1. The recent boom in world dairy prices combined with long-term growth prospects for dairy products in Asia presents a promising opportunity for strategies to include and upgrade smallholder participation in these markets. Smallholders and the national and sub-national (local) dairy value chains may be able to respond to growing market opportunities, but there is no guarantee of this outcome. FAO is working to develop a framework for understanding the ability of smallholder dairying in participating countries to respond to these opportunities. The framework, tested in the three value chain case studies, reviews and analyzes the related abilities of value chain participants to respond to market opportunities, upgrade to meet new market requirements, address challenges posed by international competition, and to provide sustainable livelihoods to value chain participants as the competitiveness of the smallholder dairy enterprise.
2. The competitiveness framework is a set of analytical steps that constitute a structured process for analyzing the current situation of smallholder dairy as an enterprise in any given national or sub-national marketplace in a way that can provide useful comparisons across the participating countries. Within the context of the regional strategy on smallholder dairy development, the goal of which is to enable participants to succeed in many different environments, this framework attempts to develop a common language that can help with the discussion of common challenges and differences between markets25. It is based on the approach that all participants can experience improvements in smallholder dairy performance, though some countries may have more favourable overall conditions and greater success in the long-term. And finally, the framework is a method for identifying which models are most suitable to address and correct or overcome specific challenges, or to respond to specific opportunities.
3. Using the framework entails a number of analytical steps. Mapping and diagnosis of the dairy value chain yields an understanding of the issues facing smallholder dairy. In the framework, these issues are categorized into a standard set of performance/competitiveness drivers that fall into five areas. Each issue is then evaluated for whether it is subject to the influence (or control) of: (i) governments, (ii) firms, (iii) whether it is can only be partially controlled, or (iv) whether it is entirely out of the span of control of local actors. The relative favourability or unfavourability of each issue is then determined, normally through discussions among a variety of stakeholders. Existing models are then evaluated and scored for their effectiveness in addressing the constraints of the environment. In this way, the framework is helpful in understanding what elements of specific models provide solutions to specific challenges, and what challenges require new policy and organizational innovation.
4. The five Performance-Competitiveness Drivers categories are: (i) demand conditions, (ii) factors of production and utilization, (iii) market and competitive structure, (iv) related and supporting industries, including producer services; and (v) government and business enabling environment. The model captures economic, technological, institutional, governmental, and market structure issues across the value chain, consequently serving as a useful framework for analysis.
Steps in prioritizing performance-competitiveness drivers
5. The competitiveness framework includes three steps in prioritization of identified performance and competitiveness drivers. Keeping in mind what national-level policy and program interventions can realistically achieve is very important in regional strategy formulation. The first step in prioritizing which performance and competitiveness drivers to address entails understanding whether opportunities and constraints can be controlled or influenced by government, by firms, those factors that are “quazi-controllable,” and those that cannot be controlled.
6. The second and third steps in prioritization entail analyzing the drivers (identified above) to determine their relative influence on the competitive position of the value chain. This is accomplished by assessing their favourability or unfavorability to the smallholder dairy enterprise on a scale of -2 (Very unfavourable) to +2 (Very favourable), and assigning each issue a relative weight (importance) compared with other factors in a given category. Each category of issues represents a weight of 100%, and sub-factors are assigned a value reflecting their significance to the enterprise as a whole. By multiplying the favourability score by the weight, each sub-factor is assigned a positive or negative value, and the performance of the category as a whole can also be analysed.26
Evaluating model effectiveness
7. Evaluating and choosing models to scale up and/or replicate requires understanding what a particular model addresses well, and also a recognition that there may not yet be an appropriate model developed to overcome specific challenges or take advantage of current opportunities. The most fundamental question considered in the model evaluation step is, “whether a particular model responds effectively to the specific, high-priority challenges and opportunities that smallholder milk producer faces in my country’s environment?” The framework uses a simple scoring system to address this question and provides an opportunity to review the effectiveness of various smallholder dairy models in addressing a few of the key opportunities and challenges.27
8. The existing framework analysis of smallholder dairy competitiveness focuses at the system almost exclusively from the “inside” – that is, from the perspective of upgrading what currently exists. However, research has demonstrated that the attractiveness of smallholder dairy as a remunerative option declines quickly with rising rural wage rates. The attractiveness of dairying as a remunerative activity appears to depend on low labour opportunity costs (as represented by low rural wage rates) and lack of access to other savings and investment vehicles.
9. The implication of this analysis suggests that “next steps” for smallholders should be considered very carefully with respect to the rural wage context. Where rural wages are moving towards convergence with urban wages (though these cases may be somewhat rare), it is likely that the value of ‘other returns’ to milk production will decline (particularly manure), reducing both the competitiveness and the desirability of smallholder dairy production.
10. In these cases, encouraging smallholder strategies may be less favourable than considering other forms of local dairy enterprise development in which smallholders can participate, focusing on those that can reap the economies of scale required to make dairy a favourable option in a higher rural wage context.
25 For consistency and understanding the following SDD generic characterisations are adopted. These are based on the findings of the country studies commissioned by the project and will of course vary according to the local context.
Smallholder milk producer: family producing milk mainly for home consumption and selling any surplus, i.e. subsistence production.
Small dairy farmer: someone specialising in commercial milk production with up to 20 dairy cows in milk. Many subsistence smallholders aspire to up-scale and become more intensive small dairy famers.
Informal dairy market: usually small-scale, short chain / local market, with / without processing, lower-cost end product, price more important than quality to consumers.
Formal dairy market: usually medium to large-scale, long chain / more distant market, with processing, higher-cost end product, quality and safety important to consumers. Informal and formal markets often overlap.
Dairy value chain: the stages through which milk and dairy products pass from farm to final consumer.
26 This category structure is derived from Harvard Business School Professor Michael Porter’s diamond model of competitive advantage.
27 The framework findings from the country case studies reveal that the challenges faced by each of the three countries differ significantly both within and across driver categories (for specific information, go to workshop paper and presentation located at the following web site: http://www.aphca.org/reference/dairy/chiangmai_workshop_feb08.htm
