29 May - 28 July, 2000


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


Poster Paper: The System of Milk Payment in Nepal






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by R.M. Upadhayay, Senior Dairy Specialist, Nepal


Historically, milk was not supposed to be sold. Probably it was so because
every house hold used to produce milk for their own consumption. Milk has, however, been traditionally processed into country butter, Tschurpi,
Shergham, etc. and ghee, all indigenous products. Butter milk used to be
served to guests in place of water, free of cost. Processed products were
bartered or sold for cash within and outside the country. The products from high mountain areas found their market in the north and from plains in the south across Nepalese borders.




Later, as the population started growing and the urbanization process began, milk went into market to serve those who could not afford to keep milking animals. In rural areas milk used to be bartered with rice on one to one basis volume wise. In urban areas milk was sold on cash or credit by
producers directly to consumers. Later on middlemen entered into the
marketing channel. Milk shops came up in cities like Kathmandu about 100
years ago. It seems that there was no system of price fixation. Prices were
bargained between the buyer and the seller and payment was made in cash at the time of purchase or after a week, a fortnight or even a month, as
mutually agreed by both parties


It was only in early 1950s that a pricing and payment system was introduced in Nepal. It was the time when HMG of Nepal first initiated buying milk from farmers to process it into cheese and other milk products. The Dairy Development Section, under the Department of Agriculture introduced a system of milk payment based on criteria of price  etermination and frequency of payment.


Early stages:

Slab system:
Milk price was determined on the basis of fat content in milk. Different
rates were fixed for milk containing different ranges of fat, say 4 to 6, 6
to 8, and above 8 percent of fat, with proportional variation. For example,
if 4 to 6 percent milk price was Rs. X per unit of milk, the price for 6 to
8 and above 8 percent fat milk was fixed at Rs 1.5 X and Rs 2 X per unit,

During those times, all the milk brought to the collecting centers were from
buffalo. During the late lactation period buffalo milk tested up to 13% fat
(Personal experience from this author). The payment was made at intervals of 15 days.(Payment is still made at the same frequency).

This system worked fairly well for some time. Later the farmers became
clever enough to manipulate the milk in such a way that no milk was received testing more than  8.5%, and almost all the supplies tested nearer to the lower level.

Linear fat percentage system:
Learning lessons from above experiences, a linear fat percentage rate was
introduced. For example, Rs X per fat percentage per unit of milk was fixed
for all milk deliveries which contained above the minimum fat level fixed at
5%. A penalty rate was fixed for milk testing less than 5% fat.

This system worked very well. Farmers realized that they did not gain
anything by adulterating the milk. This system was in practice for long

Present: Fat + SNF system:
Improved cross bred cows entered into the farming system in 1980s. Farmers selling cow milk got very low rate because of low fat in milk. It was not possible to fix different rates for cow and buffalo milk because it was
practically impossible to detect and differentiate between these two types
of milk under field conditions. It was even more difficult if the milk was

Thorough study of this problem was made and a dual axis payment system was introduced. A minimum level of fat and SNF was fixed. Different rates per kg of fat and per kg of SNF were introduced.:

Different rates per unit of fat and SNF were fixed on the basis of distance
and season of procurement. However, the seasonal differences in price are
not sufficient to induce farmers for adjusting their breeding system to
bring more animals in milk during the lean season.

This double axis payment system has brought many problems of adulteration with sugar soda ,starch, urea etc. in order to raise SNF. It is very difficult to detect these adulterations at field level, and. NDDB is now
preparing a proposal for a new payment system.

Quality Payment System :
The present system is based only on fat and SNF. The new, incentive payment system under preparation in NDDB will be based on fat and protein content and on microbiological quality. Milk will be graded according to quality, and high quality milk will be paid a premium price, whilst low quality milk will be paid a penalty rate.

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FAO, 2000