ANNEX 5

AN APHCA BRIEF ON SMALLHOLDER DAIRY EVELOPMENT

Supporting opportunities for the smallholder dairy sector in Asia
The challenges for regional stakeholders

1. Dairy consumption in Asia and the Pacific has more than doubled in twenty-five years, rising 4 percent annually to reach nearly 240 million tonnes in 2007, more than one-third of global totals. Nearly four-fifths of these gains have been housed in South Asia which accounts for 60 percent of the region’s bovine and ovine populations and for 20 percent of global milk consumption.

2. In 2006, a possible long-term structural adjustment in international dairy markets, characterized, in particular, by tight global supplies and high prices as a result of elimination of EU export subsidies for dairy products shocked market participants. Combined with long term drought in Australia and a potential long term investment slow down in that industry, which accounts for 10 percent of global exports, these developments hold unprecedented opportunities for smallholder dairy operations in many developing countries. This is particularly true in Asia where over 80 percent of dairy animals are raised by backyard or small scale farmers who have provided a critical and unique ingredient in the region’s ability to maintain robust gains in milk production. Certainly one of the catalysts for supporting local dairy development from the perspective of policy-makers is highlighted by FAO’s recent estimates that dairy product imports by developing countries will reach US$ 21.3 billion in 2007, up from $13 billion in 2006. This is fuelled by a two-thirds increase in import prices and, in combination with escalating prices for basic food stuffs such as maize, rice, and vegetable oils, raises regional concerns about food security.

Local responses to growing consumption needs

3. Translating into opportunities for local producers, strong consumption gains in Asia over the past 10 years have supported the dairy sector with production rising from 138 million tonnes to 222 in 2007. In fact, production gains in Asia have accounted for nearly 60 percent of global totals over the past decade. Growing demand by both urban and rural consumers in South Asia, a region of strong dairy traditions, was supplied by smallholders holding 2-5 cows; these are the producers who reputedly account for nearly 80 percent of milk production.

4. Characterized by a long historical tradition of both urban and rural milk consumption accompanied by strong informal rural milk market systems, consumers in South Asia consume nearly 93 kg/caput/annually (compared to the 113 kg/global average). However, the explosion in consumer acceptance of dairy products over the past decade has been in East and South East Asia where per capita consumption levels are generally one-third the levels of South Asia.

5. Coming from a low base characterized by low traditional preferences for fluid milk, double digit consumption gains in have been witnessed in countries like China and Viet Nam where annual gains since 2000 in this region have exceeded 11 percent/year. These gains have been fuelled by growing incomes, changing diets and demographic trends which favour more western diets and strong generic promotion of milk products, including the promotion of school milk programmes.

The role of imports in supplying local consumption

6. Asia, a region where GDP growth is estimated at 5-6 percent annually, constitutes an important market for the major dairy exporters, dominated by New Zealand, the European Union, Australia, the United States of America, and increasingly Argentina. While the region’s dairy product imports, particularly those of milk powder, have nearly doubled over the period, from 10 to an estimated of 24 million tonnes in 2006, the import dependency of the region has remained stable at nearly 9 percent.

7. Regional averages, however, tend to mask local realities and, in fact, while dairy product imports by South Asia, limited by strong consumer preferences for fresh milk, availabilities of local product and barriers to imports, constitute only 1 percent of domestic consumption, imported milk products into the South East Asian region supply nearly one-quarter of domestic requirements. When calculating dairy imports as a share of processed milk, this share jumps to over 90 percent in some countries.

8. In fact, Asian imports constitute more than half of global totals in milk products, and in countries like Sri Lanka, the Philippines, and Viet Nam, where tariff levels are very low and consumers are familiar with and favour reconstituted milk products, import dependency has reached over 80 percent. In China, a country which has witnessed double-digit consumption gains over the past decade, imports constitute only 6 percent of total consumption. However, with imports estimated at 2.5 million tonnes, China constitutes the largest dairy product importer in the world, followed by Mexico, the Russian Federation, Egypt, Indonesia, Malaysia and the Philippines.

The opportunity …….

9. International market prices of dairy products, rising well over twice their levels of one year ago, hold considerable opportunities for future dairy development in Asia. While prices of internationally traded milk powder are expected to subside gradually from their historical peak of near US$ 5 000/tonne in late 2007, the perceived competitiveness of large holder dairies heavily reliant on increasingly higher-priced imported inputs is expected to erode. Increasingly large processors in the region are gravitating towards local suppliers of fresh milk, and in many regions, this implies stronger institutional linkages with smallholder producers, the characteristics of which differ by country and by local conditions within countries.

10. In some countries, depending on their linkages with international markets and the substitutability of fluid milk with reconstituted or UHT milk, domestic prices have been rising. This affords interesting opportunities for local dairy development. In some countries, however, smallholder participation has been constrained by government administered pricing schemes for milk or strong monopsony power by processors or collusion in price setting.

Changes in dairy prices since late 2006

The Challenges……

11. To ensure broader stakeholder engagement in current market opportunities for dairy, it is clear that the opportunities for smallholder dairy producers can only be understood within the wide range of influencing factors: economic, institutional, commercial, legal, technological and social. However, effective strategies for enhancing the contribution by smallholders to growing livestock product demand is complicated by the fact that the specific constraints/opportunities facing the sector differ not only by country but by specific localities.

12. Consequently, useful models of small and large-holder milk producers, which are characterized by the specific linkages within the value chain, need to be reviewed and analyzed. It is particularly important that the enabling factors which are critical in successfully forging linkages between smallholder suppliers, processing facilities and traditional markets for fluid milk and other locally acceptable dairy products be identified, weighted and ranked. The selection and promotion of acceptable models need to be based on local conditions, market access, cultural factors and consumption patterns. These models could range from enterprise-driven smallholder dairy operations in the Philippines and Viet Nam, to cooperative development in South Asia, to strengthening opportunities for subsistence farmers in Bangladesh.

APHCA’s response

13. In anticipation of generating guidance on best practices involved in context specific sustainable smallholder dairy development, lessons learned in the region need to be reviewed and analyzed as to the critical factors supporting their success or leading to failure. It is critical that the context specific/organization issues be analyzed to determine possibilities for increasing productivity, scaling up and/or replication of specific models. It is only then that specific entry points for the various stakeholders, whether they be producers, processors, or policy-makers, can be identified