to-drink processed and cultured milks (Philippines, Thailand, Viet Nam). School nutrition programmes have helped to develop the milk drinking habit while promoting future demand (Bangladesh, Philippines, Thailand); but they have been frequently based on imported milk, which does not benefit the local dairy sector (Bangladesh)4. |
These lessons may be further consolidated into five overarching factors as follows:
1) | Smallholder dairying 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 would be sensitive to the impact of policies, programmes and activities to smallholders” (Sally Bulatao, the Philippines) |
4) | Smallholder dairy action plans: the impact of appropriate policies, programmes and activities on smallholders depends on the local context and, most importantly, the people involved |
5) | The private sector must be fully engaged in participating in the development of: • the regional smallholder dairy strategy • national actions plans5 |
Conclusions and the challenge for workshop participants
Leaving aside the two major dairy production and consumption countries of Australia and New Zealand, developing countries in the Asia-Pacific region have very different traditions of milk use and consumption. These are reflected by very different levels of per capita milk consumption, which ranges from as little as 2 kg to almost 200 kg/capita/year. This compares to an overall average in Asia of 41 kg and 196 kg for developed countries. With the gathering pace of globalisation, consumer preferences are changing and those countries not traditionally associated with milk drinking are adapting their food consumption habits as urbanisation and disposable income increase.
In the 1970s and 1980s, huge, so-called integrated dairy programmes and projects were set up in many countries in the region with hugely expensive, high capacity western technologies and equipment with the help of the international community. At the same time- in some of these same countries, incentives to invest in local dairying were constrained by policies of these same donors which supported the movement of huge amounts of subsidized milk onto international markets, mainly in the form of skimmed milk powder and butter oil. Some developing countries in Asia were able to use these commodities to develop their own dairy industries, such as India which used European surpluses as an investment into the modernization of the dairy industry. Others could not and the influx of low priced imports resulted in depressed local milk prices, stagnating milk production, and an underutilization of dairies, partly because the packaging materials and spare parts from developed countries were very expensive. Today these countries are still highly dependent on imported milk. On the other hand. during this period dairying increasingly became recognized as a catalyst for livelihood and social development, initially based on the success of the Indian Anand pattern dairy cooperative model. This cooperative was driven by its charismatic leaders that now benefits tens of millions of smallholder milk producers in many parts of India. The new dairy park models (centrally-operated collectives) from the Inner Mongolian Autonomous Region of China are even larger. It needs to be recognized, however, that these successful models can not be immediately replicated in other places due to the specific and contextual enabling environments, which are not easily transferable.
There have been many initiatives, consultations and workshops over the past quarter of a century on dairying for developing countries. As long ago as 1974 the slogan “Dairying as an instrument of change” was adopted by the International Dairy Federations and FAO at the International Dairy Congress held in Delhi, India in 1974. Many workshops addressing smallholder dairying have been held since, with limited impact and virtually no involvement of the private sector.
How can our workshop and the outcomes flowing from it be different and have more lasting impact? We believe that the workshop and our approach have some unique advantages in this respect.
1) | First, our approach is participatory, i.e. inclusive of all stakeholders throughout the producer-consumer dairy food chain, including the public, private and NGO sectors. We have participants here representing all these interest groups. |
2) | Second, the workshop is dynamic, i.e. it builds on the smallholder dairying workshop held here in Chiang Mai by APHCA in late-2004, but more importantly will build on your combined experiences as well as some newly developed systematic tools for assessing the competiveness of the various smallholder dairying models. |
3) | Third, the regional dairy strategy and national action plans will be business-oriented, i.e. it will recognise the market and the private sector as the driving forces and Governments as facilitators. |
We are extremely fortunate to be implementing our project at a time of unprecedented demand for milk in the region and the prospect of increasingly remunerative prices for milk producers. We have the technologies, the equipment and the knowhow in the region to increase milk production to the benefit of smallholder milk producers, processers large-scale and small-scale, and urban consumers.
Our project slogan is Asian milk for health and wealth: healthy people, wealthy producers. Our challenge is to grasp these opportunities and, in so-doing, better the livelihoods of smallholder milk producers and milk consumers in APHCA member countries.
Meeta Punjabi, UNFAO, New Delhi
The Indian Dairy Industry is at cross roads. An industry which has strongly been dominated by the government sector and working in co-operative mode is going to face keen competition from private sector in procurement and marketing of dairy products in the coming years. Dairy co-ops have performed well in some states; for example, the AMUL co-operative in Gujarat. But in many states, these institutions are weak representatives of farmer interests. Their functioning is more of a parastatal, characterized by strong linkages and interference from government. Furthermore, private companies, depending on their market power, tend to use the cooperative price as a bench marker to determine farmer milk prices. In this situation, weak co-ops competing with private sector may not serve the farmers they represent.. Key questions for policy makers, industry players and smallholders in this context are: Which models better serve the interests of the farmers? What policies are conducive to support their interests?
Overview of the Indian dairy sector
India is the largest milk producer in the world, with milk production at 100 million MT and valued at Rs. 1,179 billion (2004 -05). This is almost equal to the combined output of paddy and wheat. The country also has 1/5th of the world bovine population which consists of 45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows. Milk productivity per animal is very low at around 1,000 kg/lactation, compared to a world average of 2,038 kg/lactation. Low genetic potential, poor nutrition and lack of services are key ingredients for low productivity. However, the diverse nature of India implies that different regions in India are at a different level of dairy development. For examples, Punjab and Maharashtra can be considered as well developed dairy states while Tamil Nadu and Andhra Pradesh fall in the category of states with average progress. The states of Bihar, Orissa and most NE states fall in the category of less developed areas.
Tremendous growth as a result of Operation Flood
During the period of 1950s and 60s, milk production in the country remained stagnant. Major dairy policy changes were introduced under Operation Flood, initiated in the 1970s. The key objectives were: linking-up rural producers with the urban consumers through pricing, procurement, processing and marketing, and large public investment in milk processing sector (chilling plants, milk processing and product manufacturing plants) through cooperatives. An indicator of success was that, juxtaposed to the growth rate of agriculture which was below 2%, growth in the livestock sector exceeded more than 4.5%. The biggest impact of these changes was on rural nutrition, employment, income and women empowerment.
Dairy and livelihoods: Opportunities for pro-poor impact
Dairying in India is a small farmer activity the proceeds of which comprise about 1/3rd of rural incomes. Small and marginal farmers own 33 % of land (<2 hectares) and about 60% of female cattle and buffaloes. 75 % of households own cattle with ownership averaging 2-4 animals. As dairying is a part of an integrated farming system, feed is mostly residual from crops (paddy straw, ground nut straw) and serves as an inexpensive input into the dairying process. In addition, dairying provides regular income to the farmer throughout the year whereas crop income is seasonal – risk minimization mechanisms. Further, livestock is a security – an asset to be sold in times of crisis.
Marketing
15 % of the marketable surplus goes through organized sector, where the rest goes through the traditional unorganized sector. Until recently the organized sector consisted mainly of co-operatives. The AMUL model of Gujarat was replicated in all states of the country with NDDB as the lead agency. The co-operative are traditionally 3 Tiered structures - Village society, district unions federated at state level. The Model adopted with some variations in different states However, in many cases because of heavy government interference and weak democracy at the village level, cooperatives have achieved limited success in various states.
Regulatory environment
The dairy sector was de-licensed in 1991. However, some controls were reinstalled through Milk and Milk Products Order 1992. In particular, these included the specification of collection areas/milk sheds and fixing processing capacity. With the revised MMPO in 2002, almost all controls stand withdrawn. Until recently, with strong government controls, co-operatives did not have any competition from the private sector. After liberalization, however, private sector investment in dairying has increased considerably. To strengthen co-operatives in the face of private competition, a MACS Act was passed in 1995 with the objective of minimizing government interference and strengthening democratic societies at the village level. Finally, the MACS societies do not have to follow prices set by the Cooperative.
Livestock inputs and services
Agriculture policy is State-determined in India with the Department of Livestock housed with within the Ministry of Agriculture. The Department of Livestock has a network of veterinarians providing livestock veterinary services with many of these services fully subsidized by the government. However, due to financial constraints, partial cost recovery has now been initiated in several states. Efforts to enhance coverage through paravets and community based animal health workers (CAHW) have been initiated. Co-operatives are also involved in feed distribution at subsidized rate to the member farmers.
Future potential
With increasing incomes and increase in population, the dairy industry is likely to have a high growth rate in the coming years which portends opportunities to enhance small farmer incomes from through the development of dairy enterprises. However, it is important, on an enterprise basis, to assess the critical strengths and weaknesses within the dairy value chain.
Input challenges for the sector
Marketing issues
Two major dairy marketing channels are predominant in India: the organized channel, which has mostly served by the co-operative, and traditional channels in which traders procure milk from rural areas and sell in urban areas. Milk prices are typically set by the co-operatives and in India, the fat content in milk is very valued. This leads to prices for cow milk being lower than that of buffalo millk. Premiums are established for fat content; hence buffalo milk fetches higher price, while cow milk pricing is based on total solids. For example, a farm price is Rs. 11 for cow milk and Rs. 14 for buffalo milk (0.25 USD & 0.35 USD). This compares to a 1 liter bottle of water which costs Rs. 12. The trader, as well as an emerging private company, usually pays a small amount higher than the cooperative with the co-op price serving as a benchmark price. Quality of milk is also an issue, and the bacterial load is high due to the amount of time taken to reach the bulk cooling/chilling center. In a large part of the country, there are no testing facilities at the village level. However, there are ongoing government efforts to enhance “clean milk production” by improving practices and providing subsidies and loans to develop this infrastructure.
The competitive environment
While historically co-operatives have not had much competition from the private sector, in recent years, private sector activity is increasing. Consequently, one priority for smallholders is to strengthen co-operatives to allow them to better compete with the private sector. Regulatory changes have been introduced in the co-operative sector through MACS and formation of “Producers company”.
Key features of MACS (Mutually Aided Co-operative Societies)
Three typical value chains in India
Andhra Pradesh state in South India is a leader in dairy activity and has experimented with various new models for dairy. It was the first state to introduce the MACS Act. Also, the private sector in this state is very active. Of the three chains chosen for this analysis, two are in Andhra Pradesh and the third is a state co-operative from a lagging region. The first model is a large private sector dairy, the second a MACS society in AP, instituted in 1998.
Model 1: The Private Dairy
This Dairy is head quartered in Andhra Pradesh. It was initiated in 1992 after MMPO permitted private dairies and is now traded on the stock exchange. Daily milk collection is about 7 lakh liters per day. Milk is collected from 150,000 households and 3500 villages in three states, though the major operations are in AP. The company is now serving 3 main metros with fresh milk – Hyderabad, Chennai and Bangalore, and is now ready to enter Mumbai.
The Model
The company procures milk through agents in the village with the quantity procured dependent on the personal relations of the agent with the villagers. Several villages have more than one agent, depending on the social structure as well. The company is not directly involved with the farmers and negotiates the price with agent. It is not involved in setting the price that the agent gives the farmers.
The price paid by the agent to the farmers is slightly above co-o price in the state. Many times, the agent in the village is competing with agents of other private companies for milk procurement. Consequently, the agent oftentimes gives loans to farmers to maintain loyalty. Collection areas depend on milk density and are in areas in which district co-ops are less active.
Model 2: MACS Society in Andhra Pradesh
Dairy activities started in the district in 1971. This district union has now delinked with state Federation and in 1998, following the inception of MACS Act in1995, transformed itself into a MACS society. The union is currently collecting milk from 650 villages in the district. Milk collection is 60,000 liters per day, likely to go up to 100,000 in the coming 2-3 years.
Business Model of MACS
As per MACS norms, this is a 2 tiered operation at the village level and district level. The village level is managed by the village society, district level by BOD. Both of these societies are run by members elected every year. The village level society itself is registered as a separate MACS society and has the freedom to use its own profits. 10% of sales are allowed at the village level to earn higher profits.
Model 3: State Co-operative
The state co-operative is an apex level Dairy Cooperative Society registered under Cooperative Society Act – 1962. Currently, milk procurement is from 12 district unions. About 322,000 liters per day is collected form 3800 village societies and 224,000 farmers. Currently, there is not much competition with private sector in the area.
Comparative analysis of the chains: Support along the chain
Input supply
In the Private Dairy, there is no provision for input supply except for occasional loans given to farmers. The MACS Society provides breeding and health services through linkages with NGOs/State Dept. They also manufacture quality feed and supply to farmers at subsidized rates as well as organizing thrift and credit co-operatives which extend credit for animal purchases. Finally, veterinary medicines are available at cost at extension meetings organized for farmers. In the State Co-operative, feed is available at subsidized rates through the village society while breeding and health services can be procured through the State Dept. There are no facilities for loans; while medicines are available at cost, adequate supply is a problem.
Production
At the farmer level, differences are minimal between the three models because of a lack of extension activities carried out by any of the three agencies. However, it is possible that in the case of the MACS society because of extension and provision of feed, producers may be using more and better feed as compared to crop residues However, this needs to be confirmed.
Milk procurement
In the Private Dairy, milk purchases are done through the agent who decides what price he will give the farmer. This is usually decided based on competition with agents of other companies and based on the declared co-op price. Testing is done in very few cases. This has implications for farmer confidence in the prices received. In the MACS society milk collection is done through Village MACS society which is democratic functioning society. The MACS has the freedom to decide the price and does not have to follow the co-op price. Prices declared by the Union are usually higher than Co-op pricing and testing of milk is conducted through electronic milk-o-testers. In the State Co-operative, collection is done through done through the village society, which is run by a president who wields considerable power. Farmer prices, fixed for cow and buffalo milk, are declared by the co-op which typically are low. In most cases, there is no testing. There appears to be a lack of uniform pricing with influential people in the community receiving better prices.
Processing/Marketing
The Private Dairy processing plant is ISO certified and meets all quality requirements. They produce a variety of quality products catering to children and younger generation (yoghurt, flavored milk), mainly in the urban metro market. The MACS society has good quality products, but no certification as yet and the products are largely traditional products. They are selling milk to urban consumption areas, while tapping the rural markets as well through village societies (small packets, 250 ml). At the Co-operative, quality of the milk continues to be an issue though it has improved in the recent years. The co-op is also largely selling traditional products, mostly in the urban market.
Future growth
The Private Dairy is not involved in dairy development activity and is only focusing on procurement. Faced with increasing competition, they will have to move to newer areas for expansion. In the future, if MACS becomes strong in these areas, procurement will be affected. The MACS society involvement in dairy development activity will help them to grow and increase milk procurement in this area. They are geared to face competition from private sector because of the community linkages at the village level. Finally, the Co-operative, because of low involvement of community, will find it difficult to compete with private sector. Difficulty in competing will also be magnified by their lack of variety and quality of products.
The way forward
It is evident from the above discussion, that the MACS society best represents the interests of the farmers in the coming years, with stiff competition from private sector. The Act was passed to make the co-operative strong in face of competition, however, the act is most practiced only in AP, with other states having yet to put the Act in place. In AP itself, the previous government was supportive, but the new government is not supportive of MACS and has stopped further conversions of district unions to MACS. In the past few years, about 650 MACS societies have registered in the state.
Patrice Gautier, Asian Veterinary & Livestock Services
Viet Nam has a relatively short history in both production and consumption of dairy products. Five main waves of development of smallholder dairy can be described:
Today while most of the milk is produced by up to 20,000 smallholders, they account for less than 1% of the total number of livestock smallholders in Viet Nam. The country�s herd is now around 110,000 dairy cattle with a total milk production of around 220,000 tons per year. Around 70% of the production is located in and nearby Ho Chi Minh City. The herd includes around pure Holstein- Friesian (15%) and crosses between HF and the Lai Sind (already a cross between Red Sindhi & a local small cow). Most smallholders have less than 5 dairy cattle raised in a zero-grazing way with the average herd size per farm tending to increase over the years. Elephant / king grass and local grasses are the main forages given, although maize silage and new tropical and non-tropical forages are being more used. Average production levels are reported to be around 4,000 kg (pure-HF) and 3,500 kg (HF crosses) per lactation. However, there are great variations and generally a very high calving interval.
Milk is sold to nearby milk collection points generally equipped with cooling tanks, then transported to more than 5 private processing factories. These factories produce pasteurized, UHT milk, yoghurts, etc. The informal market accounts for less than 20% of local consumption. Consumption has constantly expanded since the mid-nineties and has now reached around 1 million tons (or 10 kg per capita). However, imports of dairy products represent around 80% of the consumption.
Overview of models and description of studied smallholder dairy models
More than 90% of dairy producers have less than 10 cattle. They are found mainly in lowland areas where the human density is high. A small percentage of producers are also located in more upland locations which support the few large-scale dairy farms. Smallholder dairy models can therefore be found in almost half of Viet Nam�s provinces.
Four models were visited during the study:
In these models:
Key reasons for success
The recent increase in milk price makes these models� success more obvious today. Three of them have been operating for 25 years and one for 12 years. These models were not so much affected by the decrease in number of cattle, dairy smallholders observed from 2004 to 2007. However, had the recent increase in milk price had not happened, some of them would probably have started to reduce production too (particularly in the north).
The key reason for these models to be still operating today (despite the low profitability during some years) is likely to be that smallholder dairy developed there in a gradual manner. Many initial weaknesses (low technical skills of farmers; weak local services; milk marketing) were addressed through experience rather than artificially corrected. Over the years these systems maintained an adequate and favourable balance between the models� strengths and weaknesses. Indeed, one model may have a weakness that another one does not have, but the negative impact of this weakness may be balanced by the positive impact of some strengths.
The common favourable factors identified in these models (and not or less observed in models that have been unsuccessful) : Experience > 12 years (rather than rapid training); Good local service providers & supported by external actors (NGO, Nestl�, Dutch Lady & state companies); existence of a milk buyer; appropriate feeding; appropriate breed (with management / environment).
Options for improvement, expansion and replication
A pre-condition for the further development and possible expansion of these dairy models is a better measurement and analysis of the current production and economic performances of smallholder dairy units. This can be done initially via a simple and cost-effective system that records and analyses the animal and the farm results. The challenge is to determine if improvement is possible; to identify the elements that can be improved; to assess how these elements can be improved; and to measure if improvement occurs after actions.
Improvement of productivity is essential if smallholders want to survive a sudden decline in world prices of milk. Some of the needed changes (in addition to the recording & analysis of performances) may be:
Replication of the existing models can be successful if:
Key reasons for failure of other models
The models that have been set up from 2000 onwards have experienced serious difficulties, if not almost complete failure, during their first years. But following the recent milk price increase, development could occur again in these �inexperienced� dairy locations. These models had to deal with a combination of several weaknesses at the same time, possibly similar to the ones faced by the older models during their initial phases. However, the new models started in a period where (1) the cost of heifers was very high; (2) the price of milk was very low.
Summary of reasons that explain the difficulties of some new models:
Conclusions
Smallholder dairy in Viet Nam is still a young activity. Major gradual changes could occur in the coming years and decades particularly as urbanisation continues to expand in the main dairy production zone (Ho Chi Ming City). The success of smallholder dairy depends a lot on the world price of dairy products and on the willingness of the processing factories to decrease their margins especially during difficult times for farmers.
Certain important factors are, however, controllable and can be encouraged by policy makers:
Sally Bulatao,
National Consultant/Dairy Enterprise Specialist
This paper consists of: (1) a brief description of the Philippines’ milk market; (2) highlights of four cases, one of which has a focus on enterprise elements; and, (3) the development strategies and activities recommended for improved market access by smallholder dairy producers.
Market overview
The Philippines’ milk production in 2006 was equivalent to half a day’s milk production in India in that year. The daily milk production in the Philippines is easily produced by a single dairy farm in Florida or California. With an annual milk production of 13 million liters or barely 36,000 liters per day, there is hardly an industry to speak of, in terms of production.
However, milk consumption tells a different story: the Philippines represents a sizeable and growing dairy market generating annual sales of milk and milk products worth nearly one billion US dollars. It is the 2ndbiggest country destination for New Zealand’s exports of milk and milk products. At its highest in 2005, liquid milk consumption was 25 times the consumption level in 1991. On a daily basis, this was 125,233 liters per day, from 5,424 liters per day in 1991. This, however, would appear as a flat growth rate when compared to China’s milk consumption which has doubled over the last five years. In the Philippines, the growing preference for natural food figures as a dominant demand driver rather than a fast growing mass purchasing power for milk and milk products. Nonetheless, Table 1 is attached to provide the basic indicators of the Philippines’ dairy industry.
Notwithstanding a demand situation that is slower in comparison with emerging Asian dairy markets, the rising world milk prices in the 2006-2007 period visibly enhanced small milk producers’ edge in the direct consumer market as well as in the food service and industrial use market. Higher milk import prices already neutralized by a stronger peso resulted in more competitive price levels. Specifically, a liter of UHT milk which sold for P54 (US$1.12) in 2006 is priced at P65 ($1.59) in 2008 compared to fresh milk prices that averaged about P60 ($1.43) over the same period. Bulk pasteurized milk for food service outlets and industrial users also started to explore the use of local fresh milk following the improved price difference.
Who are the smallholder dairy producers of the Philippines?
The Philippines’ dairy industry consists of two distinct sectors. One is the milk powder based sector that imports, re-processes and repacks milk and milk products. The other is the liquid milk sector that has its imported UHT milk component and the locally –produced fresh milk component. It is only in the liquid milk sector that smallholders figure in the industry.
The last survey of dairy enterprises conducted by the Bureau of Agriculture Statistics in July 2002 covered 4,957 dairy farmers in cattle, carabao and goat farms. Of these, 85 percent (4,194 farmers) owned from one to four dairy animals while another 11 percent (564 farmers) owned 5 to 10 dairy animals. Hence, unorganized small dairy farmers and smallholder milk producers, together, comprised some 96 percent of the local dairy farming sector.
Table 1. Philippine Dairy Industry Indicators
Indicators | 1995 | 2000 | 2005 | 2006 |
Annual milk prod'n in million liters |
12.11 | 10.21 | 12.34 | 12.87 |
Total dairy herd Cattle Carabao (Buffalo) Goat |
21,054 11,145 8,134 1,775 |
21,100 7,780 11,943 1,377 |
26,344 11,733 13,606 1,005 |
28,395 13,092 13,648 1,655 |
Total dams and does Cattle Carabao (Buffalo) Goat |
9,687 5,543 3,360 784 |
10,254 3,550 5,950 754 |
12,679 5,210 6,820 649 |
13,255 5,669 6,879 707 |
Dairy import cost (CIF -in US$ million) | 438.29 | 402.17 | 421.33 | 457.30 |
Dairy import volume1 in LME (in million liters) | 1,605.14 | 1,853.16 | 1,353.39 | 1,510.68 |
Per capita milk intake in liters per year | 16 | 16 | 19 | 19 |
Number of farm families engaged2 | 4,066 | 8,197 | 13,077 | 14,347 |
Total employment in the dairy industry | 4,066 | 8,197 | 17,020 | 19,583 |
Number of dairy enterprises | 58 | 118 | 289 | 315 |
Number of children supplied in milk feeding programs | 12,750 | 20,932 | 96,167 | 29,843 |
1Import volumes are net of re-exports by importer-processors.
2First survey of farmers engaged in dairy was conducted in 1996 by the Bureau of Agriculture Statistics.
Three dairy enterprises, selected for the high degree of smallholder participation, have been identified as the initial source of data in a value chain analysis of the Philippines’ dairy sector. These are the Katipunan ng Kooperatiba ng Maggagatas, Ink, (KKMI) in Calauan, Laguna in Luzon island, the Federation of Davao Dairy Farmers Cooperatives (FEDDAFC) in Malagos, Davao City in the island of Mindanao, and the Kapanig Multipurpose Cooperative in San Juan, Siquijor in the Visayas. A fourth one, the carabao development program of the Philippine Carabao Center in its National Impact Zone in Nueva Ecija is, likewise, profiled to showcase buffalo-based dairy enterprises.
The full presentation includes slides on the highlights and winning features of each case. However, the discussion below is focused on one case to better illustrate the business features applied by a smallholder-based dairy enterprise.
Federation of Davao Dairy Farmers Cooperatives (FEDDAFC)
This plant started operation in 1990 under the direct management of the coop federation, FEDDAFC. Starting with four founding primary coops, it is now composed of 13 primary cooperatives of about 200 farmers. It processes an average of 1,100 liters of milk daily. Operating results of the plant had been up and down for most of the years depending on the trustworthiness of the plant manager. The federation has hired professional managers who have come from bigger firms and has also designated from among the farmer board members as General Manager. FEDDAFC has been the victim of numerous funds misappropriation. NDA has actually taken over management of the plant in the past. But the take over two years ago involved a change, not only in management, but of plant ownership as well.
FEDDAFC’s turnaround and the interplay of competitiveness factors
Towards the end of 2005, this plant was declared delinquent for failing to pay its farmer suppliers for raw milk delivered over three months. The lease contract with the NDA for the use of the plant includes a clause for automatic take over by the NDA in case of non payment to farmers for at least two months. NDA implemented this provision and completed the turnover of the plant from the coop federation to the NDA after a series of general assembly meetings where all members were informed on the consequences of such a takeover.
The assets of the enterprise were valued and the NDA took its equity share in the enterprise. The dairy federation ended up holding a minority share of 21 percent in the new entity which took on the nature of a public-private venture.
With the takeover, the General Manager (GM) designated by the NDA had to deal with a workforce that was wary if they would be retained under the new management. The staff transition to new assignments was handled adequately although not without intense pressures at the start, particularly on the GM.
There were suppliers to be paid, farmers waiting for milk payments, bank accounts to be validated and a market to put in shape. To the credit of the GM and her team, these matters were handled one by one and the plant slowly assumed a new dynamism.
Within the first year of the takeover (2006), the enterprise realized a net income. The profitability was sustained into the second year (2007).
The Davao Milk Plant has initiated various other schemes that contribute to its good enterprise performance. In particular, the development of its network of 29 dealers of frozen milk products has stabilized the market for 43 percent of its product mix. The dealers pick up the goods from the plant significantly reducing delivery costs. In turn, the dealers distribute the frozen milk bars to their own network of variety stores and school canteens. The Plant Manager who is also the General Manager meets with the dealers regularly to enforce the delineation of the area of coverage of each dealer and avoid unhealthy competition. This product line, developed in the last two years, has greatly reduced the dependence of the plant on school milk feeding as a market.
Customers in Davao City have associated fresh milk with the brand Davao Dairy Best. Brand recognition is acknowledged and that is why the enterprise pays the coop federation a royalty for the use of the brand. It is designed in an attractive format that allows it to compete on the supermarket chillers side by side with other commercial milk brands. The General Manager realized that supermarket sales can be profitable as long as the documents for collection of accounts are prepared promptly and served to the supermarkets regularly.
The plant has also installed a milk payment system that pays an average of P2 on top of the base price of raw milk. The plant quality assurance staff visited individual dairy farms to demonstrate milk collection procedures. Milk collected is then tested for compliance. The first round of tests was done without any charges to the farmer. However, when they fail and subsequent tests are required, the farmer has to pay a testing fee.
The Davao Plant maintains a sales force that is paid on a commission basis . Instead of keeping a regular sales force, the team sells milk in particular residential areas and gets compensated based on volume sold. The system has improved sales and reduced overhead for the enterprise.
Organizationally, this first attempt at a public-private venture is stimulating the imagination of the players. They are currently in discussions on how to maintain the discipline installed through the new organizational setup while increasing the equity of the farmers and possibly, the plant team, in the venture.
The entry of a foreign investor as a new player in the dairy zone represents both a shift in factor conditions (more animals, new farm infrastructure) as well as an enhancement of competition within the zone. Instead of being considered a threat, the new player stimulates good milking practice among the farmers who would not want to be outdone by the newcomer. Aside from this, the Korean investor has been a source of some farm equipment made available to the farmers in exchange for a young calf or a heifer.
The pressure on land use, however, is a factor condition challenge to the Davao dairy zone. Plantations of high value crops compete with use of land for dairy purposes. Many smallholders are either tenants or leaseholders who usually have to give up the land when the landowner decides to shift the use of the land to a fruit orchard or to lease the land to a corporate farm.
On the other hand, young, second-generation dairy farmers are taking over and improving the existing dairy farms. Anthony Naraval is an example of the new batch of dairy farmers who are keen on engaging in dairy as an entrepreneur. The crop of young dairy farmers represents an enhancement of factor conditions in the dairy zone. Having fully paid their previous animal loans, they are preparing to acquire additional animals to increase their dairy herd.
FEDDAFC, as a federation, continues to suffer from weaknesses in leadership. Its officers seek to buy back the plant but there are no assurances that the problems of the past will not recur if this happens. The tension between the objective of establishing a viable enterprise and the traditional drive to put all operations in the hands of smallholders is playing out vividly in this situation. All the parties involved-the NDA, the cooperatives, the plant staff – will all interact to shape a suitable enterprise structure that will effectively protect the gains of the enterprise while ensuring the maximum benefits to smallholders. The settlement of this issue reflects the interplay of enabling government support through the NDA as lead organizing institution and the governance structure of the cooperative and its capacity to discipline its ranks.
During the validation meeting with industry players, the following activities were recommended: the holding of regular farmer-to-farmer visits and exchange of farm practices among smallholder dairy farmers, the formulation of feed rations for dairy zones with the appropriate feeds testing and milk yield monitoring, the gearing of areas with limited markets for milk as suppliers of dairy stocks, encouraging the establishment of breeding enterprises among AI technicians at the village level, formalizing popular calf rearing and growing arrangements at the coop level and the enhancement of coop-based lending programs.
Other lines of action that have been considered following discussions with model enterprises are the following:
The common facilities may be distinguished from government extension work in that dairy enterprises themselves could contract the delivery of common services at fees based ozn business results traced to the services accessed. Some examples may be increases in milk yield due to regular feed testing, improved calving interval due to herd recording, longer shelf life due to laboratory testing, increased sales due to improved product label, etc.
Prospects for enterprise-driven dairy development
There are strong indications of accelerated growth in the Philippines’ dairy sector. Most prominent of these signs is the maturing of enterprises that have established their market networks and are able to invest in expansion without relying, solely, on government support. These are the building blocks that provide the foundation of the industry. The same enterprises represent individual dairy producers who have “learned the ropes” and are realizing the gains from the industry. Ultimately, it is the concrete benefits that would make the players remain in the industry.
The profitability of these enterprises, in turn, has been attracting new entrants that may yet provide the needed “critical mass” for the industry to move ahead, gaining more credit support and a more conducive policy environment.
Even government that has historically provided wavering support is poised to allocate more assistance for herd buildup, breeding infrastructure and common facilities. The big challenge is to evolve the suitable enterprise designs that will maximize smallholder participation in the value chain.
Phil Psilos, Value Chain Competitiveness Consultant
The short-term boom in world dairy prices combined with long-term growth prospects for dairy products in Asia presents a promising opportunity for strategies to include and upgrade smallholder participation in these markets. Smallholders and the national and sub-national (local) dairy value chains may be able to respond to growing market opportunities, but there is no guarantee of this outcome. This presentation is focused on how the FAO-CFC-APHCA team is working to develop a framework for understanding the ability of smallholder dairy in participating countries to respond to these opportunities. For the purpose of this project, we refer to the related abilities of value chain participants to respond to market opportunities, upgrade to meet new market requirements, address challenges posed by international competition, and to provide sustainable livelihoods to value chain participants as the competitiveness of the smallholder dairy enterprise.
This presentation outlines the elements the competitiveness framework, why it was developed, and how it was used by the three consultants you heard from this morning to produce some indicative results from three countries. In the next session, the consultant team will facilitate your working together to perform a rapid self-assessment exercise using this framework.
The competitiveness framework is a set of analytical steps that constitute a structured process for analyzing the current situation of smallholder dairy as an enterprise in any given national or sub-national marketplace in a way that can provide useful comparisons across the participating countries. Because the goal of the FAO-CFC-APHCA process is to develop a strategy that can enable participants to succeed in many different environments, it is also an attempt to develop a common language that can help with the discussion of common challenges and differences between markets. Thirdly, the framework is a tool for analyzing and comparing the actual current situation from the inside, rather than against a single benchmark of what is “correct.” It is based on the approach that all participants can experience improvements in smallholder dairy performance, though some countries may have more favorable overall conditions and greater success in the long-term. Finally, the framework is a method for identifying which models are most suitable to address and correct or overcome specific challenges, or to respond to specific opportunities.
If the project’s work were only focused on scaling up existing models in a specific country, the framework would be less useful. If, on the other hand, we want to help participants from many different countries and contexts select the right models (or elements of models) to address the constraints that they face, we need to be clear on what factors the models we are looking at can address, resolve, or improve. The three goals served by the competitiveness framework are:
1.) | Prioritization of the most important deficiencies and opportunities in the smallholder dairy environment; |
2.) | Informed collaboration among participants who face similar matrices of opportunities and challenges; |
3.) | Targeting models to explore based on the specific challenges and opportunities participants face in their countries. |
Feedback from some consultants has also suggested that the framework process has been useful as a discussion tool with national industry stakeholders, and in reaching new understandings regarding what industry participants see as the most urgent challenges of the environment.
Competitiveness framework: Process
Using the framework entails a number of analytical steps. Mapping and diagnosis of the dairy value chain yields an understanding of the issues facing smallholder dairy. In the framework, these issues are categorized into a standard set of performance/competitiveness drivers that fall into five areas. Each issue is then evaluated for whether it is subject to the influence (or control) of (1) governments, (2) firms, (3) whether it is can only be partially controlled, or (4) whether it is entirely out of the span of control of local actors. The relative favorability or unfavorability of each issue is then determined (perhaps through discussions among a variety of stakeholders). Existing models are then evaluated and scored for their effectiveness in addressing the constraints of the environment. In this way, the framework helps us understand what elements of specific models provide solutions to our specific challenges, and what challenges require new policy and organizational innovation. It is our hope that the FAO-CFC-APHAC project will be a forum for assisting the dissemination of existing models, and for new policy and organizational innovation.
The five Performance-Competitiveness Drivers categories are (1) demand conditions, (2) factors of production and utilization, (3) market and competitive structure, (4) related and supporting industries, including producer services; and (5) government and business enabling environment. This category structure is derived from Harvard Business School Professor Michael Porter’s diamond model of competitive advantage. In this model, the competitive results for smallholder dairy are viewed as a function of how well the key drivers work together to produce a sustainable and profitable industry. Of course, the choice of these issue categories is somewhat subjective: other ways of categorizing issues could serve a similar purpose, but because this model captures economic, technological, institutional, governmental, and market structure issues across the value chain, it serves as a useful framework for analysis.
Driver Categories with Sub-Factors
Demand Conditions | Market Structure & Governance | Factor Conditions | Related and Supporting Industries | Business Enabling Environment |
Market size and growth | Domestic Market | Herd | Value-Added Processing | National |
Consumption patterns | Governance | Breed | Transportation and Distribution | Sector Regulation |
Sophistication of consumers | Market Chain | Human Capacity | Producer servcies | Formal sector support |
Receptivity to new products | Lead Firms | Distribution-Infra Capacity | Specialized inputs | Provincial/Local |
Price elasticity | Barriers to Entry & Rents | Processing | Specialized finance & credit | Formal Private Governance |
Impact of market opening and imports on local demand | International Market | Land Supply & Utilization | Relevant research capacity & utilization | Donor/NGO |
Credit-Finance Market | ||||
External Economies |
In each of these categories, much of the analysis is subjective, but collecting the most important quantitative factors to describe the performance of the system is useful. Some of these measures, if collected and averaged out across the entire national market, could be quite misleading. As a result, some factors are much more useful in describing performance at the farm and enterprise level (those appearing to the left), and others, such as the demand measures fresh milk premium in a given country as a percentage of world market prices, are more useful in describing the national market environment. The team used this as a guide for data collection, and are still exploring how a simple set of quantitative indicators can improve the framework’s effectiveness.
What can be quantified rapidly?
Factor conditions and utilization | Market structure & governance | Producer services and value chain depth | Demand conditions |
---|---|---|---|
Calving interval (# months) | Transport & Processing Costs (TPC) per unit output | Growth in processing capacity (5 years, %) | Demand growth |
Quantity milk output/year (UNIT) | TPC as % WMP | Licensed veterinarians per 1000 population | Fresh Milk Premium (FMP) as % WMP |
Lactation period (days) | TPC as % FMP | Capital resources | FMP increase past 5 years |
Feed/fodder unit cost (FF) in local currency | Spoilage/Losses as % output | % output to non-powdered uses | |
FF unit cost as % of WMP | Import parity (value) | ||
![]() Farm & Enterprise Level Value Chain Level Market Level |
Steps in prioritizing performance-competitiveness drivers
The competitiveness framework includes three steps in prioritization of identified performance and competitiveness drivers.
Process
Keeping in mind what national-level policy and program interventions can realistically achieve is very important in regional strategy formulation. Analyzing the factors that can be controlled or influenced by participants in the APHCA project, and the limitations of policy
action to influence some outcomes, and focus clearly on the opportunities for the next best step in each national (and regional) context. Project participants have a greater degree of influence and, potentially, control, over the conditions determining chain performance and smallholder participation and national market structures than over factors such as multinational firm strategies and the international trade system. As a result, the first step in prioritizing which performance and competitiveness drivers to address entails understanding whether opportunities and constraints can be controlled or influenced by government, by firms, those factors that are “quazi-controllable,” and those that cannot be controlled.
Step 1: What can we control through policy and program interventions?
The second and third steps in prioritization entails analyzing the drivers (identified above) to determine their relative influence on the competitive position of the value chain. This is accomplished by assessing their favorability or unfavorability to the smallholder dairy enterprise on a scale of -2 (Very unfavorable) to +2 (Very favorable), and assigning each issue a relative weight (importance) compared to other factors in a given category. Each category of issues (outlined in slide 9-10) represents a weight of 100%, and sub-factors are assigned a value reflecting their significance to the enterprise as a whole. By multiplying the favorability score by the weight, each sub-factor is assigned a positive or negative value, and the performance of the category as a whole can also be analyzed. The results for one category of drivers- Factor Conditions and Utilization- is illustrated in the table below which reviews the situation in Viet Nam.
Driver Evaluation Matrix: Vietnam Factor Conditions
Controllability | Relevance | Weight | Drivers Evaluation | ||||||
Performance/ Competitiveness Drivers | Key Industry Issue | CF | CG | QC | NC | F/U | Score -2 to +2 | ||
Factor Conditions | |||||||||
Herd | |||||||||
Herd | Unsufficient supply of cross-bred heifers | x | U | -1 | 0.05 | -0.05 | |||
Breed | Cross-bred heifers are expensive and starting dairy is risky for unexperienced smallholders. | x | U | -1 | 0.10 | -0.10 | |||
Breed | High heat & humidity in Vietnam lower the performances of the H-LS | x | U | -1 | 0.10 | -0.10 | |||
Feed | Lack of forages only partially solved. | VU | -2 | 0.10 | -0.20 | ||||
Feed | Recent considerable increase of industrial concentrates. | x | U | -1 | 0.05 | -0.05 | |||
Veterinary Medicine | Apart maybe from southern Vietnam, poor availability of essential drugs for dairy (mastitis & reproduction) | x | x | U | -1 | 0.05 | -0.05 | ||
Producer Technical Capacity | A very small number of producers have followed a good practical short-term training course on dairy production. | x | x | VU | -2 | 0.10 | -0.20 | ||
Support services technical capacity | In locations with no international cooperation, smallholders are only advised by vets and inseminators. Vets have a low level of training and almost no continuing professional education is organized. | x | x | U | -1 | 0.05 | -0.05 | ||
Org & Managerial Capacity | Lack of willingness from farmers to take leading roles and organize farmers' groups. | x | U | -1 | 0.05 | -0.05 | |||
Entrepreneurial Capacity | As for other sectors in Vietnam, initial investment is very often too high in comparison to the funds that are put into the routine daily costs. | x | U | -1 | 0.05 | -0.05 | |||
Land Supply & Utilization | Insufficient for smallholders | x | VU | -2 | 0.10 | -0.20 | |||
Formal credit mechanisms | Credit has been available with the National Dairy policy and some dairy processing companies | x | x | VF | 2 | 0.10 | 0.20 | ||
Informal credit mechanisms | Credit can be supplied by family relationships, other dairy farmer (in-kind) or collecting centers. | x | F | 1 | 0.05 | 0.05 | |||
Transmission of learning | Happens a lot from farmer to farmer. | x | F | 1 | 0.05 | 0.05 | |||
Social Capital and Trust | |||||||||
TOTAL | 1.00 | -0.80 |
Framework findings from value chain studies
The significant differences between the three countries studied are apparent in the chart below. According to this analysis, the challenges faced by each of the three countries differ significantly both within and across driver categories. While all three countries were reported to have favorable demand conditions, this was weighted as a much more positive factor in Viet Nam, in light of the country’s weaker dairy tradition. In all three countries, factor conditions and utilization were rated as a significant challenge. The studied countries diverged significantly with respect to the favorability of market structure and governance, related and supporting industries, and the regulatory and business enabling environment.
Results from Consultant Studies
The most favorable sub-factors for each of the case study countries are presented below. While market size/growth and processing capacity are significant factors for both India and Viet Nam, the Philippines’ market structure appears to be a much significant strength upon which to build than in either India or Viet Nam.
Most Favorable Competitiveness Drivers in 3
Countries
With respect to the greatest challenges identified in these case studies, there was almost no consistency of the most highly weighted factors across the three countries. This result reinforces the conclusion that it will be more effective for groups of countries facing similar challenges to work together within the project framework to achieve sustained upgrading and find solutions to common challenges.
Least Favorable Competitiveness Drivers in 3 Countries
Evaluating model effectiveness
Evaluating and choosing models to scale up and/or replicate requires understanding what a particular model addresses well, and also a recognition that there may not yet be an appropriate model developed to overcome specific challenges or take advantage of current opportunities. The most fundamental question considered in the model evaluation step is, “whether a particular model responds effectively to the specific, high-priority challenges and opportunities that smallholder dairy faces in my country’s environment?” The framework uses a relatively simple scoring system to address this question.
Models effectiveness in addressing a few of the key opportunities and challenges is illustrated in the table. Two groups of issues are apparent. First, in four cases, where significant opportunities or challenges have been identified, at least one of the models offers a “very effective” or “somewhat effective” example of how to address the issue. These are shown in the top section of the table. In four other cases, significant challenges in the operating environment have been identified, but there is no clear evidence that the models examined have been effective in addressing these issues. Where this is the case, further innovation, rather than scaling up of current models, should be considered, and project participants may find the APHCA project an effective vehicle for working together to catalyze this innovation, whether it comes from policy, program, or private-sector initiatives.
Rating Models’ Effectiveness: India examples
Competitivness Drivers | Key Issues | Drivers Evaluatio n | Score Co-operative Union | Score MACS Society | Scor e Private Dairy | |||
MODELS PROVIDE WAYS TO ADDRESS KEY DRIVERS | ||||||||
Market size and growth | Market growth due to high per capita consumption and increasing population | 0.6 | 4 | Not much investment in developing milk procurment to meet future high demand | 1 | Developing a village level infrastructure to meet future high demand | 4 | Not much investment at village level to meet future high demand |
Performance | still large share of milk 85% of marketable surplus goes through traditional channel | -0.3 | 4 | Not been able to undercut the traditional market | 1 | Giving competition to traditional channel by strengthening societies | 2 | Giving competition to traditional by offering higher price |
Processing Capacity | lack of processing capacity in the country, including primary processing by bulk chilling | -0.4 | 3 | Need to enhance capacity for processing and bulk cooling | 2 | Has a strong processing and primary processing infrastructure | 2 | Has strong processing and primary processing infrastructure |
Price regulation | Price regulation by cooperatives | -0.4 | 4 | Has to follow the price regulation norms of the cooperatives hence cannot give farmers better price | 2 | Has the flexibility to higher prices to farmers | 4 | Purchases milk from farmers through agents, thus they don't have control over prices |
MODELS DO NOT ADDRESS KEY DRIVERS: NEED FOR FURTHER INNOVATION | ||||||||
Consumption patterns | Unpackaged milk is still preferred because of taste and price | -0.6 | ||||||
Producer servcies | Availability of health and breeding services can be enhanced, extension is almost non-existent | -0.6 | ||||||
Specialized finance & credit | Exist on paper, but very difficult to avail | -0.4 | ||||||
Processing Capacity | Government subsidies on bulk chilling and processing infrastructure | 0.4 | 5 | has not availed of government subsidies | 3 | Cannot avail of government subsidies for bulk cooling | 3 | Cannot avail of government subsidies for bulk cooling |
Model Scoring Key | (3) Unclear or neutral effectiveness in addressing this key industry issue; |
(1) Very effective in addressing this key industry issue; | (4) Somewhat ineffective in addressing this key industry issue; |
(2) Somewhat effective in addressing this key industry issue; | (5) Very ineffective or counterproductive in addressing this key industry issue. |
The rural wage rate as a determinant of smallholder dairy trajectory
So far, our analysis of smallholder dairy competitiveness has looked at the system almost exclusively from the “inside”-- that is, from the perspective of upgrading what currently exists and assuming, rightly in most cases, that the performance of the smallholder dairy system can be improved if challenges are addressed appropriately and if the smallholder enterprise is organized to take advantage of opportunities. One factor that may be an overriding determinant of the trajectory (direction, likely future development path) of smallholder dairy is the evolution of rural wage rates. This work is based on an ongoing research program at ILRI and the work of Steve Stahl, who could not be with us today. It suggests that the rural wage rate context has been a key determinant of the scale at which dairy activities can be competitive. Rising rural wage rates make other activities more attractive and may tend to divert smallholders away from dairy enterprise. Dairy also becomes less attractive when nonfinancial benefits of dairying are reduced as mixed-crop farming declines. Considering these issues can help you target resources within your country more effectively and with a greater awareness of how rural economic development impacts the smallholder enterprise.
Some research has demonstrated that the attractiveness of smallholder dairy as a remunerative option declines quickly with rising rural wage rates. The basic outline of this argument, as presented resulting from a trans-regional study conducted in the late 1990s, provides some important insight into anticipating industry trajectories.
1) Smallholder dairy is labor intensive and arises where other remunerative options for labor are small. Dairy competitiveness relie(d) on low opportunity cost for labor.
Dairy Herds Grow as Rural Wage Rates Rise
Unpublished results from case studies carried out in November to December 2000 by the International Livestock Research Institute
(ILRI) and collaborators under the project on Transregional Analysis of Crop–Livestock Systems.
2) Herd sizes rise with rising rural wage rates and greater access to remunerative opportunities for family labor. When wages rise, smallholders may respond with capital investment, either in land for grazing (as an alternative to labor-intensive fodder), milking equipment, or other upgrades that reduce labor inputs, but also require economies of scale for profitability and sustainability. As a result, smallholder production may transition to more specialized, small commercial production in the context of rising rural wages.
3) High value of manure as fertilizer input, particularly in dense, low-yield subsistence environment(s), sustains smallholder dairying. In Kenya, researchers found that the value of manure produced in a small dairy farm may be <30% of the value of milk produced, based on the observed market values for both (Lekasi et al. 1998). Benefits from manure erode where wages are higher (or rise) because manure handling is a labor-intensive process.
4) Dairy provides savings and capital accumulation mechanisms for smallholders which may lose attractiveness as other formal-sector options become more widely available.
In the context of rising rural wage rates, it may be difficult for smallholders to remain competitive in dairy, since (1) some smallholders will abandon the hard work of feeding and milking cows and pursue other types of work, if these opportunities are available, and (2) those who do stay in dairy shift towards a different model of production that is more concerned with cash remuneration rather than the various forms of income and asset building that makes dairy attractive to smallholders in a mixed-crop environment.
The attractiveness of dairying as a remunerative activity appears to depend on low labor opportunity costs (as represented by low rural wage rates) and lack of access to other savings and investment vehicles. Where opportunities for other use of labor are low, and where soil nutrients and land are scarce, smallholder mixed dairy producers successfully out-compete larger more specialized producers locally because they require lower formal financial returns from sale of milk.
Smallholders and commercial producers view
Economic returns on dairy production: smallholder and small commercial producers
Smallholder | Small Commercial | |
Returns from Milk | X | X |
Other Returns | ||
Fertilizer (manure) | X | |
Improved land productivity | X | |
Savings/ Investment | X | |
Costs | X | |
Fodder costs | X | |
Capital costs | Principally cow/herd cost | Equipment costs, grazing land costs, herd costs |
The implication of this analysis suggests that “next steps” for smallholders should be considered very carefully with respect to the rural wage context. Where rural wages are moving towards convergence with urban wages (though these cases may be somewhat rare), it is likely that the value of ‘other returns’ to milk production will decline (particularly manure), reducing both the competitiveness and the desirability of smallholder dairy production.
In these cases, encouraging smallholder strategies may be less favorable than considering other forms of local dairy enterprise development in which smallholders can participate, focusing on those that can reap the economies of scale required to make dairy a favorable option in a higher rural wage context.
A variety of likely and potentially appropriate growth trajectories, summarized in this table, should be considered after analyzing the competitiveness of the dairy production system and prior to selecting appropriate models to adopt. In this table, the rural wage context is considered alongside smallholder market access conditions to suggest 15 different scenarios for appropriate strategy development.
Different Strategies are appropriate in varying rural wage and smallholder access conditions
Conclusions and next steps
The measure of whether this framework is useful is whether you and your collaborators in-country find it to be of value. As a result, we hope that you will provide input into this “work in progress.”
In addition, another of the project’s goals is to develop an internet-based (online) or software-based system that allows you to search for models that have been effective in addressing specific constraints or challenges. This goal is one reason it has been important to standardize the categories in which the main performance-competitiveness challenges of different countries are captured in the framework analysis.
A group session
The Process: To better understand the process for ranking factors favourable/non-favourable to industry development, participants were asked to complete a worksheet exercise which reviewed the standard set of performance/competitiveness drivers that fall into five areas:
(1) | Demand conditions, |
(2) | Factors of production and utilization, |
(3) | Market and competitive structure, |
(4) | Related and supporting industries, including producer services; and |
(5) | Government and business enabling environment. |
Driver Categories with Sub-Factors
Demand Conditions | Market Structure & Governance | Factor Conditions | Related and Supporting Industries | Business Enabling Environment |
---|---|---|---|---|
Market size and growth | Domestic Market | Herd | Value-Added Processing | National |
Consumption patterns | Governance | Breed | Transportation and Distribution | Sector Regulation |
Sophistication of consumers | Market Chain | Human Capacity | Producer servcies | Formal sector support |
Receptivity to new products | Lead Firms | Distribution-Infra Capacity | Specialized inputs | Provincial/Local |
Price elasticity | Barriers to Entry & Rents | Processing | Specialized finance & credit | Formal Private Governance |
Impact of market opening and imports on local demand | International Market | Land Supply & Utilization | Relevant research capacity & utilization | Donor/NGO |
Credit-Finance Market | ||||
External Economies |
1. Participants were first asked to individually highlight in green those factors most favourable for industry development in their respective country and describe the most important industry issue for that factor. The data was then collected for analysis and presented to the group.
2. Participants were then asked to work in groups to complete a series of ‘self-assessment worksheets’ on competitiveness drivers.
Group 1 China India Samoa Facilitator: Meeta |
Group 2 Philippines Thailand Malaysia Facilitator: Sally |
Group 3 Bangladesh Mongolia Pakistan Facilitator: Brian |
Group 4 Sri Lanka Afghanistan Indonesia Facilitator: David |
Group 5 Myanmar Nepal Bhutan Facilitator: Nancy |
Group 6 Iran Viet Nam Facilitator: Patrice |
In summary:
Demand conditions
Almost all respondents rated conditions as favourable, with considerable opportunities offered by strongly favourable market size and growth potential. There appeared to be a consusus that one constraint facing the industry was consumer’s receptivity to new products, perhaps linked to the sophistication of consumers. Strong demand conditions were particularly ranked highly by Viet Nam, India, Pakistan, Afghanistan, and Iran. This contrasted to concerns expressed by representatives from Bangladesh, Sri Lanka, Mongolia and Samoa.
Market structure
The ranking on this driver were more diverse with more countries identifying more constraints: in particular those related to competition from international markets and barriers to entry.
Factor conditions
Surprisingly, most countries reported extremely positive conditions, particularly to those related to herd numbers. Not so positively ranked were breed availability and land supply and utilization.
Related and supporting industries
This driver, which reflects outside resources which are supportive of industry development, is typically a feature of more advanced value chains. Not surprising, however, there was considerable variation in the results. The Philippines, Viet Nam, Bangladesh, Nepal, and Iran ranked high for this driver, however, some of the results weren’t intuitive with India and Pakistan ranking this driver very low. Within the general category, value-added processing, transportantion and distribution, and producer services were ranked high, while specialized input and finance and credit were negative.
Business enabling environment
Ranking by participants indicate that factors conducive to investment in the dairy sector appear to be supported by strong donor/NGO support and adequate governance in private sector operations. However, formal sector support was only reported in the Philippines with most countries indicating that the sector, in general, lacks effective regulations, both on the national and the provincial and local level.
2 Omore, A., Cheng�ole Mulindo, J., Fakhrul Islam, S.M., Nurah, G., Khan, M. I., Staal, S.J. and Dugdill, B.T. (2004). Employment generation through small-scale dairy marketing and processing. Experiences from Kenya, Bangladesh and Ghana. A joint study by the ILRI and the FAO. FAO Animal Production and Health Paper No. 158. Romeo, 60pp, ISBN 92-5-104980-7. ISSN 0254-6019. TC/M/Y4860/E. http://www.fao.org/catalog/bullettin/07_04.htm
3 CFC-FAO Asia Dairy Strategy Project (CFC/FIGMDP/16FT) Field Document 4: Smallholder Dairy Lessons Learned (from FAO case studies and other literature), October 2007.
4 The subject of school nutrition schemes based on local milk or imported milk is covered in Session 2 paper: Selected smallholder dairying experiences from Bangladesh and Mongolia
5 Strategy (n): plan, scheme, policy, approach, tactic, line of attack, stratagem
Policy (n): rule, strategy, plan, guiding principle, course of action, guidelines, procedure
Plan (n): diagram, map, chart, sketch, graph, arrangement, preparation.