FAO ANIMAL PRODUCTION AND HEALTH PAPER 62
Milk and dairy products: production and processing costs
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FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS Rome, 1988
2. ESTIMATION AND CONTROL OF COST PRICES
2.2 The point of cost prices
2.3 Classification of charges
2.4 Cost centres
2.5 Ascertaining and analysing differentials
2.6 Setting up a budgetary control procedure (management audit)
3. MILK PRODUCTION COSTS
3.1 General considerations
3.2 Cost accounting applied to the agricultural enterprise
3.4 Feeding livestock
3.5 Available on-farm labour
3.6 Presentation of a dairy plant
3.7 Auxiliary cost centres
3.8 Structural charges
3.9 Summary of model tables used to determine milk production costs
4. COST OF REFRIGERATION, MILK COLLECTION AND RECEPTION
4.1 Different milk-collecting systems
4.2 Making the most of milk pick-up rounds
4.3 Pick-up work-time study
4.4 Analysis of collection costs
4.5 Analysis of cooling costs
4.6 Overall cost “refrigeration-collection-reception”
5. MANUFACTURING COSTS OF DAIRY PRODUCTS
5.1 Cost of auxiliary centres
5.2 Structural cost centres
5.3 “Pre-workstation” processing costs
5.4 Evaluation of milk content - yields and costs
5.5 Dairy product distribution and marketing costs
In “liquid milk equivalent” international milk prices are less than half the price paid for domestic liquid milk in many Third World cities. Though the international milk market may fluctuate in the short term, it is likely to remain low in the years to come. From a strictly economic standpoint, therefore, it might not seem reasonable to encourage Third World countries to develop dairy programmes. However, development potential and specifics do vary considerably from country to country and from one region to the next. An individual government may have its own social or political reasons for wishing to develop milk production.
In point of fact:
The sale of milk provides extra income on a regular basis to rural people who often have just enough to get by. Milk sales also improve the nutritional status of rural populations, though not necessarily the urban needy. Milk is also one of the few agricultural products which can be supplied and marketed regularly by non-landowners. A dairy plant creates jobs in rural areas, and thus helps check urban migration.
Milk and milk products are thought of as staple foods in Europe. Favourable production conditions mean that every one can consume large amounts of milk and dairy products. For many of the world's peoples, however, even though milk plays no role in the diet, if balanced food is available in sufficient quantities, neither health nor welfare should be affected by the lack of milk. Recommended Third World dairy policies fall somewhere between these two extremes. As FAO Agricultural Paper No. 89 (FAO 1973) shows, milk protein can enhance plant protein. In a diet combining several foods, a compensatory balance is established among the various sources of proteins. Animal proteins supply essential amino acids, plant proteins can then economically top up the total supply.
Many Third World countries find it hard to right the balance of payments: imported dairy products are one foreign exchange savings which can be effected by a dairy development policy. Moreover, international prices may go up in the medium or long run, placing a country which is not in a position to partially substitute imports by local production at a disadvantage.
Many Third World countries have decided to develop national dairy production for the above reasons. A certain amount of protectionism is necessary to ensure success and avert unfair competition between producer country-subsidized dairy imports and domestic production. The government needs to tax dairy imports, particularly powdered, concentrated or evaporated milk products. The revenues are used to finance dairy development projects or to boost producer prices (subsidizing some major components of production costs). For the consumer, the outcome of these measures is high-priced milk and dairy products. In many developing countries, the cost of one litre of milk is equivalent to more than 5 percent of the median daily income - in some cases as much as 60 percent.
Consumer milk prices have a great psychological impact. Many governments are tempted to try to regulate milk prices to keep the urban population happy, but milk producers' associations often have great economical and political strength. This leaves the government very little room for manoeuvre, caught as it is between producers and consumers. The dangers inherent in a failure to take appropriate measures are:
Excessively low processing industry profits, which bar re-investment and, in a few years, leave the plant with obsolete equipment thus driving up its processing costs.
Rock-bottom producer prices, which discourage production development, encourage the rise of a parallel market and the sale of adulterated, unpasteurized milk.
To act with discernment, a government therefore needs to know milk production costs in its major milk-producing regions, as well as the costs of processing and marketing milk and of the major dairy products. Getting such data is, in practice, a highly complex matter, and the figures tend to be approximative.
Production costs do in fact fluctuate greatly in accordance with:
the region under consideration (depending on soils, climate, etc.);
level of technical skills;
whether the enterprise is multi-purpose and how much area is available.
Likewise, processing costs are frequently not known as most dairies simply list all manufacturers' gross profits without itemizing the real processing cost of each of the individual products manufactured. In addition, these costs are often too high because dairy plants have been overequipped and depreciation is excessive for the volumes actually processed. Frequently, the processing equipment does not produce the expected yields due to shortages of spare parts and inadequate maintenance.
National dairy policy-makers will therefore require the most detailed information possible on the various cost prices. They will also have to consider such concepts as added value, which is connected to the social function of domestic dairy production.
Added value represents the difference between the value of output over a specific period of time and the value of the goods and services purchased abroad and used to produce this output during this same period.
Added value during a given period can be measured by adding up the following items: personnel costs, duties and taxes, financial costs, depreciation, profit.
In a way, added value is a measure of an enterprise's contribution to the national wealth. It is a much better reflection of actual business activity than turnover, and is the figure which expresses the purpose of the business for time and place, e.g. comparisons between different years and different enterprises.
Ratios such as, for example:
|Added value||Added value|
make it possible to measure the respective share of staff and equipment in the wealth generated by the enterprise.
An increase in added value has the following effects:
An increase in the number of jobs generated by the enterprise. This is of particular interest to the nation as these jobs are created in rural areas where unemployment is frequently chronic.
An enhancement of technical skills in milk production and/or processing.
Greater added value for a specific dairy firm usually means greater productivity and hence greater competitivity. If national productivity goes up, the country becomes less vulnerable to depressed international prices for milk and dairy products. Within the industry, greater added value means more sophisticated products - or enhanced values for plant by-products.
Reduced milk or dairy product imports or, conversely, increased exports.
The first purpose of this paper is to review the basic concepts of cost accounting and the second to suggest a method for calculating and managing the costs of producing, processing and marketing milk and dairy products which can be applicable to individual circumstances. Obviously, each case is specific, and there is no universal way of calculating cost price. Cost price, moreover, is only valid at a given moment. Such findings are primarily of use to those in charge of dairy farms or plants, who can use them to lower cost prices, but they will also be of interest to the makers of national dairy policy.