Previous Page Table of Contents Next Page

Models and opportunities for smallholder dairy producers in Asia: lessons learned

Nancy Morgan
Livestock Policy Officer
FAO Bangkok
Brian Dugdill
International dairy development specialist

It is clear that the demand prospects for dairy products are expected to remain strong in Asia. But the ability of smallholder dairy producers to benefit from the growing demand could be compromised in the rapidly globalizing market for milk products. Studies have shown that smallholder dairy producers remain competitive in many areas in developing countries (Stahl et al., 2003). However, their competitiveness amid the diversity of production and marketing systems for dairy in Asia is shaped by a myriad of factors that are largely contextual and influenced by geography, relative natural resource bases, socio-cultural factors, demand growth, demographics, economics and the status of an individual country’s economic growth and development.

These same influences also affect the variability of a country-specific dairy-development growth path, whether it is dominated by investments in large processing units, such as in China, cooperative systems, such as in India, or smallholder links, such as in South Asia where the informal market supplies a large amount of the fluid milk/artisanal products produced. Public policies and incentives fostering private-sector investment decisions also play an instrumental role in shaping the outlook for the sector and determining the role played by smallholders.

Identifying the lessons

Drawing from the previously presented FAO-commissioned case studies on dairy development, this chapter examines the critical factors influencing the success of various interventions to support dairy systems, with a focus on smallholders. It outlines country-specific responses to constraints and reviews the models and interventions in the region that have been influential in fostering dairy development.

Addressing the challenges related to dairy development in any country requires reviewing the factors that can be detrimental or conducive. Given the diverse nature of dairy demand, production systems and market structures across the Asian region, no broad summation is possible. However, the following observations and analysis of some of the regional lessons learned may be of relevance when considering action to support sector development.

In only a few countries have carefully targeted smallholder interventions been effective in supporting dairy development. This is particularly true because in many countries most smallholder production is channelled into traditional markets, which are largely neglected by policy interventions. In formal markets, market access is challenged by the fact that dairy product supply channels are rapidly changing, with supermarkets playing an increasingly important role in all countries. Specifically identifying entry points for smallholders is difficult. However, the following examples illustrate successful interventions:

Models that link smallholders to formal markets

In general, those models effective for engaging smallholders are those which: i) provide good economic returns; ii) have policy/institutional support from governments, either national or regional; and iii) are supported by active involvement from private sector milk-processing enterprises. In a globalizing economy characterized by cross-border movement of products, information, technology and financing, it is critical that all models be governed by supportive and enforceable standards and regulations to ensure basic adherence to modern food safety standards.

Cooperatives are often cited as one of the most effective way of grouping small dairy farmers to deal with the challenges of producing and marketing milk. The unique characteristics of milk require special considerations in terms of linking producers to markets. These characteristics include its perishability, the daily nature of production, the lack of synchronization between demand and supply, and the inability to quickly adjust supply to changes in demand. Even in countries such as the United States, dairy cooperatives handle a significant proportion of production: in 2002, for instance, cooperatives in the US accounted for an estimated 86 percent of farm sales (Kraenzle and Eversull, 2003; Ling, 2004).

In India, the dairy cooperative model has been perceived to be central to the development of its dairy industry, the largest in the world and one that has been based on integrating small and marginal farmers into a business environment. However, while successful in numerous states, in particular the Amul cooperative56 in Gujarat, not all have flourished. In many other areas of India, the cooperative movement has been less successful in empowering farmers and transforming dairying into a means of development for rural people. The challenges include: i) cultural, socio-economic constraints in replicating the model; ii) the critical need for democratically elected management and, in particular, the need to avoid state-management; and iii) difficulties in ensuring competitiveness with the private sector. Another example is the Milk Vita Cooperative in Bangladesh where periodic state involvement in the day-to-day management of the cooperative has limited growth and delayed dividend payments to members and suppliers, acting as serious disincentive to participation.

These shortcomings of cooperatives in many parts of India generated the concept of mutually aided cooperative societies (MACS). A MACS Act was enacted57 in 1995 to respond to governance issues related to cooperative organization. The law gives autonomy to district and village cooperatives to set up societies that are profit-making but function like cooperatives in terms of services provided to farmers, without the involvement of state management.

Collective farms, such as those in Sichuan province in China, are supported by the township and county governments. Farmers are grouped into a farm model in which all the cows are milked by machine. A local investor/builder constructs the dairy facility, supplying all the capital. After construction, in the Sichuan example, the village director settled the debt with the builder by identifying individual producers to purchase stall space within the barn. While the operation is run by a village committee, individuals own the stall space and assume full management of their cows, including feeding. Milking machines, however, are owned by the company, in the China case, the New Hope Dairy Cattle Company. A member of the collective supervises the milking and keeps records of the amount of milk produced by each cow. A local company collects the milk. One of the obvious constraints to extending this type of operation is geographical access to facilities.

In milking stations, similar to the collective farm, operations revolve around the construction of mechanical milking facilities linked to households. However, in this case, the producers bring their dairy cows to the station for milking. In some areas, one milking station services about 200 dairy cow-raising households. The governance of these stations can differ; a processing company owns some of them and leases to the township or the producers, or there are private and cooperative owners. According to Hu (2008), benefits of the stations reduce labour requirements by farmers and ensure the provision of a stable market and access to technical training, while the processors benefit the stable supply of high-quality milk and limited opportunities for milk adulteration.

Private dairies reflect one of the numerous opportunities for linking processors to producers. The institutional links with the producers, however, can differ depending on the circumstances. Typically, processing companies procure milk through village agents who have a personal connection with producers. The processor occasionally has direct interaction with the producers; however, usually the milk price is negotiated directly with the agent. This limits price transparency to producers and reduces their market power as well as incentive to provide quality, unadulterated milk. Some processing companies, such as Dutch Lady in Viet Nam, operate a payment scheme that is transparent with various check points, including random individual quality checks. This more direct contact with producers provides incentive for ensuring milk quality at the farm level.

The contract farming model is a variation of the private dairy in which producers are given contracts for their milk supply (Halla and Habeel Foods in Pakistan). However, in Pakistan, only 3–5 percent of the total milk production is sold through formal channels. Informal rural or peri-urban-based agents in the marketing chain sell the bulk of the supply.

Farmer-managed milk collection stations in some areas of China are preferred to the milking stations owned and managed by processors because farmers are less at risk from monpsony pressures, such as the power of relatively few processors to control prices. In cases such as China, increased competition between processors results in lower prices to producers; management and control of some of the dairy infrastructure provides producers with more market power.

Dairy development zones (in the Philippines and China) regroup dairy producers in a designated area, with processors or a local government constructing the infrastructure. Typically the zone requires at least 200–300 cows, with some in China reaching 500–1 000 cows. The advantage of the zones is the technical assistance and supervision that is provided, while the separation between production and residential areas benefits disease control. In the Philippines, many of the zones are public–private partnerships with the National Dairy Authority, which provides development support, while in China financial assistance is available through government supportive policies.

Joint venture operations (Shanghai area of China) have linked ex-state-owned companies and independent farmers. The company owns the dairy animals typically, with farmers providing the land, labour and cattle barns. The company owns 40 percent of the equity in the farms (and the farmers own the remainder) and provide technical assistance for improving feeding practices and disease control.

Pastoral parks (implemented in Northern China) are suitable in pastoral regions where households with large herds join together with assistance from dairy-processing enterprises or other organizations. In China, the processing company invests in the construction while the households raise the cows. However, other organizational structures are possible, such as a cooperative one where the infrastructure is owned by the households.

Mobile-dispersed milk-collecting systems:, for use in geographically dispersed milk production units. Used in the 1980s in China, these units went from household to household with milk-tank trucks. One serious constraint to this model is its inability to guarantee that quality of the raw milk.

State-owned milk processing companies still exist in many countries in Asia. For example, MILCO in Sri Lanka engages in milk collection and largely determines the farmgate milk price – based on its processing and marketing costs, both of which are reputed to be relatively high. The large private firms follow the purchasing price offered by MILCO, although they do pay a premium, depending on the competition in the local market where they operate. Unfortunately, this system limits price increases (even in times of high international prices), thus disadvantaging smallholders who currently supply the majority of milk production.

The pro-poor social/business community dairying model (Bangladesh) adds livestock activities to ongoing community development programmes that provide training, vaccination, veterinary care and other support services to help poor women become dairy farmers and assist others to improve and expand dairy operations. In Bangladesh, project participants have become suppliers of milk to private dairies, including the Grameen Danone yoghurt plant. Today, this programme and others are administered by a not-for-profit organization called the Grameen Motsho O Pashusampad (Fisheries and Livestock) Foundation.

Factors affecting model selection and overall dairy development

While international dairy product prices have declined from their record levels in 2007, the current market environment offers opportunities for dairy development and for smallholder producers, particularly those linked to traditional milk products and fluid milk markets. As retail powder prices increase, fresh liquid milk becomes more competitive. This was evident in most of the case study countries, particularly those where domestic markets were linked to international price fluctuations.

One of the challenges for regional stakeholders is the identification of specific factors that support or fail to support model adoption suitable to smallholder dairy development in a local context. Smallholder participation in markets is influenced economic incentives and shaped by institutional and policy initiatives; as well as by cultural and social practices that allow them to participate in the prospective growth. This could be through increased links with larger operations that are expanding investment in the local markets as prices for imports remain high or through continued participation of smallholders in traditional markets. The following section draws out some basic generalizations from the country case studies.

The economic considerations

Institutional considerations

Socio-cultural-environmental considerations

Technical considerations

The role of government and policies in dairy development

Governments, through policies and programmes, can provide a catalyst to sector development. However, interventions and support have to be carefully orchestrated to ensure balanced growth. In many countries, sector development flourished through a policy of non-involvement by the government in production, processing and marketing. The design of a clear road map for dairy development needs to include incentives for private sector investment.

When undertaking sector planning, it is useful to consider the following:

  1. Government investments in large operations usually fail (Pakistan, Philippines, Viet Nam). Public sector involvement is best restricted to selected co-financing arrangements and public–private partnerships that encourage private sector investment.
  2. School milk programmes, when implemented with a focus on smallholders, can support dairy development (as well as generating long-term demand for dairy products (China, Mongolia, Philippines, Thailand). They can, when linked to local milk consumption, support smallholder dairy development. However, they necessitate a long-term financial commitment by (either national or regional) governments (China, Mongolia, Thailand). In most cases, school milk feeding schemes based on imported pre-packed milk have been counter-productive to smallholder dairy development.
  3. In China, investments in school milk programmes, financial support for industry expansion and favourable credit and taxation policies to support breeding stock purchased by farm households supported a double-digit expansion in milk production over the past decade. The central Government used national debt funds to effectively mobilize resources from banks, with local governments providing tax rebates to assist the sector, particularly with processing.
  4. Working with financial institutions is a role that governments can take on to ensure accessible credit for smallholders’ housing and livestock needs. Governments should ensure that concessionary loan programmes take into account the prevailing returns and profit margins of smallholder farmers; credit schemes need to be long term to account for the biological nature of the investment. Ideally, an insurance system should accompany the loans to mitigate animal loss risks.
  5. Limited land ownership constrains the ability of many dairy farmers to grow quality fodder for cattle. Governments should look for innovative ways to support pasture or fodder development and better use of public land. This could include options for leasing communal grazing land or public land.
  6. A critical government support to industry development is the reduction of barriers to trade, in particular import tariffs on equipment, animals, raw materials and other inputs. In addition, it is important to eliminate subsidies on inputs, including veterinary drugs, vaccines and AI services, to avoid market distortions. The private sector has difficulty engaging in milk collection and processing in areas with low volumes. To resolve this issue, many countries, through private sector or government-supported economic incentives (tax concessions, etc.), have set up dairy enterprise or development zones (China, Pakistan, Philippines).
  7. Pricing policies that fix milk prices based on the cost of production or other calculations can be detrimental to sector development. This includes price setting by national agencies, cooperatives or municipalities (India, Pakistan, Sri Lanka). In some cases, such as Thailand, high administered prices supported industry profitability. However, with the proliferation of bilateral and regional trade agreements and increased market access for dairy products from competitive suppliers, these policies may not be sustainable.


There are many successful models, businesses and institutional arrangements in which smallholder milk producers have gained sustainable access to markets and some that are less successful. The challenge is to identify models that allow smallholders to compete with other forms of milk supply, in particular from larger national operations and imports. Selected successful smallholder dairy chain business models in the case study countries presented in this publication include:

1) Cooperative dairying model: the world-renowned Anand Pattern model from India and more recent cooperative company models, such as in Bangladesh, India and Thailand.

2) Contract farming model: essentially a private sector–smallholder incentive model, such as in Pakistan (Halla and Haleeb models), Sri Lanka and Viet Nam.

3) China dairy park model: collective/community dairy cow raising in an investment-driven growth environment.

4) Philippines dairy zone model: public–private sector equity partnerships.

5) Mongolia dairy chain model: involving six enterprise modules for liquid milk and cheese for each link in the farm-to-consumer food chain.

5) Bangladesh social and community dairying models:

The major factors influencing smallholder dairy chain models drawn from the case studies are summarized as follows:

The appropriateness of a specific model is largely contextual. However, in general, smallholder dairy chain models have not been so successful: i) where centrally planned approaches are used; ii) when governments intervene by establishing large public sector-managed dairy processing enterprises; iii) where producers have limited leverage over resources or governance of the chain; and iv) where low tariffs facilitated the importation of cheap dairy commodities used as raw materials rather than fresh local milk.

It is important to have the right mix of supporting factors in place to promote smallholder dairying (see the section on dairy policies in the next chapter). An enabling environment is a vital ingredient, with clear, focused and implementable policies and well-thought-out strategies designed to translate policy into bankable output. It is in this context that careful selection of appropriate and contextually designed models need to be considered and evaluated.

56 The Amul cooperative involves an estimated 2.7 million farmers in Gujarat and processes 10.2 million liters of milk per day. It is considered by some to be Asia’s biggest dairy business venture.
57 To date, only in Andhra Pradesh.

Previous Page Top of Page Next Page