Food aid in dairy products differs from commercial dairy imports in three major aspects. First, the food aid commodities are supplied free of charge, so there is no burden on the foreign exchange account of the recipient country. Second, the offer of and the request for food aid are the result of a political decision, not only of market prices and milk supply and demand forces. The availability of dairy food aid, however, may well affect the market price and the demand for commercial imports. Finally, dairy food aid has the potential to contribute to dairy development.
The European Economic Community (EEC) is the most important donor of dairy food aid to Africa. Since 1979, the EEC has annually donated 150000 t of skim milk powder and 45000 t of butter oil to various developing countries, aid organisations and the World Food Programme (Commission of the European Community, Brussels, personal communication). The major reason behind the EEC food aid policy is the large surplus of dairy products within the community: stocks of skim milk powder in mid-1982 were 1.6 times that of sub-Saharan Africa's total dairy imports for that year (both in LME), and despite milk production quotas, the surplus is not likely to be substantially reduced in the near future (FAO, 1984b). In addition, the United States and other major dairy producers in the developed world also generate dairy surpluses which are available for food aid.
The agricultural lobby within the EEC constantly presses for more food aid donations, while those responsible for development issues have become reluctant to increase them. Some even favour a reduction, arguing that the use of dairy food aid cannot be effectively controlled (Commission of the European Community, Brussels, personal communication; The Economist, 1984).
But the main argument against additional dairy donations is that, because of their price effect, they may act as a disincentive to local milk production, especially when they are not targeted towards selected groups. Also, local milk processing plants cease collecting fresh milk because they find it more economical and convenient to sell milk reconstituted from imported skim milk powder and butter oil6. Another argument against dairy food aid is the lack of control over its distribution: often the wrong people - the more affluent - benefit from the donations.
6
See Ministry of Agriculture, Tanzania (1977) and the Malian example in Chapter 7 for case-specific discussions of the dangers of dairy food aid imports.
These arguments against dairy food aid are nevertheless closely related to its one major strength - its potential to contribute to dairy development in the recipient country. Food aid for development purposes must be distinguished from emergency shipments and other consumer-oriented aid such as 'Food for Work' programmes, for it aims to benefit consumers and producers alike. The strategy has been successfully implemented on a large scale in India7 through 'Operation Flood'.
7
For more information on dairy development in India see Mogens (1977) and Patel (1979).
The concept is very simple: aid-supplied skim milk powder and butter oil are reconstituted as milk or processed into other dairy products which are sold at commercial prices. (The net revenue thus equals the market value of the products sold, minus processing and distribution costs; no product value is deducted since the raw materials are provided free). Profits realised from the sale of reconstituted milk are then used to support dairy development projects, and in time, dairy food aid imports are replaced by increasing local milk supplies. The particular advantage of food aid for development is that, unlike direct financial aid, it overcomes the problem of underutilised processing capacities until domestic production increases.
An essential aspect of the strategy's economics is to determine the sale price of the reconstituted milk. This is commonly done by taking the proportions of skim milk powder (roughly 0.10 kg) and butter oil (0.035 kg) in 1 litre of reconstituted milk and multiplying them by the equivalent border prices for commercial imports. Adding to this figure transport costs from the border to the area of consumption and processing costs gives the 'border equivalent' retail price. In theory, there is a comparative advantage if domestic production costs, net of all subsidies and taxes, are equal to or lower than the derived price for imports.
In Mali, locally produced fresh milk can claim a substantial premium over reconstituted milk, so that the price of the latter must be adjusted for this consumer preference. For example, if the border price equivalent for 1 litre of liquid milk is US$ 0.20 and transport and processing costs amount to US$ 0.15 litre-1, then the 'border equivalent' retail price (net of distribution cost) of reconstituted milk is US$ 0.35 litre-1. At a price premium of 50% for fresh over reconstituted milk, Mali can invest in dairy development without incurring overall economic losses, as long as the cost of producing domestic milk does not exceed US$ 0.53 litre-1 [US$ 0.35 × (1 + 0.50)]8. The consumer then buys reconstituted milk at world market prices, production takes place at economically undistorted prices, and the government can spend US$ 0.20 from any litre of reconstituted milk on dairy development.
8
The calculation is given in more detail in von Massow (1985a).
There are three common pitfalls in the implementation of a dairy development policy based on food aid. First, the government must resist the temptation to win political popularity by selling reconstituted milk at a price below competitive levels, as such a price would serve as a disincentive to domestic production and reduce the funds available for dairy development. Second, all revenues from the sale of reconstituted milk must be reserved for the development of the dairy sector and not used for other urgent matters. And third, the government must withstand the pressure from processing plants to import ever more food aid in order to maximise profits. In this, again, considerable political will is necessary, since it is easier to process imported raw materials than to organise efficient local milk collection.
Some of these pitfalls can be avoided by an appropriate institutional set-up. The processing plant, for example, will give the right emphasis to its collection activities if it is a true farmers' union. Sales revenues from food aid can be better targeted if they are held and administered separately from the general budget. A controlling body should be established by the aid donor with both government and producer representatives and invested with the right to stop aid deliveries or interfere otherwise if the aid programme is not appropriately implemented.
Though necessary, these measures still do not guarantee that dairy production will develop with the help of food aid. On the other hand, failure to implement them is usually the reason for lack of development in the sector. The subject will be discussed further in Chapter 7 where an actual case of food aid for dairy development is considered.
