29 May - 28 July, 2000


E-mail conference on
"Small Scale Milk Collection and Processing
in Developing Countries"

Discussion Paper 1.4: Milk Payments








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Questions raised by the moderators:

  1. According to you, what percentage of the retail price should go the milk producers?
  2. Based on your experience, what kind of low cost milk quality testing equipment suitable for small-scale operations in developing countries is available? Could you give us prices and suppliers  ???
  3. Based on your experiences, what would be the maximum percentage of the base milk price, that a payment system could use for incentives and penalties?
  4. Based on your experience, what are the stages of development of milk pricing systems? What payment system would you introduce when starting a small scale low input milk processing centre? When your processing centre is growing to a larger scale, which other milk payment systems would you introduce?



Discussion Paper 1.4: Milk Payments; General considerations
By: René Metzger, France

1.  Difficulties associated with prices and costs in milk production

1.1 Farm milk costs and prices
Milk is produced and consumed by the most important animals, i.e. mammals. Milk's nutritive qualities are essential for the young mammal's normal development from birth to a more or less advanced age, according to species, and for humans in particular.

10,000 to 15,000 years ago, man had managed to domesticate some mammals in order to improve his life-style.  The animals provided milk, meat, wool, skins, fuel, fertiliser, transport and draught power, etc. This
domestication signalled the passage from the custom of picking and hunting
to an agricultural and breeding culture.

This universality of milk production and consumption was made possible when climatic and sanitary conditions were sufficient to allow herds to develop. Today, however, the nutritive qualities of milk and dairy products' are recognised everywhere, to the extent that their production and consumption are present in all modern societies. But the universality of milk production has been changed by the local socio-economic and cultural environment to intensive production from herds of very different sizes in industrialised countries, where the selective and rational breeding habits have reached satisfactory production levels or even higher, for most animals. 

On the contrary, extensive breeding with only limited access to modern
production techniques leads to median productivity levels in many developing countries. Nevertheless, milk production was for a long time linked with economic livelihood, self-consumption of milk by the farming-breeding families using the animal as for draught purposes and for the production of meat.  These were the main objectives closely linked to cattle breeding. As a co-product of breeding, the value of milk can only be set by the market. This is still the case in many developing countries where the price of a litre of milk can correspond to several hours of labour.

Rural emigration and improved living standards in developed countries since the beginning of the industrial revolution, were the causes of increased demand from farmers.  This demand being at first realised by milk collectors who sold the milk on urban markets.

Supported by technical progress in constant evolution, (selection,
rationalised animal feeding), this production ensures the farmers of a
regular income.  Although milk has always been just one element among others in a subsistence economy, during the XXth century it became more and more important providing farmers with a regular, remunerative income from mixed farming.  But, here again, getting money for milk is often confused with family costs and farming costs. No distinction is made between income and deductions with respect to their origin and destination.  It is the same for hours worked or deductions in kind for farm products, which are not accounted for.  Therefore, production costs can only be estimated. 

Further evolution came in the 70s when milk production had become a real specialisation on large sized farms where production costs can be calculated without any ambiguity as to the direct allocation of expenses. In fact, only the industrialised countries have reached this stage for some of their milk production.  In other parts of the world, milk production is still largely considered as a subsistence activity, and less often as a cash economy.  It is therefore just an approximation to speak of production costs and prices of milk (farm-prices).

1.2 What is milk?

From the farm to the consumer the journey for raw milk is long and complex. At present, milk is the basic raw material of many products available on the market: drinking milk, cheese, butter, yoghurts, evaporated and powder milk etc. 

For the farmer, the price of milk represents labour, fodder, cattle foodstuffs, breeding, farm rent, financial expenses etc.  For the processor,
the price of the raw material depends on the composition of milk (fat and
protein content), on the bacteriological quality, and on the seasonal market
etc.  For the consumer, the price of milk and dairy products represents the
possibility of varied food and he/she appreciates the large range of milk
products for their nutritive and gastronomic characteristics.

Consequently, an exact estimation of the price of milk does not exist and
the price can be obtained using several methods:

  • Through an arbitrary decision established by professional bodies and/or administrations.
  • Based on the value to the local market (drinking milk, yoghurt, cheese...) or on the world market (butter and skimmed milk powder)
  • In accordance with the marginal price of one gram of fat and one gram of protein, and in respect to quality.

This value can be based on subsidies given to exports (E.U.), deficiency
payments (USA) or otherwise in respect to non-subsidised markets (N.Z.,
Australia). In the developing countries, the price is essentially based on the local market for dairy products.

2.  The price of milk (farmgate price)

At what price is the farmer paid for his/her milk?

To this rather simple question, there is no clear and unique answer, even
though an annual indication of price may be proposed for one region, one
country, or even a group of countries (e.g. the European Union).

2.1 Price per kg or per litre?

Although most countries give prices per kilo and per ton of milk, some still
speak about a litre and a hectolitre of milk.  The general trend must be
retained, i.e. per kilo and ton as measure units for milk even though litres
are largely used.

2.2 Seasonal pricing of milk

In all countries, either in temperate zones or in tropical zones, there are
strong seasonal variations of the milk volume produced.  As needs do not
increase at the same pace as production, there are two prices for milk; low
and high seasonal prices.  Sometimes, a monthly variation can be observed
concerning the price of a kilo of milk.

The difference between the maximum and the minimum price can reach 30% calculated on the low price (for temperate countries).   This can be doubled on the open market in tropical countries.

To calculate costs and margins, the average weighted yearly figure should be used as a reference for the calculation exercise.  This simple accounting
method must not leave aside the possibility of achieving a monthly cost
price that will be compared with the purchase price proposed by the
collecting concerns.  Optimisation of profit should lead to more regular
production during the course of the year.  For non-grazing systems, this
target is easier to reach.

2.3 Payment in respect to quality

From one season to another, from one cowshed to another, milk can show large quality differences, which milk processors must take into account.  Two types of criteria are used for paying by quality:

  • Physio-chemical
  • Bacteriological

2.3.1 Physio-chemical criteria

Physio-chemical criteria usually relate to the fat content and protein
matter, the basic rate of which per kilo of milk varies from one country to
another. The basic price will be obtained for fat content generally between
3.8 and 4.2%, and a protein content between 2.9 and 3.4%. 

Each degree of fat content or protein matter (0.1% or 1 gram/litre) results
in a premium being paid above the basic rate and a reduction below this

2.3.2 Bacteriological criteria

In developed countries, there is a question of not collecting unsound milk
(e.g. containing over 100,000 bacteria or more than 400,000 somatic cells
for E.U. standards).

Testing for better bacteriological quality could result in finding specific
bacteria such as:

  • Coliforms
  • Staphylococcus
  • Listeria
  • Butyric spores

Similarly, the presence of antibiotics and the milk temperature during
collecting can be used as quality criteria and for price reduction.  In
developing countries, for small scale dairy plants the tests normally
carried out for physio-chemical and bacteriological quality are density to
determinate possible adulteration by water and acidity to determine
suitability for processing.

2.4 Farmgate price

The price paid to the producer by the milk collecting concerns (dairy,
collecting co-operative society) includes the basic seasonal figure,
increased or reduced by a certain amount, according to the quality criteria
found.  However, this price never includes a cooling premium, as this
operation is catered for and controlled by the collecting concern.  The
milk-cooling tank is therefore included in the collecting costs (see below).

The price of milk from the farmgate should be calculated as follows:

Seasonal basic price
+ Accounted for fat content rate
+ Accounted for protein rate
+ Accounted for quality (total bacteria)
+ Accounted for quality (Leukocytes)
- Accounted for specific quality criteria (Antibiotics, specific bacteria)
± Volume premium

= Farmgate price

Finally, an additional annual price increment can be granted to producers
belonging to co-operative systems:

  • as a further premium for quality
  • as a rebate on supplies
  • as a membership bonus.

However, the most important bonus amounts are paid at the end of the year on the volumes delivered during the low season (dry season, winter).  These different premiums and rebates can represent 2 to 5% of the farmgate price paid monthly.

3.  Milk Collection Costs

For a long time, and even today in many regions of the world, transporting
milk from its production site to a transformation unit or a consumption zone was, or remains a considerable obstacle, that sometimes cannot be overcome in order to develop the milk industry.  Improved transport requires good road infrastructures to ensure rapid and safe transport of a particularly fragile raw material that deteriorates very quickly. 

3.1 Collection

Early on in developed countries, milk was traditionally collected in milk
churns (20 - 40 litres) that were put on a vehicle from the dairy, which
stopped at each farm to collect the full churns in exchange for empty
factory cleaned churns.  As the farms had no refrigeration systems, the milk was collected twice a day (morning and evening milking), seven days a week These heavy and expensive systems for collecting milk still exist in many developing countries or when milk is produced on small more or less isolated farms.  In addition to the high cost of this type of milk collection,
quality control of the milk did not exist and the churns were just checked
to see whether they contained the right amount.

In mountain village dairies or in the bush, the milk churns are also brought
to the factory by the milk producers.  In this case, the purchase price of
the milk is increased by a few cents per kilo in respect to the basic price.

In developing countries the milk producers bring their milk to the
collecting centre.  Once a day, a large capacity tanker comes to collect the
milk collected during the day. Therefore, with only a few stops at different
centres the tanker can collect the milk coming from many producers.  The
advantages of this system are numerous:

  • reduced collecting costs
  • maintained milk quality
  • easier control of volumes and quality of the milk.

All these operations can be made by one person alone; furthermore, it is at
the collecting centre where documents to pay the producers can be prepared.

The system of primary collecting centres spread over a radius of 20 to 50
kilometres around the factory is the best method of collecting milk produced in dispersed areas (small producers in mountain or remote areas) in good economic and hygienic conditions.  This is the solution to be adopted wherever milk is difficult to get out from where it is produced with the assurance of a certain and regular outlet, and is an encouragement for
producers to produce more and better milk.

The milk collection process stops at the factory when the milk is put into a
holding area or storage tank.

Cost of the raw material upon arrival at the factory =
Ex-farm price paid to the producers  +  Collection Costs

3.2 Collection cost

This is an integral part of the cost of collecting and comprises the following:

  • purchase and maintenance of the equipment
  • cleaning of the milk churns at the factory
  • supply of maintenance and hygiene products for the cooling tanks
  • consumption of water and electricity for chilling.

When collection is made in bulk, the milk is kept in cooling tanks with
direct expansion.  However, concerning milk collecting in churns, these are
put in a tank where cold or chilled water circulates.

3.2.1 Sharing of the chilling costs between the producer and the factory

It has been stated in this paper that expenses involved in storage and
cooling operations related to milk collection and are therefore the
responsibility of the factory. 

3.3 Possible Options 

Organisation of milk collecting will largely vary depending on the company's size and also in respect to geographical, climatic, seasonal, legal etc., constraints. Two options may be considered, depending on the size of the enterprise.

For the small sized enterprises
For small-sized enterprises, milk collecting will often be limited to milk
collecting in optimal time conditions in order to conserve the milk's

For units producing under 2,000 l/per day, in developing countries, several
options are possible.  In the best case, a four-wheel drive vehicle with a
platform will make one or two rounds with churns that must be washed at the factory.

Therefore, milk-collecting costs will include the following items:

Fixed expenses, namely:

  • amortisation of the vehicle, the churns and small equipment
  • insurance and taxes concerning the vehicle
  • garage and overhauling costs
  • driver's wages
  • attribution of building costs

Variable costs

  • petrol, oil and tyres
  • overhauling of the vehicle
  • churn washing costs.

In the event of very dispersed collection areas, two or three primary collecting centres can be organised and managed by one of the producers. Milk brought to these centres will be by the producers themselves.  In this case a supply premium will be added to the costs generated by the running of the collection centre.

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© FAO, 2000