India is currently the largest producer of milk in the world, overwhelmingly from the output of millions of smallholder farms. The cooperative movement (Operation Flood) has been important in dairy development in different parts of the country, especially in the western region (Gujarat), and undoubtedly has played an important role in keeping smallholders involved with this fast growing sector. The Indian dairy sector has become progressively more liberalized since 1991, culminating in the repeal in 2002 of the licensing requirement under the Milk and Milk Products Order, which restricted the ability of private milk processing plants to procure milk in areas being served by the parastatal cooperative sector. One fear is that private dairies will begin to procure primarily from larger scale suppliers, even as they provide tough competition to cooperative milk processors, and eventually lead to the eclipse of smallholder dairy production that has been so important to so many in India. While it is too early to assess changes in procurement patterns for milk as a result of the recent policy changes, it is important under liberalization framework to know whether larger scale producers have a cost advantage that will lead to the displacement of smallholders under a liberalized market. This study is an attempt to examine how the ramping up of the scale of operations - and particularly commercialization of dairy production - impacts on Social-Health-Environment (SHE) outcomes, and particularly the livelihoods and welfare of rural households in high potential milk producing regions in India.
The present study uses farm-level data of 520 milk producers divided between traditional cooperative milksheds of Gujarat and dynamic newer milksheds of the northern region of the country (Punjab and Haryana). The sample in both regions ranges from traditional smallholder producers to large-scale commercial producers. Stochastic profit frontiers with inefficiency effects are fitted to the data in a variety of ways to assess scale differences in production efficiency, and the determinants of inefficiency at different scales of operation. Results are then analyzed to assess the likelihood that smallholders will continue to compete successfully in a liberalized market, and to explore policy options for enhancing their competitiveness in such a market.
Performance of the Indian dairy industry reveals that there has been a significant increase in milk production (about 4.5% per annum) over the last three decades, broadly from early 1970s to the late 1990s. The major impetus behind this change came from successful implementation of Operation Flood program and other dairy development programs implemented by the State and Central government. Uttar Pradesh, Punjab, Rajasthan, Madhya Pradesh and Maharashtra are the major milk producing states, accounting for over half of the nation's milk production. The performance of the Indian dairy sector appears impressive in terms of total milk production, but is dismal in terms of productivity as well as per capita availability. Although average milk production per animal in India has improved substantially both in cows and buffaloes, but is still far below the world average and other major milk producing countries like New Zealand, Australia, Israel, Norway, United States and Denmark. Therefore, there is a need to increase productivity of milk animals through improvement and extension of breeding services, including artificial insemination services, upgradation of animal health care facilities, better quality feed and fodder and strengthening of research, training and extension services. Per capita availability of milk has increased from 112 gm per day in 1970 -71 to about 220 gm in 2000-01, but present level of per capita availability in many states is below minimum nutritional requirement of 220 gm recommended by the Indian Council of Medical Research (ICMR). Moreover, there are wide inter-state and inter-regional differences in terms of per capita availability of milk. The average per capita availability varies from as low as 67 gm per day in Orissa to 997 gm per day in Punjab. Only five states, Punjab, Haryana, Himachal Pradesh, Rajasthan and Gujarat have the per capita availability higher than the minimum nutritional requirement, while all other states have below this level.
The demand for milk and milk products is expected to grow at a very rapid rate due to population growth, urbanization, increase in income levels and changes in food habits and is likely to reach at 181 million tonnes in 2011-12 and per capita consumption is expected to rise to about 152 kg per year. This increase in demand for dairy products will put increasing pressure on dairy production systems; traditional breeds and feeding practices are likely to give way to higher-yielding breeds, associated intensification of production systems, increased disease risks, pollution and animal health issues, and a greater reliance on concentrates. Currently, Indian dairy farming is dependent on crop residues, natural resources, and open grazing as sources of feed. Expansion of these traditional sources of feeds and fodder to support a large increase in dairy production is unlikely, as available grazing areas and other common property resources are shrinking and are already degraded. Additional milk output will surely have to come from intensified systems based on stall-feeding, and increasingly using concentrates.
Rising human needs for milk and other livestock products have placed environmental concerns in conflict with livestock income objectives. The rapidly increasing demand for dairy products in urban areas has given rise to haphazard growth of production centers in peri-urban and urban areas. The operations are essentially detached from their supporting land base and often generate high amounts of waste that contaminate soil and groundwater. Foul odours are a particular problem. Processing plants tend to be located close to major urban markets, where discharge of waste material is uncontrollable. Pollution of the food chain is also a major issue; pesticides, nutrients, feed additives, hormones, and veterinary drugs used in excessive quantities can contaminate the food chain, showing up in tested milk.
The results of financial profitability show that small-scale producers have higher financial profits (without family labor) per liter of milk than large-scale producers, other things equal. However, there are regional differences. Small farmers in the western region have higher profits compared to their counterparts in the northern region, while large farmers in northern region have high profitability compared to western region. This differential pattern might be due to cooperatives in the western region, which provide assured market for milk output irrespective of level of production and other production inputs and services. The relationship between farm size and profitability remained unchanged even after taking into account family labor, but the level of profits declined substantially on small farms as small farms use mostly family labor for milk production activities.
The findings from the application of Stochastic Profit Frontier function present a number of noteworthy features of the performance of the milk producers in relation to their specific characteristics. The hypothesis that there were no technical inefficiencies among milk producers was rejected. The explanatory variables, price of milk, price of fodder and feed and yield have significant impact on farm profits. The analysis revealed that milk producers could benefit considerable by improving technical efficiency through the use of best-practice production methods. The estimates of mean technical efficiency of sample dairy farmers varied from 0.79 on farms with average daily milk production of 40-80 liters and above 150 liters to 0.85 on small farms (<10 liters/day production level). The results clearly indicate that small farmers are technically more efficient compared to large-scale producers. The average technical efficiency of the sample farmers in northern region was lower (0.79) than western region (0.84).
The analysis was successful in identifying the determinants of technical efficiency at the farm level. In case of small farms, access to information and technology, access to credit and expenses on pollution abatement are important variables that significantly explain (reduce) inefficiencies. Together with the fact that most small farms do not have easy access to information and technology, and credit, these results suggest that the provision of extension services and credit to small-scale milk producers might be a promising way of increasing milk production and productivity in India. In case of large producers, access to information and technology and credit do not play a bigger role in explaining the technical inefficiency. The results clearly demonstrate that the profits per unit of output of small-scale producers are more sensitive to differences in transaction costs across farms, other things equal, than is the case for large-scale production. The results suggest that dealing with transaction costs (through institutions) is critical to improving the ability of smallholders to compete in the market place with large-scale producers.
The results show that small farmers spend relatively more on pollution abatement compared to large farmers. One of the reasons that small farmers spend more on pollution abatement is that small milk producers have crop-livestock mix activities and consider manure as a source of additional income and use it on their fields in place of chemical fertilizers or make dung cakes to use as fuel. In contrast, large farms, which are located close to peri-urban areas, do not find a market for sale of manure and try to dispose-off in unsustainable manner. Therefore, failure to compensate for negative environmental externalities is another policy distortion that is encouraging the scaling-up of livestock production. The policy of livestock production waste pollution has so far remained on the low priority of the public policies related to environmental protection.
The study clearly shows that smallholder milk producers have higher profits per liter of milk and are more efficient than those of large-scale producers, however, smallholders could still be driven out of the market due to: (i) large farmers produce large volumes; (ii) smallholders have difficulty complying with SPS/quality standards, and (iii) small-scale producers are more sensitive to transaction costs due to policy distortions and poor institutional support.