Mongolia: Rebuilding the dairy industry

Background

The livelihoods and well-being of the majority of Mongolia’s people still depend largely on livestock in general and on meat and milk in particular. Milk is both a sacred and a staple food. In the short warm summer season, it is produced in great abundance by some 30 million cattle, yaks, camels, horses, goats and sheep that are owned largely by small-scale producers (see the definitions in Box 5). Nomadic herding and traditional dairy product-making are at the core of Mongolian society, providing a significant share of national income and employment. Women have the leading role because they are the ones tending the animals and processing the milk into traditional products for winter food as well as for earning income from selling the surplus for other basic family needs.

Livestock contribute more than one-fifth of GDP and almost half of all employment in what was, until recently, a predominantly nomadic society. Dairying, in particular, provides much-needed nutrition, regular income and employment and is set to play a major role in helping the country become more food secure and, in so doing, supporting the UN Millennium Development Goal seeking to halve poverty and halve under-nutrition by 2015. In Mongolia, the latter goal means reducing the number of under-nourished people living below the poverty line from 800 000 to 400 000.

In the socialist period, Mongolia used to be self-sufficient in milk (Table 1). During the rapid transition to the market-based economy in the 1990s, the dairy industry, like other food industries, collapsed; sales of domestic processed milk fell from more than 65 million litres in 1990 (approximately 20 percent of milk production) to less than 3 million litres by 2002. As a result, overall food insecurity worsened, and many people lost their livelihoods. Imports of milk and dairy products surged to about 50 million litres of a liquid milk equivalent (LME) annually. The dairy industry by 2002 was hampered by obsolete infrastructure and technologies, a chronic shortage of trained people and consumer concern about the quality and safety of domestic milk and dairy products. Consequently, most of the processed milk sold in urban areas was imported, at considerable cost.

Like other countries in the East Asian region, Mongolia is rapidly urbanizing. Domestic products need to be tailored to modern market tastes, particularly to younger Mongolians. Half the population is younger than 20 and have drank only imported milk. Even so, the huge wealth of traditional milk products remains an important part of the culture and for the livelihoods of nomadic herders, especially during the long harsh winters.

Since the move to the market economy in the 1990s, milk prices are no longer centrally set and fluctuate according to supply and demand. Farmgate and consumer prices vary considerably according to season and to how far milk producers are from the market (Annex II-a). A 5 percent tariff on milk powder imports was introduced in 2000, along with a 15 percent value-added tax (VAT). In 2006 the Ministry of Food and Agriculture proposed to increase tariffs to 15 percent on selected food imports, including the ultra-high temperature, or UHT, milk. The proposal is still under consideration. The VAT was reduced in January 2007 from 15 to 10 percent on all imported and domestic goods. Dairy plants with an annual turnover of more than 15 million tögrög (US$13 000) now pay VAT in accordance with the new tax law, which allows payment to be offset against the cost of procuring domestic raw materials such as milk. This is a highly supportive measure, considering 70 percent of costs are for raw milk.

Table 1: Milk production in Mongolia (‘000 tonnes)

At 134 kg of LME per person per year, milk availability is very high by Asian standards; for example, in neighbouring China it is only 10–20 kg, with imports currently increasing at an annual rate of 15 percent. A number of private dairy enterprises emerged during the 1990s, after the political and economic liberalization, including former food and dairy processing combinats (state-owned companies) acquired by the incumbent managers. Some failed; others experienced great difficulty in getting milk, a highly nutritious but highly perishable food, to market. Up to a reported one-third of available milk was “lost” in the post-harvest (after milking) food chain because it could not be moved to markets or could not be sold because consumers preferred imports. This encouraged the establishment of two dairy enterprises with business models based on importing subsidized milk powder from developed-country surpluses for recombination.

The current dairy situation: An overview

Dairy industry survey (2005)

Due to recent lifestyle changes from predominantly nomadic to predominantly sedentary, the country is urbanizing rapidly. A survey of dairying in the central aimags conducted in 2005 by the Mongolian Food Processors Association identified many shortcomings in the dairy food chain. Socio-economic data were collected and analysed from 84 small milk producers (nomadic herders and peri-urban households and farms), 14 dairy processors and 1 200 urban consumers. The findings (Box 1) characterize milk production and consumption as: i) a relatively small domestic market for processed milk and dairy products, ii) a huge disparity between rural (at 200 kg per year) and urban (at 58 kg per year) consumption of milk, iii) poor-quality milk and lack of consumer confidence in locally processed milk and dairy products, iv) over-reliance on imports for urban markets and v) a vast natural resource base for milk production from the 6 million or so animals owned by small milk producers that are potentially in milk at any one time.

After liberalization, the old state dairy system struggled with obsolete equipment and inexperienced management. Many of the new processors failed because their competitiveness with subsidized imports was constrained by overwhelming difficulties in obtaining: i) quality local milk from widely dispersed small milk producers, ii) modern equipment, iii) modern packaging materials and iv) low interest rates for investment finance and working capital (typically it was high at 18–30 percent). Two large food and beverage companies (one supermarket-based and the other the main producer of vodka) diversified into producing UHT milk and fruit juice. They based their business model on reconstituting imported full-cream milk powder (FCMP) marketed as “fresh” milk. At that time, the cheap milk powder from the West (often subsidized) was readily available at a LME cost of about 200 tögrög ($.17) per litre, roughly the same price as locally produced milk in the summer (Annex II-a).

The 2005 survey found that the informal milk market was still important for the older generation, though product quality was invariably uncertain. Raw milk and traditional products still accounted for approximately half of urban consumption. The informal market was important not only as a supply of milk and dairy products but also as a source of regular income and jobs, especially for female-headed households.

Dairy industry-revival strategy

The revival strategy for the dairy sector has been linked to the current policies for national agricultural development. These focus on improved competitiveness in changing markets by: i) creating favourable business conditions, ii) improving and sustaining productivity leading to iii) improved availability of quality milk and dairy products that are safe, affordable and ecologically clean, and iv) application of new technologies for both extensive pastoral and higher-productivity farming systems.

A National Dairy Task Force, representing all public- and private-sector stakeholders, was set up in 2005 to guide the industry’s re-building process. The revival strategy was based on an analysis of the dairy industry and approved by the stakeholders at a national workshop. It embraced a sector-wide, cow-to-consumer dairy food chain approach to be implemented under the following thematic programmes: i) m ilk-production enhancement, ii) milk-marketing enhancement and iii) capacity-building and training.

In line with government policy, the revival strategy is directed initially at the three central aimags where: i) the majority of the urban population live, ii) most cattle are found and iii) the main cropping areas are located and thus crop by-products are accessible for feeding. Initial interventions were based on matching modern technologies and know-how to local market needs in order to: i) persuade urban consumers to consume more domestic milk and milk products, ii) reduce post-harvest losses by linking milk producers with consumers through processors; and iii) substitute imported milk and dairy products with quality domestic products.

With public- and private-sector partners, the three thematic programmes have been operationalized through six commercial dairy modules (or investment packages) covering each link in the cow-to-consumer dairy chain. These have been backed up with supporting activities that include: i) a permanent National Dairy Training Centre at the Food Technology College in Ulaanbaatar, which provides practical, vocational and outreach/field training for each of the modules; ii) a pioneering animal genetic improvement scheme; iii) an innovative retailing concept in which processors collaborate to sell their products, including certified raw chilled milk and traditional products at the “one-stop” milk sales centres; iv) the first generic branding and advertising campaign in Mongolia; v) an innovative public–private sector partnership school lunch programme based on local milk, vi) working with the food standards and inspections authorities to train and certify milk traders; and vii) setting up the Dairy Steering Group under the Mongolian Food Processors Association to sustain the activities.

Initial results have been encouraging. By mid 2007, 16 commercial modules/units were in operation, with the National Dairy Programme sharing the investment risks with its partners by contributing up-to-date know-how and limited equipment (approximately $350 000). The partners invested about $1.3 million in equipment and buildings. The quantity of domestic milk entering the formal market in 2006 was 11.7 million litres, up from 2.5 million litres in 2003. This is expected to increase to 18 million litres in 2007. Private investors, including the two companies reconstituting imported FCMP, were expected to invest upwards of $10 million in the modules in 2007 and 2008.

Figure 1: The dairy industry revival strategy’s mid-project assessment (2006)

Source: Agricultural development strategy of Mongolia (2006–2015), Government of Mongolia, 2006

Small-scale dairy farmers

Characteristics

“Smallholder” is not a term that can be applied in Mongolia because all grazing land is communal – owned by the State (see the definitions in Box 5 ). By law, households in city areas are entitled to 0.5 acres of land and those in other areas to 0.7 acres. Since the collapse of the state collective dairy farms, small milk producers have dominated milk production. They comprise two main groups: i) traditional nomadic herder households with mixed herds of up to 200 or more animals and ii) peri-urban households with up to 20 milking cows. A growing group (currently 300-plus) of larger dairy farms, with 20 – 40 milking cows, have been established between 50 and 100 km from Ulaanbaatar and other urban centres.

Generally speaking, a dairy farm is classified as a small mixed-livestock farm within a 50–100-km radius around a centrally located area, provincial centre or city, which has winter shelters for cattle and the ability to make hay and fodder. According the 2006 livestock census, there were 8 012 dairy cattle kept on 395 dairy farms – an average of 20 animals per farm. Of them, more than 80 percent were located near Ulaanbaatar , the capital city, and in Tov and Selenge aimags , the main crop areas of the country. Small dairy farmers usually have their own market outlets and deliver raw milk to: i) milk processing units, ii) food/dairy markets, iii) small food stores or kiosks and institutions (canteens, hospitals, sanatoriums, schools, kindergartens).

Revival of the dairy industry in Mongolia depends on small producers and on their capacity to increase production of quality milk at prices that enable processors to compete with imports, both as finished products and as milk powder for reconstitution. Small milk producers are reported to be the most profitable type of farmers in Mongolia (World Bank, 2004). In 2007, milk producers linked to formal markets received between 150 and 300 tögrög ($12–$.25) per litre for milk in summer, when 80 percent of the milk supply is produced (depending on the distance from the market; Annex II-a). In winter they are paid between 350 and 500 tögrög ($.29–$.42) per litre. Winter prices were not competitive with subsidized imports from Europe until this year (2007) when the worldwide shortage of FCMP drove liquid milk-equivalent prices up to more than 600 tögrög ($.50) per litre.

The 2006 livestock census reported that 225 400 households (36 percent of the total) owned on average 152 head of livestock; of them, 170 800 households (27 percent) were classified as herding families engaged in livestock raising, owning on average 204 animals. Rural families with less than 50 head of livestock are considered poor households. Herds consist of cattle, horses, camels, sheep and goats. After more than 15 years of market transition, herding families have started to form groups to work together in marketing their produce (such as wool, cashmere, hides and skins, meat and traditional dairy products). The formation of herding groups is largely based on family membership, seasonal pasture location or bag (smallest local administrative unit) location.

Traditional dairy food chain model

Traditional dairy products are hugely important. Along with meat, they were, until very recently, the main foods for nomadic families in the long, cold autumn-winter-spring period (October–May). All the milk is used. When the quantity of milk or by-products is too small to process, it is accumulated over a number of days, allowed to sour naturally and then processed.

Though more than 100 regional varieties are produced, traditional products are broadly classified as fat- or protein-based or fermented. Many are unique, such as airag (beer fermented from mare’s milk), for which the mares are milked every two hours, night and day, during the short summer, and shimiin arkhii (vodka distilled from fermented milk). There is also the ubiquitous suuthe tsai (salted tea) offered by all households to visitors and restaurants to customers.

Fat-based products : urum (cream), shar tos (ghee or clarified butter ), tsagaan tos (white butter from camel and goat milk), airgiin tos (cream wafers)

Fermented products : airag, khoormog (sour camel milk), undaa (fermented drink), tarag (yogurt), tsegee (sour milk)

Protein-based products : byaslag (cheese), aarts and aaruul (fermented dried curd), khuruud, eezgii (evaporated curd)

These foods are produced out on the steppe in summer and by peri-urban households for both domestic consumption and selling. Traders buy and gather the products and either sell directly or as wholesale to other retailers in the suu (milk) markets found in all trading centres and urban areas. Though no studies have been carried out and quality is often highly suspect, it is understood that producing and trading in traditional dairy products is highly profitable. Many of the larger processing dairies now produce and market their own traditional product brands.

Modern dairy-food chain model

The modern dairy-food chain model evolved from the lessons learned during food security analysis and consultations and is inclusive of all milk producers, irrespective of type and size (nomads, peri-urban households, small-scale dairy farms). The model links producers to small- and large-scale processors with a module for each link in the cow-to-consumer dairy-food chain. There are six vertically integrated modules, each capable of being adapted to the local situation and each of which must be profitable. The modules include: i) milk producer organizations (MPOs), ii) dairy service centres, operated on a full cost-recovery basis by private veterinarians, iii) milk-collecting packages, iv) milk-cooling centres, v) milk-processing units and vi) “one-stop” milk sales centres. The modules are supported by many innovative training and marketing features and have been mainstreamed into the National Dairy Programme for the period 2007–2016.

The chart in Annex I shows the informal and dairy chains that link small herders and dairy farmers with consumers in large urban areas (populations of more than 25 000), such as Ulaanbaatar , Darkhan, Erdenet and Zuunhaara, and smaller aimag centres with populations from 5 000 to 25 000.

Prospects

The transition to the market economy in the early 1990s culminated in today’s enterprise-oriented dairy industry, based largely on milk produced by small producers. The strategic lessons and prospects for dairying and small milk producers in Mongolia are listed below. These have been translated into a focused strategy – the National Dairy Programme (NDP), which involves a mix of government and (mainly) private sector investment over the period 2007–2016.

• Small milk producers: Re-building the milk collection-processing marketing infrastructure, with a focus on small milk producers, milk quality and training, has driven the dairy-revival process. More effort should now be placed on improving productivity at the farm level.
• Modern dairying model: The sector-wide, integrated industry re-building strategy aimed at ensuring that each link (module) in the dairy chain is profitable and is encouraging private-sector investment.
• Dairy institutions: Setting up the National Dairy Task Force (later re-named the NDP Working Group) to guide the overall programme and the enterprise-oriented Dairy Steering Group under the Mongolian Food Processors Association enhanced coordination, giving the industry a more powerful voice in promoting local milk by focusing on quality and safety; generic branding, labelling and advertising helped to re-build consumer confidence in local milk.
• School milk: Promoting local milk and dairy products through the school lunch programme has the dual impact of improving nutrition and providing a market for local milk producers.
• Costs and competitiveness: Milk production costs and farmgate prices are now competitive with imported FCMP, notwithstanding the current 5 percent import tariff. Farmgate prices in summer ($.12–$ 25 per litre) for milk produced under the semi-intensive, peri-urban system are competitive with the most efficient Western countries, provided Western subsidies are discounted. Producer prices are even lower for milk produced by herders and small producers in more remote areas.
• Traditional dairy products: These items will continue to be important, high-value-added and profitable products. The potential to export Mongolia ’s unique mare milk-based and camel milk-based functional foods should be explored under a “green” ecological generic brand/label.
• Legislation: Updating domestic and import tax legislation has encouraged domestic milk processing; for example, the VAT paid by milk processors can now be offset against the cost of procuring domestic milk.
• Future growth prospects: Due to the already high degree of milk availability and consumption levels, at least by Asian standards, once imports are replaced and urban consumption increased, market growth is expected to stabilize around 2–3 percent per annum, assuming disposable incomes continue to grow. With the recent growth of the mining and tourism sectors’ gross national income, while still low by Western standards, has been expanding at about 12 percent annually since 2002 and should be capable of sustaining this modest growth forecast.
• Exports: Given its small population and high per capita consumption of milk and dairy products, Mongolia will need to look increasingly to exporting clean, quality, niche dairy products to the rapidly growing markets of milk-deficit countries in the region to continue growing its dairy industry in the longer term. This need is recognized in the NDP. With its huge milking herds and vast grasslands, Mongolia has a clear international comparative advantage for producing and exporting clean milk to ecologically conscious markets; hardly any pesticides or animal drugs and no milk-stimulating hormones are used.
• Investment: In the short term, investment is most needed to continue the modernizing and expanding the milk-collecting infrastructure and to further improve the productivity and profitability of dairy cows. In the medium term, investments are required to process surplus milk into niche, value-added, easily transportable products, such as milk powder and processed cheese, for export to milk-deficit markets in the north and north-eastern Asia region.
• Socio-economic benefits: The extra regular income for small milk producers, the extra jobs created and the availability of affordable, safe domestic milk and dairy products for urban consumers should help improve livelihoods through better nutrition and reduced poverty. The impact of this on small milk producers and consumers and in helping Mongolia to achieve its Millennium Development Goals of halving poverty and halving under-nutrition by 2015 needs to be assessed.

Conclusions and lessons learned

The 2005 analysis of the Mongolian dairy subsector remains valid. The following is a summary of key lessons learned during the re-building process:

• Revival strategy: Adopting a sector-wide, cow-to-consumer strategy, inclusive of small milk producers, to revive the dairy industry that relies on practical demonstration modules to ensure each link in the dairy food chain is profitable.
• Constraints into opportunities: Basing the strategy on taking advantage of the key opportunities available to the Mongolian dairy industry: i) high per capita consumption, ii) huge milking herds, iii) vast grasslands, iv) imports to substitute, v) export potential for “clean” milk to nearby milk-deficit markets can overcome the present constraints: i) low milch animal productivity and poor-quality milk; ii) lack of market access for milk producers, iii) obsolete infrastructure and equipment, iv) lack of up-to-date technical know-how and skills.
• Committed partners: Careful selection of public- and private-sector partners and collaborators has led to cost-sharing and responsible ownership of the model dairy demonstration modules; divesting ownership of the old state dairy in Ulaanbaatar revitalized the company.
• Policy: The Government has ensured consistency between its food, agriculture and tax policies by mainstreaming activities into the new ten-year National Dairy Programme (2007–2016).
• Increasing milch animal productivity: Having more animals is less vital than each animal’s productivity to sustainably increase small milk producers’ incomes; priority should be placed on services that provide immediate impact, such as feeding, artificial insemination using appropriate dual-purpose breeds, and animal health, while concurrently introducing genetic improvement.
• Capacity-building: Placing priority on establishing a permanent vocational and outreach training facilities – the National Dairy Training Centre – at the Food Technology College in Ulaanbaatar have been prudent.
• Traditional dairy products: Of continuing importance, they provide good returns to small-scale milk producers and processors.
• School lunch (and milk) programme: Linking small-scale milk producers and processors as well as larger-scale processors to the programme has facilitated the dairy sector’s revival process while introducing/re-introducing children and their parents to the nutritional benefits of local milk.
• Earnings and employment: Access to milk markets provides nomadic herders and rural households with regular earnings and the dairy food chain provides many rural and urban off-farm jobs, especially for women – up to one job for every 15 litres of milk collected, processed and marketed.
• Dairy equipment and supplies: These are only worthwhile if they are appropriate, affordable and available, such as made and maintained locally or imported from nearby counties through local agents.

Annex I: Milk flow chart for Ulaanbaatar, Darkhan, Erdenet, Zuunharaa – big urban centres

Milk flow chart at aimag provincial centres (residents are considered as urban dwellers)