1.1 Dairy production and marketing in the developing countries
1.2 Specific features of dairy in relation to marketing in developing countries
1.3 Dairy marketing research at ILRI: background and objectives
In the traditional milk producing areas of Asia and Africa, dairy is an essential component of small-scale mixed crop-livestock farming. In the semi-arid and arid regions of these continents, milk is produced by pastoralists and agropastoralists who have large herds. In the non-traditional milk producing areas of Southeast Asia, Korea, and China, the situation is more varied. In the past, fluid milk had little value in these countries because the majority of the adult population were lactose intolerant. However, with urbanization and economic development, demand for processed dairy products that pose fewer lactose related problems increased. In response, both small and large-scale dairy farms have emerged, often with public sector initiative and investment. In Latin America and the Caribbean, 60-80% of the milk producers are small-scale accounting for 25-30% of milk production in these countries; the remainder are medium-scale farms with mixed beef and dairy operations and also specialized dairy operations (Schelhaas, 1995).
Although dairy production is widespread throughout the developing world, productivity and growth of output are low. In the developing countries, 115 million dairy cattle produce 88 million tons of milk annually, i.e. 763 kg per animal, compared to 107 million cattle producing 376 million tons, i.e. 3515 kg per animal in the developed countries (De Boer et al., 1994). Dairy consumption levels per capita are also low - 22 kg in Africa, 19 kg in Asia and 109 kg in Latin America compared to 270 kg in North America and 306 kg in Europe (Shapiro et al., 1995). Imports comprise a significant proportion of developing country consumption of dairy products. During the last three decades, dairy imports by the developing countries increased dramatically in response to rapidly increasing demand and the failure of the domestic sector to meet that demand. During 1986-88, net annual imports into the developing countries was 32 million tons, which was equivalent to 25% of domestic production (De Boer et al. 1994). Projected future demographic changes - population growth, urbanization - and income growth imply further rapid increases in the demand for dairy products and the desirability of substantially increased domestic production.
Increased dairy imports by the developing countries might have resulted from fiscal, monetary, and import policies of the importing countries as well as the subsidization and dumping policies of the exporting countries. However, poor marketing linkages between rural producers and urban consumers due to inadequate infrastructure and inefficient marketing system might have accelerated imports. Hammond (1990) has shown that marketing inefficiencies for a net importer of a finished or semi-finished consumer product such as dairy (powdered milk, butter, cheese, etc.) may lead to an increase in imports. Domestic consumers, particularly in the urban areas, are unaffected by marketing inefficiencies because increase in imports keep retail prices low or unaffected. All the costs of marketing inefficiency are borne by domestic producers in the form of reduced farm prices and reduced production.1
1 Hammond's analysis is based on the assumption of fixed marketing margins, which may not always be true. With variable marketing margins, the volume of imports would still increase although the magnitude might be different than that under fixed marketing margins.
In many developing countries, over 90% of livestock is managed by smallholders living in rural communities with inadequate marketing links to distant urban markets. In some instances large-scale dairy enterprises have been established with public sector initiative and investment to supply dairy products to urban centres and to compensate for the lack of marketing channels from more remote production areas. In many countries, small-scale urban and pert-urban dairy production has developed, responding to the urban market demand and profiting from the lack of links between the remote rural producers and the urban consumers. Urban/peri-urban dairying, while satisfying potential market demand, creates problems related to dairy production (health, fodder, water) and also creates potentially significant negative impact on the environment (manure, waste and sewage disposal) (Phelan and Henriksen, 1995).
In the mid 19th century, most European cities depended on urban/pert-urban dairies for much of their milk and beef. By the turn of the century these urban/pert-urban dairies disappeared because (a) increasing population led to urban expansion, (b) more land was required for consolidation of production into larger units to capture economies of scale, (c) regulations to reduce health risks and environmental hazards were introduced, (d) transporting fodder in and water/manure out of town became more costly, and (e) milk was available from rural farming areas through improved infrastructure and market orientation of rural producers (Glamann, 1992, quoted in Phelan and Henriksen, 1995).
Urban/peri-urban dairying currently practiced in the developing countries will eventually face the same fate as their European counterparts, but such a development is still a long way ahead. So long as urban/pert-urban dairy systems serve as major sources of dairy products for expanding urban centres, it is desirable that the systems function efficiently and the policy environment support domestic dairy development.
Weaknesses in physical and marketing links between rural producers and urban processors and consumers are among the major constraints to dairy development in the developing countries. It is important to be aware of and understand how such constraints can be addressed in order to devise mechanisms that can transfer growing urban demand into increased livestock production. Inadequate infrastructure and inefficient marketing may lead to increased transactions costs and/or market failure.2 By better understanding these costs and identifying the ways of reducing their impact, policy prescriptions can be made to promote economic development by fostering production and trade.
2 Transactions costs are broadly defined to include ex ante costs of determining whether an exchange is advantageous, costs of actually carrying out the exchange (such as finding buyers or sellers, transportation costs) and, where applicable, ex post costs of ensuring that all provisions of the exchange were met. ...Among other reasons, market failure may occur when the costs of executing an otherwise advantageous exchange exceeds the net benefits realized, so the exchange fails to take place (Goeltz, 1995).
The dairy industry in the developing countries has a number of specific features which distinguish it from the other sectors of agriculture and have particular implications for marketing (Jaffee, 1995; Schelhaas, 1995). First, milk consists of over 85% water, and produced daily. Consequently, high costs of transportation are incurred per unit of output marketed. Also, milk being highly perishable, it needs to be used within a short period or processed and transformed into a more stable, longer-storable form. The quality of milk depends on farm management practices, and milk is potentially subject to adulteration, so strict and comprehensive quality regulations may be necessary when marketing involves more than direct delivery by producers to consumers.
Second, the vast majority of the dairy farmers are small-scale producers, who produce milk as a source of regular cash income. Dairy production is a labour-intensive enterprise, and dairy marketing activities often provide substantial employment. However, because of asset fixity (high percentage of fixed costs), dairy enterprises often respond to market changes and incentives in a limited and gradual way.
Third, milk can be used to make a wide range of high quality palatable and nutritious products, which often imply substantial value added over the cost of the raw material. When production and consumption points are far apart and demand increase rapidly, processing of dairy products become very important.
Fourth, as a consequence of the above features of milk and the market vulnerability of its producers, cooperatives may assume a strong position in milk processing. A survey by the International Dairy Federation in 1984 revealed that in 21 developed countries together accounting for 55% of the world's milk supply, producer cooperatives marketed 86% of total sales of milk from farm to the first handler (quoted in Schelhaas, 1995). In some of these countries, cooperatives also handled 80-90% of the total processing activity. It may be noted that the history of development of dairy cooperatives in these countries are not always similar. However, in most developing countries, dairy producer cooperatives and cooperative processing are either non-existent or very weak. The need for cooperatives in these countries is driven by the need to capture some economies of scale in transportation and processing where numerous small producers are scattered far away from the consumption centres. In many countries, this gap has been filled by establishment of parastatal dairy enterprises for collection and processing of milk to promote domestic dairy production. In most cases, these enterprises ended up processing subsidized imported dairy products, neglecting the rural dairy sector. The monopolistic character of these enterprises often led to inefficiency thus they failed to serve the interests of domestic producers and consumers (Brokken and Seyoum, 1992; Staal, 1995).
Market-oriented dairy is an important focus of research at ILRI because it is considered to have a good potential for contribution to the process of economic development in the developing countries in several ways: through increased domestic production of dairy products to meet increased demand and reduce dependence on imports; through increased employment, income generation and food security among the poor. Realization of this potential will require an adequate understanding of the history and processes of dairy development in the developing countries, identification of facilitating factors where development occurred and constraints or inhibiting factors where it did not occur or occurred inadequately, and also find potential solutions to identified constraints.
In order to undertake research in a systematic manner taking a holistic approach, a conceptual framework for market-oriented smallholder dairy research, henceforth referred to as CF, has been developed. The CF takes a production-to-consumption approach to the analysis of a dairy system of which production, processing, marketing and consumption are subsystems.3 It is assumed that the development of the dairy sector may be facilitated by research that documents the functional linkages among the four components, and performance of the industry as well as the various subsystems. A common framework for dairy systems analysis is proposed in the CF with a minimum data set for each component of dairy system, so that ILRI and the partner national research institutions together may generate information from a wide variety of locations and situations to compare experiences to learn from one another (Rey et al., 1993). Without a common framework and common data set, it is often difficult to compare studies conducted at different locations for drawing lessons of wider relevance. For example, Table 1 summarizes the methods and results of some dairy marketing studies. The results are not easily comparable because of the differences in methods used.
3 Dairy marketing essentially includes processing as a function that creates form utility of products. The function involves big-physical processes to convert raw milk into various products. In disciplinary terms, this is the domain of dairy technology. In the CF, the processing subsystem deals with the dairy technological aspects and options for dairy development. The existing processing functions that create form utility and involves costs and returns, are treated as marketing functions, and are included in the marketing subsystem.
Within the CF, research activities are proposed to be phased. In Phase I, information on the general characteristics or types of dairy systems existing in various parts of the developing world and their history of development will be collected primarily using secondary data and literature review supplemented with rapid appraisal techniques, particularly where secondary data may be inadequate. In Phase II, detailed characterization of dairy systems and their subsystems at appropriate levels will be done, and constraints and opportunities for dairy development in different developing regions and countries will be identified. In Phase III, solutions to the constraints identified in Phase II will be sought to take advantage of opportunities for dairy development. Within the CF, separate methodologies will be developed for each subsystem (Rey et al., 1993).
This document presents the methodology of characterization of dairy marketing systems to be used in Phase II. The objectives of characterization of the marketing subsystem in this phase are to:
· provide baseline data on the characteristics and objectives of market participants, and performance of the marketing system;· identify and understand factors influencing dairy marketing, the constraints to and opportunities for improved marketing;
· understand the linkages between marketing, production, processing and consumption subsystems; and
· identify researchable issues which, if pursued, can be expected to produce information necessary for dairy system development.
In section 2, a framework for characterization of a dairy marketing system is described along with a brief discussion on the concept of market, marketing system and its efficiency, and hypotheses to be tested to assess marketing structure and efficiency. In section 3, data requirements and methods of data collection are described. This document is not intended to be a substitute for standard texts on marketing theory, research methodology and analytical technique. Users of this document will be expected to have basic background in these areas.
Table 1. Methods used in selected dairy marketing studies
|
Study location and period |
Observation units and sample size |
Sampling methodology |
Source of sampling frame |
Number of visits |
Recall period |
Markets involved |
Results/outputs |
|
Shewa, Ethiopia |
Peasant producers (105) |
Multistage stratified random sample |
Secondary source: Central statistics Office |
1 for baseline |
1 year for baseline |
Formal |
Determinants of marketed surplus |
|
Bamako, Mali |
Marketing agents (150): Producers selling milk, Coop. members, |
Stratified random sample |
Exploratory survey |
2 |
Half a week |
Formal |
Marketing channels used |
|
Addis Ababa Ethiopia |
Enumeration areas (25); Households: Exploratory survey (3888) |
Multistage stratified random sampling |
Central Statistics Office Exploratory survey |
1 for exploratory |
1 day for exploratory |
Formal |
Relative price efficiency |
|
Addis Ababa Ethiopia |
Food institutions |
|
Secondary source |
1 |
|
Formal |
Products, volumes, prices, clients, outlets, organization of agents |
|
Mombasa Kenya |
Producers (102) |
Purposive |
Ministry of Livestock, National Dairy Devt Programme |
2 |
1 week |
Formal |
Products, volumes, clients, outlets constraints, technical assistance |
Sources: Achuonjei and Debrah 1992; Debrah and Anteneh 1991; Mbogoh, 1992; Mullins et al, 1994; Duteurtre, 1992.
