Introduction

The industry and policy background

Dairy production in Fiji can be categorised into three major groups.

• Suppliers to the Rewa Co-operative Dairy Company (RCDC). Currently RCDC has 179 suppliers of whom 175 are shareholders.
• Registered dairy farms supplying fresh raw milk to urban centres. These number around 38 in both the Central and Western Divisions.
• Non-commercial dairy farms meeting household consumption. Surplus milk, through manual processing, turned into ghee for household consumption and limited localised sale to the Indian community.

In regard to policy, the dairy industry developed when government emphasised import substitution and self-sufficiency. Under this strategy, the industry was protected and supported in a number of ways:

• import licencing and tariff control on major dairy products such as milk powder, butter and cheese (table 1)
• taxation relief to dairy farmers,
• low interest rates through Fiji Development Bank,
• various subsidies including fencing material, equipment, livestock drugs, roading and water supply, and
• free dairy extension services and diseases control programmes.

To mitigate the adverse effects of deregulation, the industry has been offered adjustment assistance to the tune of $F4 million. This has been offered as follows:

• The establishment of the Interim Dairy Industry Council to oversee the dairy industry.
• The establishment of a revolving fund administered by FDB to address credit needs of farmers.
• Assistance to RCDC by writing off a portion of its debt.
• Direct financial assistance of $20,000 to RCDC.

Dairy production and imports

The number of farmers in the industry has gradually increased since the early eighties. The industry now has 226 farmers compared to 187 in 1984, (Table 2). There has been a marked increase in the number of producers producing fresh milk since 1994 . This increase is more a function of farmers switching from cream to milk production than new farmers entering the industry.

Milk production and imports

Competitiveness of milk production in Fiji

Measuring comparative and competitive advantage

This can be written as:
 

The DRC shows the number of units of domestic currency required to earn (or save) a unit of foreign exchange. A DRC of less than unity implies that the industry is competitive and expanding production of this activity will improve efficiency of agriculture in the country under consideration. A DRC of greater than unity implies the industry is uncompetitive and expanding production will increase inefficiencies in the agricultural sector.

The competitive advantage indicator compares the DRC to the exchange rate and can be written as:
 

The CAI can be calculated to gauge the efficiency of an industry in terms of earning or saving foreign exchange. A CAI value of less than unity shows that an activity is an efficient means of earning (saving) foreign exchange while a CAI of greater than unity implies an activity is an inefficient means of earning (saving) foreign exchange. The CAI depends on the DRC as well as the exchange rate. A weak (devalued) currency compared to the boarder currency will reduce the competitiveness of the industries. By contrast, an overvalued currency can render an industry competitive or at least improve its competitiveness.

To overcome the problem of devalued/overvalued currencies, one has to resort to shadow exchange rates. However, estimates of shadow exchange rates are hard to come by. Under such circumstances, the best estimate of industry efficiency to rely on is the DRC.

Data and methodology

The basic information is presented in Tables 5 and 6 and Table A1 in the Statistical Annex. Where unit values of the costs are not available, costs have been adjusted with the Consumer Prize Index to take account of inflation. The costs of labour, animal health, breeding, milking shed, repairs & maintenance, fuel/power and vehicle have been increased by 9.5 % to reflect the general increase in prices between 1993 and 1997. Up to date statistics for meal feed, pasture, molasses, land rental, milk price, calves and cull cows are available so they are used in this form in the calculations.

Because of the nature of milk production, export value cannot be precisely determined in border prices. This is because farmer returns is not only the value of milk sold but also include the value of calves and cull cows sold. As such, export value is calculated as follows.
 
 

Australian dollar is used as border price as currently Australia is Fiji’s major trading partner. For both farm models, the number of milkers is 180 and milk price per litre is $0.34. Milk yield per lactation is 1309 litres for Farm Model 1 while 1140 litres for Farm Model 2.

Domestic Resource Costs (DRCs) and Competitive Advantage Indicators (CAIs)

The effect of devaluation

• imported costs will increase by 20 %
• export price will increase by 20 %, and
• the domestic costs remain constant.

Sensitivity Analysis

Under the existing circumstances, sensitivity analyses needs to be conducted only for farm model 1. Without any manipulations, it has already been demonstrated that farm model can become efficient if it relies only on semi-improved pasture instead of relying on a combination of pasture and meal feed.

A possibility that is worth considering is an increase in export value. The value that may be understated is the milk yield per lactation. While the estimates for model 1 are based on 1309 litres per lactation, FAO (1994) estimated this figure to be 1703 litres. If FAO’s estimates are used then model 1 becomes efficient as well. Model 1 in fact will become efficient with milk yield per lactation of 1600 litres.

Conclusion

Based on the initial results, the policy implication is that milk production that uses only semi-improved pasture be expended. But as argued by ESCAP/POC (1997:1), this expansion cannot go indefinitely as the market share, both for fresh milk and products processed from fresh milk, is limited. Thus, for the short to medium term the emphasis should be towards increasing fresh milk production using semi-improved pasture. For the long term, any large increase in fresh milk production would first require an expansion in the market share.

Statistical Annex

References

Lincoln International Limited, 1993. Fiji Dairy Sector Study , MAFFA, Suva.
ESCAP/POC, 1997. Fiji Rewa Dairy and the Fiji Industry, United Nations ESCAP/POC, Port Villa, Vanuatu.