Theme 1: Past experience and learning from successful and unsuccessful smallholder dairying initiatives

Smallholder dairying in the Asia-Pacific region

Based on synthesis of nine country lessons learned studies from
Bangladesh, China, India, Mongolia, Pakistan
the Philippines, Sri Lanka, Thailand and Viet Nam

Brian Dugdill, Dairy Development Specialist, FAO
Nancy Morgan, Livestock Policy Officer, FAO, Bangkok

Dairying is practiced by millions of dairy operators � smallholders and small traders � in many of the countries of the Asia-Pacific region, where milk and dairy products often fulfill important cultural and social functions as well as providing nutritional and economic benefits. Over the past two decades most countries in the region have been implementing economic reforms, leading to rapid growth and increasing urbanisation. The adoption of market liberalization policies, in addition to heavy farm subsidies in the industrialised countries, has resulted in the domestic markets of some countries in the region becoming increasingly dependent on highly competitive, but increasingly volatile global dairy commodity markets.

Emerging changes in the Indian dairy industry

Meeta Punjabi, UNFAO, New Delhi

The Indian Dairy Industry is at cross roads. An industry which has strongly been dominated by the government sector and working in co-operative mode is going to face keen competition from private sector in procurement and marketing of dairy products in the coming years. Dairy co-ops have performed well in some states; for example, the AMUL co-operative in Gujarat. But in many states, these institutions are weak representatives of farmer interests. Their functioning is more of a parastatal, characterized by strong linkages and interference from government. Furthermore, private companies, depending on their market power, tend to use the cooperative price as a bench marker to determine farmer milk prices. In this situation, weak co-ops competing with private sector may not serve the farmers they represent.. Key questions for policy makers, industry players and smallholders in this context are: Which models better serve the interests of the farmers? What policies are conducive to support their interests?

Overview of the Indian dairy sector

India is the largest milk producer in the world, with milk production at 100 million MT and valued at Rs. 1,179 billion (2004 -05). This is almost equal to the combined output of paddy and wheat. The country also has 1/5^th of the world bovine population which consists of 45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows. Milk productivity per animal is very low at around 1,000 kg/lactation, compared to a world average of 2,038 kg/lactation. Low genetic potential, poor nutrition and lack of services are key ingredients for low productivity. However, the diverse nature of India implies that different regions in India are at a different level of dairy development. For examples, Punjab and Maharashtra can be considered as well developed dairy states while Tamil Nadu and Andhra Pradesh fall in the category of states with average progress. The states of Bihar, Orissa and most NE states fall in the category of less developed areas.

Tremendous growth as a result of Operation Flood

During the period of 1950s and 60s, milk production in the country remained stagnant. Major dairy policy changes were introduced under Operation Flood, initiated in the 1970s. The key objectives were: linking-up rural producers with the urban consumers through pricing, procurement, processing and marketing, and large public investment in milk processing sector (chilling plants, milk processing and product manufacturing plants) through cooperatives. An indicator of success was that, juxtaposed to the growth rate of agriculture which was below 2%, growth in the livestock sector exceeded more than 4.5%. The biggest impact of these changes was on rural nutrition, employment, income and women empowerment.

Dairy and livelihoods: Opportunities for pro-poor impact

Dairying in India is a small farmer activity the proceeds of which comprise about 1/3rd of rural incomes. Small and marginal farmers own 33 % of land (<2 hectares) and about 60% of female cattle and buffaloes. 75 % of households own cattle with ownership averaging 2-4 animals. As dairying is a part of an integrated farming system, feed is mostly residual from crops (paddy straw, ground nut straw) and serves as an inexpensive input into the dairying process. In addition, dairying provides regular income to the farmer throughout the year whereas crop income is seasonal – risk minimization mechanisms. Further, livestock is a security – an asset to be sold in times of crisis.

Marketing

15 % of the marketable surplus goes through organized sector, where the rest goes through the traditional unorganized sector. Until recently the organized sector consisted mainly of co-operatives. The AMUL model of Gujarat was replicated in all states of the country with NDDB as the lead agency. The co-operative are traditionally 3 Tiered structures - Village society, district unions federated at state level. The Model adopted with some variations in different states However, in many cases because of heavy government interference and weak democracy at the village level, co­operatives have achieved limited success in various states.

Regulatory environment

The dairy sector was de-licensed in 1991. However, some controls were reinstalled through Milk and Milk Products Order 1992. In particular, these included the specification of collection areas/milk sheds and fixing processing capacity. With the revised MMPO in 2002, almost all controls stand withdrawn. Until recently, with strong government controls, co-operatives did not have any competition from the private sector. After liberalization, however, private sector investment in dairying has increased considerably. To strengthen co-operatives in the face of private competition, a MACS Act was passed in 1995 with the objective of minimizing government interference and strengthening democratic societies at the village level. Finally, the MACS societies do not have to follow prices set by the Co­operative.

Livestock inputs and services

Agriculture policy is State-determined in India with the Department of Livestock housed with within the Ministry of Agriculture. The Department of Livestock has a network of veterinarians providing livestock veterinary services with many of these services fully subsidized by the government. However, due to financial constraints, partial cost recovery has now been initiated in several states. Efforts to enhance coverage through paravets and community based animal health workers (CAHW) have been initiated. Co-operatives are also involved in feed distribution at subsidized rate to the member farmers.

Future potential

With increasing incomes and increase in population, the dairy industry is likely to have a high growth rate in the coming years which portends opportunities to enhance small farmer incomes from through the development of dairy enterprises. However, it is important, on an enterprise basis, to assess the critical strengths and weaknesses within the dairy value chain.

Input challenges for the sector

• Breeding: Efforts have been undertaken to enhance breeding facilities through the National Cattle and Buffalo Breeding Program. However, the performance is far for satisfactory. Only small percent of animal bred are covered by artificial insemination with the remainder dependent on natural breeding.
• Health/Extension: State veterinary departments are the key players. However, while they have well qualified technical manpower they lack financial resources. NGOs, private veterinarians, and paravets are also providing rural services with partial or full cost recovery has been started in many states. This has enhanced the reach as well as the quality of services. Regions with high producing dairy animals, willingness to pay for the services and private veterinary services are flourishing. However, in general, extension services have been severely lacking and lack of information about good feeding practices does not enable farmers to capitalize on potential market opportunities.
• Feed : The availability, quality and the cost of feed is an issue. 70% of arable land is dry or rain-fed with erratic rainfall resulting in poor productivity of cereal grains and low output of dry fodder. In particular, the availability of land for fodder grass is an important issue as farmers prefer to plant high value crops to maximize returns from scarce land. While subsidized feed is available through co-ops, the quality and affordability are issues.
• Credit: Farmers have highlighted lack of access to credit as a major factor in expanding dairy activities. Access to institutional credit is very poor while credit through informal channel is charged high interest rates.

Marketing issues

Two major dairy marketing channels are predominant in India: the organized channel, which has mostly served by the co-operative, and traditional channels in which traders procure milk from rural areas and sell in urban areas. Milk prices are typically set by the co-operatives and in India, the fat content in milk is very valued. This leads to prices for cow milk being lower than that of buffalo millk. Premiums are established for fat content; hence buffalo milk fetches higher price, while cow milk pricing is based on total solids. For example, a farm price is Rs. 11 for cow milk and Rs. 14 for buffalo milk (0.25 USD & 0.35 USD). This compares to a 1 liter bottle of water which costs Rs. 12. The trader, as well as an emerging private company, usually pays a small amount higher than the co­operative with the co-op price serving as a benchmark price. Quality of milk is also an issue, and the bacterial load is high due to the amount of time taken to reach the bulk cooling/chilling center. In a large part of the country, there are no testing facilities at the village level. However, there are ongoing government efforts to enhance “clean milk production” by improving practices and providing subsidies and loans to develop this infrastructure.

The competitive environment

While historically co-operatives have not had much competition from the private sector, in recent years, private sector activity is increasing. Consequently, one priority for smallholders is to strengthen co-operatives to allow them to better compete with the private sector. Regulatory changes have been introduced in the co-operative sector through MACS and formation of “Producers company”.

Key features of MACS (Mutually Aided Co-operative Societies)

• Two tier, village level and union level, no state federation
• No government control in administration
• Democracy at the village and union level
• Freedom in setting prices
• Accountability and ownership at the village/union level
• Strong governance and internal audit system
• More freedom to village level societies (more than 1 soc/village)

Three typical value chains in India

Andhra Pradesh state in South India is a leader in dairy activity and has experimented with various new models for dairy. It was the first state to introduce the MACS Act. Also, the private sector in this state is very active. Of the three chains chosen for this analysis, two are in Andhra Pradesh and the third is a state co-operative from a lagging region. The first model is a large private sector dairy, the second a MACS society in AP, instituted in 1998.

Model 1: The Private Dairy

This Dairy is head quartered in Andhra Pradesh. It was initiated in 1992 after MMPO permitted private dairies and is now traded on the stock exchange. Daily milk collection is about 7 lakh liters per day. Milk is collected from 150,000 households and 3500 villages in three states, though the major operations are in AP. The company is now serving 3 main metros with fresh milk – Hyderabad, Chennai and Bangalore, and is now ready to enter Mumbai.

The Model

The company procures milk through agents in the village with the quantity procured dependent on the personal relations of the agent with the villagers. Several villages have more than one agent, depending on the social structure as well. The company is not directly involved with the farmers and negotiates the price with agent. It is not involved in setting the price that the agent gives the farmers.

The price paid by the agent to the farmers is slightly above co-o price in the state. Many times, the agent in the village is competing with agents of other private companies for milk procurement. Consequently, the agent oftentimes gives loans to farmers to maintain loyalty. Collection areas depend on milk density and are in areas in which district co-ops are less active.

Model 2: MACS Society in Andhra Pradesh

Dairy activities started in the district in 1971. This district union has now delinked with state Federation and in 1998, following the inception of MACS Act in1995, transformed itself into a MACS society. The union is currently collecting milk from 650 villages in the district. Milk collection is 60,000 liters per day, likely to go up to 100,000 in the coming 2-3 years.

Business Model of MACS

As per MACS norms, this is a 2 tiered operation at the village level and district level. The village level is managed by the village society, district level by BOD. Both of these societies are run by members elected every year. The village level society itself is registered as a separate MACS society and has the freedom to use its own profits. 10% of sales are allowed at the village level to earn higher profits.

Model 3: State Co-operative

The state co-operative is an apex level Dairy Cooperative Society registered under Cooperative Society Act – 1962. Currently, milk procurement is from 12 district unions. About 322,000 liters per day is collected form 3800 village societies and 224,000 farmers. Currently, there is not much competition with private sector in the area.

Comparative analysis of the chains: Support along the chain

Input supply

In the Private Dairy, there is no provision for input supply except for occasional loans given to farmers. The MACS Society provides breeding and health services through linkages with NGOs/State Dept. They also manufacture quality feed and supply to farmers at subsidized rates as well as organizing thrift and credit co-operatives which extend credit for animal purchases. Finally, veterinary medicines are available at cost at extension meetings organized for farmers. In the State Co-operative, feed is available at subsidized rates through the village society while breeding and health services can be procured through the State Dept. There are no facilities for loans; while medicines are available at cost, adequate supply is a problem.

Production

At the farmer level, differences are minimal between the three models because of a lack of extension activities carried out by any of the three agencies. However, it is possible that in the case of the MACS society because of extension and provision of feed, producers may be using more and better feed as compared to crop residues However, this needs to be confirmed.

Milk procurement

In the Private Dairy, milk purchases are done through the agent who decides what price he will give the farmer. This is usually decided based on competition with agents of other companies and based on the declared co-op price. Testing is done in very few cases. This has implications for farmer confidence in the prices received. In the MACS society milk collection is done through Village MACS society which is democratic functioning society. The MACS has the freedom to decide the price and does not have to follow the co-op price. Prices declared by the Union are usually higher than Co-op pricing and testing of milk is conducted through electronic milk-o-testers. In the State Co-operative, collection is done through done through the village society, which is run by a president who wields considerable power. Farmer prices, fixed for cow and buffalo milk, are declared by the co-op which typically are low. In most cases, there is no testing. There appears to be a lack of uniform pricing with influential people in the community receiving better prices.

Processing/Marketing

The Private Dairy processing plant is ISO certified and meets all quality requirements. They produce a variety of quality products catering to children and younger generation (yoghurt, flavored milk), mainly in the urban metro market. The MACS society has good quality products, but no certification as yet and the products are largely traditional products. They are selling milk to urban consumption areas, while tapping the rural markets as well through village societies (small packets, 250 ml). At the Co-operative, quality of the milk continues to be an issue though it has improved in the recent years. The co-op is also largely selling traditional products, mostly in the urban market.

Future growth

The Private Dairy is not involved in dairy development activity and is only focusing on procurement. Faced with increasing competition, they will have to move to newer areas for expansion. In the future, if MACS becomes strong in these areas, procurement will be affected. The MACS society involvement in dairy development activity will help them to grow and increase milk procurement in this area. They are geared to face competition from private sector because of the community linkages at the village level. Finally, the Co-operative, because of low involvement of community, will find it difficult to compete with private sector. Difficulty in competing will also be magnified by their lack of variety and quality of products.

The way forward

It is evident from the above discussion, that the MACS society best represents the interests of the farmers in the coming years, with stiff competition from private sector. The Act was passed to make the co-operative strong in face of competition, however, the act is most practiced only in AP, with other states having yet to put the Act in place. In AP itself, the previous government was supportive, but the new government is not supportive of MACS and has stopped further conversions of district unions to MACS. In the past few years, about 650 MACS societies have registered in the state.

Smallholder dairy development in Viet Nam

Patrice Gautier, Asian Veterinary & Livestock Services

Viet Nam has a relatively short history in both production and consumption of dairy products. Five main waves of development of smallholder dairy can be described:

1. Early eighties: the first smallholders started in the 4 provinces (Son La, Ha Tay, Lam Dong and Ho Chi Minh City) where state dairy farms had been set up by the government.
2. During the nineties, dairy smallholder models started in 7 additional in provinces nearby the major two cities (Hanoi & Ho Chi Minh City).
3. From 2000 to 2004, with the implementation of the first Dairy National Plan and the import of dairy cattle, a more rapid development was reported in 22 new provinces.
4. From 2005-2007, the number of dairy smallholders and of dairy cattle decreased in the Northern provinces and especially in provinces witnessing the more recent investments in the sector.
5. Since the end of 2007, a new wave of development is observed due to the major increase of world milk prices which has resulted in a major increase of the price of fresh milk.

Today while most of the milk is produced by up to 20,000 smallholders, they account for less than 1% of the total number of livestock smallholders in Viet Nam. The country�s herd is now around 110,000 dairy cattle with a total milk production of around 220,000 tons per year. Around 70% of the production is located in and nearby Ho Chi Minh City. The herd includes around pure Holstein- Friesian (15%) and crosses between HF and the Lai Sind (already a cross between Red Sindhi & a local small cow). Most smallholders have less than 5 dairy cattle raised in a zero-grazing way with the average herd size per farm tending to increase over the years. Elephant / king grass and local grasses are the main forages given, although maize silage and new tropical and non-tropical forages are being more used. Average production levels are reported to be around 4,000 kg (pure-HF) and 3,500 kg (HF crosses) per lactation. However, there are great variations and generally a very high calving interval.

Milk is sold to nearby milk collection points generally equipped with cooling tanks, then transported to more than 5 private processing factories. These factories produce pasteurized, UHT milk, yoghurts, etc. The informal market accounts for less than 20% of local consumption. Consumption has constantly expanded since the mid-nineties and has now reached around 1 million tons (or 10 kg per capita). However, imports of dairy products represent around 80% of the consumption.

Overview of models and description of studied smallholder dairy models

More than 90% of dairy producers have less than 10 cattle. They are found mainly in lowland areas where the human density is high. A small percentage of producers are also located in more upland locations which support the few large-scale dairy farms. Smallholder dairy models can therefore be found in almost half of Viet Nam�s provinces.

Four models were visited during the study:

1. Tien Du / Bac Ninh
2. Ba Vi / Ha Tay
3. Don Duong / Lam Dong
4. Hoc Mon / HCMC

In these models:

1. Smallholders are either less than 1 hour away or more than 6 hours from processing factories.
2. Weather is tropical for most of them but with a cooler season for northern Viet Nam. In Lam Dong, the weather is less tropical and more temperate.
3. There are strong differences between the models in term of forage availability, distance from market, competition between processing factories.

Key reasons for success

The recent increase in milk price makes these models� success more obvious today. Three of them have been operating for 25 years and one for 12 years. These models were not so much affected by the decrease in number of cattle, dairy smallholders observed from 2004 to 2007. However, had the recent increase in milk price had not happened, some of them would probably have started to reduce production too (particularly in the north).

The key reason for these models to be still operating today (despite the low profitability during some years) is likely to be that smallholder dairy developed there in a gradual manner. Many initial weaknesses (low technical skills of farmers; weak local services; milk marketing) were addressed through experience rather than artificially corrected. Over the years these systems maintained an adequate and favourable balance between the models� strengths and weaknesses. Indeed, one model may have a weakness that another one does not have, but the negative impact of this weakness may be balanced by the positive impact of some strengths.

The common favourable factors identified in these models (and not or less observed in models that have been unsuccessful) : Experience > 12 years (rather than rapid training); Good local service providers & supported by external actors (NGO, Nestl�, Dutch Lady & state companies); existence of a milk buyer; appropriate feeding; appropriate breed (with management / environment).

Options for improvement, expansion and replication

A pre-condition for the further development and possible expansion of these dairy models is a better measurement and analysis of the current production and economic performances of smallholder dairy units. This can be done initially via a simple and cost-effective system that records and analyses the animal and the farm results. The challenge is to determine if improvement is possible; to identify the elements that can be improved; to assess how these elements can be improved; and to measure if improvement occurs after actions.

Improvement of productivity is essential if smallholders want to survive a sudden decline in world prices of milk. Some of the needed changes (in addition to the recording & analysis of performances) may be:

1. Farmers moving up in the value chain (through decreasing the role of independent milk collectors; intorudcing more transparent payment of milk)
2. Mandatory minimal standards for milk quality
3. Better management of heat stress
4. Adequate supply of essential veterinary medicines
5. Continuing professional education/training for farmers and services
6. Up-scaling herd sizes and/or number of farmers

Replication of the existing models can be successful if:

1. There is an active & transparent dissemination of lessons learnt from successful & unsuccessful models
2. SWOT analysis are conducted
3. There is a good selection of new dairy candidates (�dairy is not for any farmer!�) and a mandatory training course for them as well as for their new support services.

Key reasons for failure of other models

The models that have been set up from 2000 onwards have experienced serious difficulties, if not almost complete failure, during their first years. But following the recent milk price increase, development could occur again in these �inexperienced� dairy locations. These models had to deal with a combination of several weaknesses at the same time, possibly similar to the ones faced by the older models during their initial phases. However, the new models started in a period where (1) the cost of heifers was very high; (2) the price of milk was very low.

Summary of reasons that explain the difficulties of some new models:

1. High speed implementation / Insufficient SWOT analysis
2. Low experience + Low milk price + High heifer price + High feed price
3. Small scale milk production and no interested dairy processor
4. Insufficient support services (public support was there but inexperienced; whereas private was not there yet because of small production)
5. Lack of learning from successful models
6. Farmers discouraged because of lack of trust in dairy processors

Conclusions

Smallholder dairy in Viet Nam is still a young activity. Major gradual changes could occur in the coming years and decades particularly as urbanisation continues to expand in the main dairy production zone (Ho Chi Ming City). The success of smallholder dairy depends a lot on the world price of dairy products and on the willingness of the processing factories to decrease their margins especially during difficult times for farmers.

Certain important factors are, however, controllable and can be encouraged by policy makers:

1. Improving productivity: continuing professional education; recording of performances; more support to local private service providers; milk quality standards
2. Information sharing (example of �Dairy Viet Nam�), facilitation of public-private initiatives especially in new locations

Enterprise-driven dairy:
The Philippines’ smallholder dairy sector

Sally Bulatao,
National Consultant/Dairy Enterprise Specialist

This paper consists of: (1) a brief description of the Philippines’ milk market; (2) highlights of four cases, one of which has a focus on enterprise elements; and, (3) the development strategies and activities recommended for improved market access by smallholder dairy producers.

Market overview

The Philippines’ milk production in 2006 was equivalent to half a day’s milk production in India in that year. The daily milk production in the Philippines is easily produced by a single dairy farm in Florida or California. With an annual milk production of 13 million liters or barely 36,000 liters per day, there is hardly an industry to speak of, in terms of production.

However, milk consumption tells a different story: the Philippines represents a sizeable and growing dairy market generating annual sales of milk and milk products worth nearly one billion US dollars. It is the 2^ndbiggest country destination for New Zealand’s exports of milk and milk products. At its highest in 2005, liquid milk consumption was 25 times the consumption level in 1991. On a daily basis, this was 125,233 liters per day, from 5,424 liters per day in 1991. This, however, would appear as a flat growth rate when compared to China’s milk consumption which has doubled over the last five years. In the Philippines, the growing preference for natural food figures as a dominant demand driver rather than a fast growing mass purchasing power for milk and milk products. Nonetheless, Table 1 is attached to provide the basic indicators of the Philippines’ dairy industry.

Notwithstanding a demand situation that is slower in comparison with emerging Asian dairy markets, the rising world milk prices in the 2006-2007 period visibly enhanced small milk producers’ edge in the direct consumer market as well as in the food service and industrial use market. Higher milk import prices already neutralized by a stronger peso resulted in more competitive price levels. Specifically, a liter of UHT milk which sold for P54 (US$1.12) in 2006 is priced at P65 ($1.59) in 2008 compared to fresh milk prices that averaged about P60 ($1.43) over the same period. Bulk pasteurized milk for food service outlets and industrial users also started to explore the use of local fresh milk following the improved price difference.

Who are the smallholder dairy producers of the Philippines?

The Philippines’ dairy industry consists of two distinct sectors. One is the milk powder based sector that imports, re-processes and repacks milk and milk products. The other is the liquid milk sector that has its imported UHT milk component and the locally –produced fresh milk component. It is only in the liquid milk sector that smallholders figure in the industry.

The last survey of dairy enterprises conducted by the Bureau of Agriculture Statistics in July 2002 covered 4,957 dairy farmers in cattle, carabao and goat farms. Of these, 85 percent (4,194 farmers) owned from one to four dairy animals while another 11 percent (564 farmers) owned 5 to 10 dairy animals. Hence, unorganized small dairy farmers and smallholder milk producers, together, comprised some 96 percent of the local dairy farming sector.

Table 1. Philippine Dairy Industry Indicators

¹Import volumes are net of re-exports by importer-processors.
²First survey of farmers engaged in dairy was conducted in 1996 by the Bureau of Agriculture Statistics.

Three dairy enterprises, selected for the high degree of smallholder participation, have been identified as the initial source of data in a value chain analysis of the Philippines’ dairy sector. These are the Katipunan ng Kooperatiba ng Maggagatas, Ink, (KKMI) in Calauan, Laguna in Luzon island, the Federation of Davao Dairy Farmers Cooperatives (FEDDAFC) in Malagos, Davao City in the island of Mindanao, and the Kapanig Multipurpose Cooperative in San Juan, Siquijor in the Visayas. A fourth one, the carabao development program of the Philippine Carabao Center in its National Impact Zone in Nueva Ecija is, likewise, profiled to showcase buffalo-based dairy enterprises.

The full presentation includes slides on the highlights and winning features of each case. However, the discussion below is focused on one case to better illustrate the business features applied by a smallholder-based dairy enterprise.

Federation of Davao Dairy Farmers Cooperatives (FEDDAFC)

This plant started operation in 1990 under the direct management of the coop federation, FEDDAFC. Starting with four founding primary coops, it is now composed of 13 primary cooperatives of about 200 farmers. It processes an average of 1,100 liters of milk daily. Operating results of the plant had been up and down for most of the years depending on the trustworthiness of the plant manager. The federation has hired professional managers who have come from bigger firms and has also designated from among the farmer board members as General Manager. FEDDAFC has been the victim of numerous funds misappropriation. NDA has actually taken over management of the plant in the past. But the take over two years ago involved a change, not only in management, but of plant ownership as well.

FEDDAFC’s turnaround and the interplay of competitiveness factors

Towards the end of 2005, this plant was declared delinquent for failing to pay its farmer suppliers for raw milk delivered over three months. The lease contract with the NDA for the use of the plant includes a clause for automatic take over by the NDA in case of non payment to farmers for at least two months. NDA implemented this provision and completed the turnover of the plant from the coop federation to the NDA after a series of general assembly meetings where all members were informed on the consequences of such a takeover.

The assets of the enterprise were valued and the NDA took its equity share in the enterprise. The dairy federation ended up holding a minority share of 21 percent in the new entity which took on the nature of a public-private venture.

With the takeover, the General Manager (GM) designated by the NDA had to deal with a workforce that was wary if they would be retained under the new management. The staff transition to new assignments was handled adequately although not without intense pressures at the start, particularly on the GM.

There were suppliers to be paid, farmers waiting for milk payments, bank accounts to be validated and a market to put in shape. To the credit of the GM and her team, these matters were handled one by one and the plant slowly assumed a new dynamism.

Within the first year of the takeover (2006), the enterprise realized a net income. The profitability was sustained into the second year (2007).

The Davao Milk Plant has initiated various other schemes that contribute to its good enterprise performance. In particular, the development of its network of 29 dealers of frozen milk products has stabilized the market for 43 percent of its product mix. The dealers pick up the goods from the plant significantly reducing delivery costs. In turn, the dealers distribute the frozen milk bars to their own network of variety stores and school canteens. The Plant Manager who is also the General Manager meets with the dealers regularly to enforce the delineation of the area of coverage of each dealer and avoid unhealthy competition. This product line, developed in the last two years, has greatly reduced the dependence of the plant on school milk feeding as a market.

Customers in Davao City have associated fresh milk with the brand Davao Dairy Best. Brand recognition is acknowledged and that is why the enterprise pays the coop federation a royalty for the use of the brand. It is designed in an attractive format that allows it to compete on the supermarket chillers side by side with other commercial milk brands. The General Manager realized that supermarket sales can be profitable as long as the documents for collection of accounts are prepared promptly and served to the supermarkets regularly.

The plant has also installed a milk payment system that pays an average of P2 on top of the base price of raw milk. The plant quality assurance staff visited individual dairy farms to demonstrate milk collection procedures. Milk collected is then tested for compliance. The first round of tests was done without any charges to the farmer. However, when they fail and subsequent tests are required, the farmer has to pay a testing fee.

The Davao Plant maintains a sales force that is paid on a commission basis . Instead of keeping a regular sales force, the team sells milk in particular residential areas and gets compensated based on volume sold. The system has improved sales and reduced overhead for the enterprise.

Organizationally, this first attempt at a public-private venture is stimulating the imagination of the players. They are currently in discussions on how to maintain the discipline installed through the new organizational setup while increasing the equity of the farmers and possibly, the plant team, in the venture.

The entry of a foreign investor as a new player in the dairy zone represents both a shift in factor conditions (more animals, new farm infrastructure) as well as an enhancement of competition within the zone. Instead of being considered a threat, the new player stimulates good milking practice among the farmers who would not want to be outdone by the newcomer. Aside from this, the Korean investor has been a source of some farm equipment made available to the farmers in exchange for a young calf or a heifer.

The pressure on land use, however, is a factor condition challenge to the Davao dairy zone. Plantations of high value crops compete with use of land for dairy purposes. Many smallholders are either tenants or leaseholders who usually have to give up the land when the landowner decides to shift the use of the land to a fruit orchard or to lease the land to a corporate farm.

On the other hand, young, second-generation dairy farmers are taking over and improving the existing dairy farms. Anthony Naraval is an example of the new batch of dairy farmers who are keen on engaging in dairy as an entrepreneur. The crop of young dairy farmers represents an enhancement of factor conditions in the dairy zone. Having fully paid their previous animal loans, they are preparing to acquire additional animals to increase their dairy herd.

FEDDAFC, as a federation, continues to suffer from weaknesses in leadership. Its officers seek to buy back the plant but there are no assurances that the problems of the past will not recur if this happens. The tension between the objective of establishing a viable enterprise and the traditional drive to put all operations in the hands of smallholders is playing out vividly in this situation. All the parties involved-the NDA, the cooperatives, the plant staff – will all interact to shape a suitable enterprise structure that will effectively protect the gains of the enterprise while ensuring the maximum benefits to smallholders. The settlement of this issue reflects the interplay of enabling government support through the NDA as lead organizing institution and the governance structure of the cooperative and its capacity to discipline its ranks.

During the validation meeting with industry players, the following activities were recommended: the holding of regular farmer-to-farmer visits and exchange of farm practices among smallholder dairy farmers, the formulation of feed rations for dairy zones with the appropriate feeds testing and milk yield monitoring, the gearing of areas with limited markets for milk as suppliers of dairy stocks, encouraging the establishment of breeding enterprises among AI technicians at the village level, formalizing popular calf rearing and growing arrangements at the coop level and the enhancement of coop-based lending programs.

Other lines of action that have been considered following discussions with model enterprises are the following:

1. Establishing common facilities along the value chain: for feed testing, for herd recording, for laboratory testing of milk, label and package design, business and label registration.

   The common facilities may be distinguished from government extension work in that dairy enterprises themselves could contract the delivery of common services at fees based ozn business results traced to the services accessed. Some examples may be increases in milk yield due to regular feed testing, improved calving interval due to herd recording, longer shelf life due to laboratory testing, increased sales due to improved product label, etc.

2. Toll processing : improved toll processing arrangements can broaden engagement of smallholders and increase their share in final product margins. It can also reduce working capital burden of processing plants and help balance production and use of milk throughout the year. New players, from among smallholders’ families, may participate.
3. Management training : smallholders need professional help but qualified and honest managers are not easy to find. Firm-level content of conferences may be given more emphasis so that discussions can focus on business matters. Exchange activities may also include small exhibits of equipment and packaging materials that may be useful for farms and plants. Here, successful smallholders and plant managers may be invited as resource speakers. Successful smallholders may be tapped as on-farm trainers.

4. Designs for making local markets work: sponsored school milk feeding, product positioning at key outlets, targeted public taste tests, monitoring of customer feedback.

5. Dairy business process outsourcing: some administrative support services may be initiated on an outsourced basis such as the collection of receivables, preparation of regular financial statements, executive search and training.

6. Identification of technical and enterprise performance indicators that smallholders can compare with one another. Some of these indicators may be the milk yield per kilogram of concentrates fed to the lactating animal, calving interval, milk payroll, cost to produce a liter of milk and similar measures.

7. The conduct of comparative cost and return analysis for dairy and alternative crops. This study would enhance the enterprise awareness of farmers who can be introduced to the concept of opportunity costs and comparative investment options.

Prospects for enterprise-driven dairy development

There are strong indications of accelerated growth in the Philippines’ dairy sector. Most prominent of these signs is the maturing of enterprises that have established their market networks and are able to invest in expansion without relying, solely, on government support. These are the building blocks that provide the foundation of the industry. The same enterprises represent individual dairy producers who have “learned the ropes” and are realizing the gains from the industry. Ultimately, it is the concrete benefits that would make the players remain in the industry.

The profitability of these enterprises, in turn, has been attracting new entrants that may yet provide the needed “critical mass” for the industry to move ahead, gaining more credit support and a more conducive policy environment.

Even government that has historically provided wavering support is poised to allocate more assistance for herd buildup, breeding infrastructure and common facilities. The big challenge is to evolve the suitable enterprise designs that will maximize smallholder participation in the value chain.

Competitiveness framework for Asian smallholder dairy development

Phil Psilos, Value Chain Competitiveness Consultant

The short-term 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. This presentation is focused on how the FAO-CFC-APHCA team is working to develop a framework for understanding the ability of smallholder dairy in participating countries to respond to these opportunities. For the purpose of this project, we refer to 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.

This presentation outlines the elements the competitiveness framework, why it was developed, and how it was used by the three consultants you heard from this morning to produce some indicative results from three countries. In the next session, the consultant team will facilitate your working together to perform a rapid self-assessment exercise using this framework.

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. Because the goal of the FAO-CFC-APHCA process is to develop a strategy that can enable participants to succeed in many different environments, it is also an attempt to develop a common language that can help with the discussion of common challenges and differences between markets. Thirdly, the framework is a tool for analyzing and comparing the actual current situation from the inside, rather than against a single benchmark of what is “correct.” It is based on the approach that all participants can experience improvements in smallholder dairy performance, though some countries may have more favorable overall conditions and greater success in the long-term. 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.

If the project’s work were only focused on scaling up existing models in a specific country, the framework would be less useful. If, on the other hand, we want to help participants from many different countries and contexts select the right models (or elements of models) to address the constraints that they face, we need to be clear on what factors the models we are looking at can address, resolve, or improve. The three goals served by the competitiveness framework are:

Feedback from some consultants has also suggested that the framework process has been useful as a discussion tool with national industry stakeholders, and in reaching new understandings regarding what industry participants see as the most urgent challenges of the environment.

Competitiveness framework: Process

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 (1) governments, (2) firms, (3) whether it is can only be partially controlled, or (4) whether it is entirely out of the span of control of local actors. The relative favorability or unfavorability of each issue is then determined (perhaps 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 helps us understand what elements of specific models provide solutions to our specific challenges, and what challenges require new policy and organizational innovation. It is our hope that the FAO-CFC-APHAC project will be a forum for assisting the dissemination of existing models, and for new policy and organizational innovation.

The five Performance-Competitiveness Drivers categories are (1) demand conditions, (2) factors of production and utilization, (3) market and competitive structure, (4) related and supporting industries, including producer services; and (5) government and business enabling environment. This category structure is derived from Harvard Business School Professor Michael Porter’s diamond model of competitive advantage. In this model, the competitive results for smallholder dairy are viewed as a function of how well the key drivers work together to produce a sustainable and profitable industry. Of course, the choice of these issue categories is somewhat subjective: other ways of categorizing issues could serve a similar purpose, but because this model captures economic, technological, institutional, governmental, and market structure issues across the value chain, it serves as a useful framework for analysis.

Driver Categories with Sub-Factors

In each of these categories, much of the analysis is subjective, but collecting the most important quantitative factors to describe the performance of the system is useful. Some of these measures, if collected and averaged out across the entire national market, could be quite misleading. As a result, some factors are much more useful in describing performance at the farm and enterprise level (those appearing to the left), and others, such as the demand measures fresh milk premium in a given country as a percentage of world market prices, are more useful in describing the national market environment. The team used this as a guide for data collection, and are still exploring how a simple set of quantitative indicators can improve the framework’s effectiveness.

What can be quantified rapidly?

Factor conditions and utilization	Market structure & governance	Producer services and value chain depth	Demand conditions
Calving interval (# months)	Transport & Processing Costs (TPC) per unit output	Growth in processing capacity (5 years, %)	Demand growth
Quantity milk output/year (UNIT)	TPC as % WMP	Licensed veterinarians per 1000 population	Fresh Milk Premium (FMP) as % WMP
Lactation period (days)	TPC as % FMP	Capital resources	FMP increase past 5 years
Feed/fodder unit cost (FF) in local currency	Spoilage/Losses as % output		% output to non-powdered uses
FF unit cost as % of WMP	Import parity (value)
Farm & Enterprise Level Value Chain Level Market Level

Steps in prioritizing performance-competitiveness drivers

The competitiveness framework includes three steps in prioritization of identified performance and competitiveness drivers.

Process

Keeping in mind what national-level policy and program interventions can realistically achieve is very important in regional strategy formulation. Analyzing the factors that can be controlled or influenced by participants in the APHCA project, and the limitations of policy

action to influence some outcomes, and focus clearly on the opportunities for the next best step in each national (and regional) context. Project participants have a greater degree of influence and, potentially, control, over the conditions determining chain performance and smallholder participation and national market structures than over factors such as multinational firm strategies and the international trade system. As a result, 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.

Step 1: What can we control through policy and program interventions?

The second and third steps in prioritization entails analyzing the drivers (identified above) to determine their relative influence on the competitive position of the value chain. This is accomplished by assessing their favorability or unfavorability to the smallholder dairy enterprise on a scale of -2 (Very unfavorable) to +2 (Very favorable), and assigning each issue a relative weight (importance) compared to other factors in a given category. Each category of issues (outlined in slide 9-10) represents a weight of 100%, and sub-factors are assigned a value reflecting their significance to the enterprise as a whole. By multiplying the favorability 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 analyzed. The results for one category of drivers- Factor Conditions and Utilization- is illustrated in the table below which reviews the situation in Viet Nam.

Driver Evaluation Matrix: Vietnam Factor Conditions

Framework findings from value chain studies

The significant differences between the three countries studied are apparent in the chart below. According to this analysis, the challenges faced by each of the three countries differ significantly both within and across driver categories. While all three countries were reported to have favorable demand conditions, this was weighted as a much more positive factor in Viet Nam, in light of the country’s weaker dairy tradition. In all three countries, factor conditions and utilization were rated as a significant challenge. The studied countries diverged significantly with respect to the favorability of market structure and governance, related and supporting industries, and the regulatory and business enabling environment.