Introduction: Dairy development in Asia

Production grows faster than in any other region

This rising regional demand for milk and dairy products (from 76 million tonnes in the early 1980s to an estimated 247 million tonnes in 2008) has translated into opportunities for local producers, the majority of whom maintain between two and five cows and supply more than 80 percent of milk in the region. Aggregate output gains for the region, growing annually by 5 percent over the past decade, have doubled the global average. With approximately 352 million head of cattle and buffalo (Annex Table 1), Asia became by 2005 the largest milk-producing region in the world – surpassing Europe.

Figure 1: Strong income growth prompts increased milk consumption over past decade

This has largely benefited smallholder dairy producers in a region where milk production is an integral part of the small-farm economy in many countries, providing cash, capital assets and nutritional benefits to tens of millions of households. Spread across the largest, most geographically diverse region in the world, aggregate growth in the Asian milk output over the past decade has been exceeded only by that of certain meats and vegetable crops (Figure 2). It also has likely served as a catalyst to overall rural development; FAO estimates that every 10–20 litres of milk marketed in traditional markets has created one non-farm job. Of concern, however, is the much slower growth in grain and fodder production (Figure 2). While many of the production systems in which animals are now located are low input–output systems, characterized by feed produced from local crops, increasingly the emergence of more commercial operations will require access to better quality feed.

Figure 2: Growth in agricultural production in Asia, 1997–2007

Aggregate regional statistics mask the considerable differences in dairy development among subregions and countries. Nearly 80 percent of the production gains in Asia can be attributed to three countries: India (the world’s largest producer), China (the fastest growing market) and Pakistan, with output in India and Pakistan originating from low input–output crop-based systems in which milk from buffalos is important (Figure 3). And yet, the strongest gains over the past decade have been in Southeast Asia. This is also the area where lack of traditional consumption preferences for fresh milk, combined with low tariffs, has led to imported milk products accounting for nearly one-quarter of the subregion’s domestic requirements. When calculating dairy imports as a share of processed milk, this proportion in countries such as the Philippines and Viet Nam can jump to over 90 percent. It is clear from the trends that a growing appreciation for fluid milk and products made with locally produced milk is rapidly gaining acceptance.

Asia, as a region, provides feed and forage to more than half of the global cow population of 672 million (Annex Table) and appears to have been marginally successful in increasing output by way of raising production intensity. Over the past 15 years, yields have almost doubled, with productivity gains per animal (calculated as yield per animal) attributing to the nearly two-thirds of overall output gains. Yield gains have been very broad based, with Afghanistan, China, Iran and Viet Nam recording average annual gains that exceed 3 percent.

However, regional average yields, at less than 1 tonne per animal, remain below the global average and only one-tenth of the developed country average (Table 2).

In China and Viet Nam, double-digit production gains have been the strongest in the world. That growth has been supported by government assistance with the enhancement of cross-bred animal availability, which has resulted in average yield increases of between 4 and 7 percent (Figure 4).

Figure 4: Contribution of yield to milk output (over the past decade)

It is these successes that have prompted yield gains in the region to rise annually, at almost 3 percent – faster than in any other region. In developed countries, the expansion in output has been largely fuelled by enhanced yields per animal, with the exception of Australia and New Zealand where cows are mostly grass fed.

By contrast, productivity per animal in Africa appears to have virtually stagnate. It is clear that favourable economic signals to producers have the potential to quickly increase yields in many parts of Asia where producers poorly feed their animals. Thus, there is ample scope for rapid increases in milk productivity simply by improving the feed quality of local crops.

Opportunities for import substitution

Despite the rapid production gains, growing regional demand has also led to a near doubling of imports in Asia over the past 25 years, particularly those of milk powder. Asian imports swelled from 10 million tonnes in the early 1980s to an estimated 19 million tonnes in 2008. Asia currently accounts for approximately half of the global dairy product trade and constitutes an important market for the major dairy exporters, dominated by New Zealand, the European Union (EU), the United States and Australia (Figure 5). However, regional import dependency has remained stable at only 7 percent. This implies that the region as a whole has been relatively successful in supporting local industries to respond to the rising demand for dairy products. But regional averages can mask local realities. For instance, in South Asia, consumer preferences for fresh milk, local product availability and import barriers have limited trade with dairy product imports constituting only 1 percent of domestic consumption. In contrast, imported milk products into Southeast Asia supply nearly one-quarter of domestic requirements; when calculating dairy imports as a share of processed milk, this share jumps to over 90 percent in some countries.

In countries such as Sri Lanka, Philippines and Viet Nam where tariff levels are very low and consumers are familiar with and favour reconstituted milk products, import dependency has reached over 80 percent. And yet in China, a country that has experienced double-digit consumption gains over the past decade, imports constitute only 6 percent of total consumption. However, with imports estimated at nearly 2 million tonnes, China is the largest dairy product importer in the world, followed by Mexico, Russia, Egypt, Indonesia, Malaysia and Philippines.

As global dairy product supplies tightened in late 2006 due to drought in some exporting countries, as the EU intervention stocks drew down and as certain export subsidies discontinued, international dairy product prices rose to record levels. Rising faster and sooner than other agricultural commodities, prices for internationally traded milk powder hit a plateau and started declining in late 2007. While prices declined quickly in line with other agricultural commodities through 2008, many of the factors prompting higher prices (increased feed and other input prices and policy reforms) will likely underpin market fundamentals over the medium term.

Figure 5: Net trade position in dairy products, 2007

The region’s challenge: How to ensure local participation in the growing demand for milk products

The opportunity for growth presents Asia dairying stakeholders with the challenge of supporting industry expansion in an increasingly complex and competitive environment, one characterized by longer dairy value chains and mounting pressures on resource availabilities. Dairy farming is still at the preliminary stage in most countries in Asia, with milk supplied by millions of smallholder farmers. But the dairy processing industry is gradually maturing to better meet the requirements of consumers. These diverging trends necessitate a closer look at the diverse structure of dairy industries within the region and their evolution under local conditions.

One of the benefits of supporting dairy development, particularly in Asia where domestic demand is expected to grow faster than in any other region, is that there are fewer economies of scale involved in production than in other livestock systems. Studies have empirically shown that smallholder dairy producers remain competitive in many areas in developing countries (Stahl et al., 2003); nearly 80 percent of overall milk production gains over the past decade were supplied by producers with two to five cows. This is particularly evident where the opportunity cost of labour is low and where value is captured from non-food farm outputs, such as crop residues, manure and the opportunity for capital accumulation in the form of livestock (capita assets). However, as producers scale up to take advantage of the growing demand, smallholder systems become disadvantaged by economies of scale in marketing, input supply and service delivery.

To better shape broader stakeholder engagement and investment into the dairy sector, the opportunities for smallholder dairy producers need to be reviewed within a wide range of influencing factors: economic, institutional, commercial, legal, technological and social. The constraints and opportunities differ both by country and by specific locality, which can affect the development of effective strategies for enhancing smallholder contribution to the growing livestock-product demand.

Useful models need to be identified and analysed. It is particularly important that the enabling factors critical for successfully forging links between smallholder suppliers, processing facilities and traditional markets for fluid milk and other locally acceptable dairy products be identified, weighted and ranked. The selection of acceptable models needs to be based on local conditions, market access, cultural factors and consumption patterns. The possibilities range from enterprise-driven smallholder dairy operations (such as in the Philippines and Viet Nam) to cooperative systems (such as in South Asia) and to strengthened opportunities for subsistence farmers (such as in Bangladesh).