It is estimated that, throughout the world, almost 150
million farm households are engaged in milk production,
the majority of them in developing countries where annual
growth rates in milk consumption averaged 3.5 to 4.0 percent
in the decade 1995-2005. This is at least double the growth
rates of 1.4 to 2.0 percent for major staple foods over the
same period. Therefore, if properly directed, dairy sector
development could serve as a powerful tool for reducing
poverty.
With this in mind, the aim of the present publication is to
provide an overview of the global dairy sector and the forces
shaping its development with a focus on the characteristics
of, and implications for, ‘typical’, mostly smallholder, dairy
farming systems in developing countries.
Status and trends in the global dairy sector
Based on milk equivalents (ME), average per capita global
milk consumption amounts to about 100 kg of milk per year,
with very significant differences between countries/regions.
Per capita consumption in Western Europe is in excess of
300 kg of milk per year compared with less than 30 kg (and
even sometimes as little as 10 kg) in some African and Asian
countries. In the past, increases in global milk demand have
been mainly driven by population growth, whereas nowadays
they are increasingly also fuelled by rising per capita milk
consumption in some highly populated developing countries.
Increasing income levels are expected to raise the demand for
milk and dairy products by more than 1.8 percent per annum.
Should increases in milk production not follow suit, dairy
prices will rise significantly over past levels.
South Asia and EU-25 are the most important dairy regions,
accounting for 44 percent of global milk production. In
the period 2002 to 2007, world milk production grew by
13 percent, or by an average of 15 million tons of energycorrected
milk (ECM) per year – mainly through production
increases in China, India and Pakistan. Overall, therefore,
developing countries, which rely predominantly on
smallholder dairy production systems, have increased their
share in world milk production.
Milk is likely to become one of the most volatile agricultural
commodities owing to: (a) the strong influence that small
changes in the quantities available internationally have on
world market prices; (b) the length of time required for milk
production to increase in response to rising prices; and (c) the
delayed reaction of consumer demand to changing dairy
commodity prices.
A key determinant of milk prices is the cost of feed, which
directly affects milk production through increased production
costs and, indirectly, higher land values. Demand for grain, an
ingredient of dairy rations, is driven by the need for food, feed
and fuel of a growing world population. Higher incomes in
developing countries raise the demand for food derived from
livestock, leading to more demand for animal feed. Higher
energy prices and policies that promote bio-fuels lead to an
increased use of crops for energy production and, thereby,
push up the prices of feed and land. The Organisation for
Economic Co-operation and Development (OECD) and
the Food and Agricultural Policy Research Institute (FAPRI)
forecast that, in the long term, feed price levels will increase
to about 50 percent above those of 2002-2006.
The milk:feed price ratio is one of the main factors
determining the choice of dairy production system. The
highest milk:feed price ratio (more than 2.5) is seen in North
America, where, as a likely consequence, the most intensive
milk production systems are found. Farming systems with
lower milk yields, making little use of compound feed, are
generally observed in countries with a milk:feed price ratio of
less than 1.5.
Very few countries are self-sufficient with regard to milk. The
main milk-surplus countries are Argentina, Australia, New
Zealand, USA, Uruguay and countries of the European Union
(EU) and Eastern Europe. The main milk-deficit countries are
Algeria, China, Japan, Mexico, the Philippines and Russia. Over
the period1990-2004, global milk exports increased from
4.4 to 7.1 percent of production, while the share delivered to
formal milk processors increased from 14 to 24 percent.
International competitiveness of ‘typical’
dairy farms
Farms representative of various dairy farming systems in
Bangladesh, Cameroon, China, India, Morocco, Pakistan, Peru,
Thailand, Uganda and Viet Nam were subjected to detailed
technical and economic analyses. For industrialized countries,
similar analyses were conducted for farms in Germany, New
Zealand and the USA.
Milk returns account for 55 to 95 percent of the returns of all
farm types analysed and range from US$12 to US$36/100 kg
of ECM. Non-milk returns range from US$2 to 38/100 kg ECM.
Non-milk returns were very low for the farms in India whereas
they were very high in Germany and Morocco.
Average milk production costs in the three industrialized
countries covered by the study stand at US$31.4/100 kg, or 56
percent above the average production cost of US$20.2/100 kg
calculated for the ten developing countries while the average
price of milk in the three industrialized countries (US$31.2/100
kg) is only 30 percent higher than that in the developing
countries (US$24.0/100 kg). Thus, the overall profitability of
milk production appears to be higher in developing than in
industrialized countries, which may be one of the reasons
why developing countries are increasing their shares in global
dairy production.
© IFCN 2008 7
Given the major differences in agricultural wage rates
between industrialized and developing countries, it could be
assumed that in the latter farms have a labour cost advantage.
However, this was found not to be the case when comparing
labour costs per litre of milk, mainly because countries with
higher salaries also tend to have a significantly higher level
of labour productivity. Per litre of milk, the labour costs of
a nine-cow dairy farm in Punjab, India, are similar to those
of a 350-cow farm in the USA. The main cost advantage of
smallholder dairy farming lies in the use of low(er)-cost feed
and the overall ‘low-tech’ approach to milk production. Cows
fed on crop residues, such as straw, are significantly lower-cost
producers of milk than high-yielding, grain-fed dairy cows.
Given the rapid increases in feed prices over the recent
past, it is important to consider how this trend affects the
competitiveness of small-scale dairy farmers in developing
countries. As these smallholder dairy systems normally use
much less compound feed per kilogram of milk than dairy
farms in industrialized countries, rising feed prices increase
the cost of milk production in the latter to a larger extent
than in the low-yield systems predominating in developing
countries. Thus, as feed prices increase, ‘typical’ smallholder
dairy farms become more cost-competitive.
For dairy farming to remain sustainable, it must be able to
compete for labour on local labour markets. If the ‘return to
labour’ in dairy farming (i.e. the ‘value-added’ per hour of
labour put into dairy farming) is higher than the average local
wage rate, the dairy farming system can pay competitive
wages and should be sustainable from the labour standpoint.
The average return to labour observed in the developing
countries covered by this study is US$0.45/hour, which is
45 percent higher than the average local wage of US$0.31/
hour. In the three industrialized countries covered, the
average return to labour is US$16.30/hour, which is still
22 percent above the average estimated wage of US$13.30/
hour. These figures indicate that it would be possible for
dairy farming to compete on local labour markets in both
groups of countries. However, milk production quickly loses
its competitive advantage when local wages rise faster than
labour productivity.
Conclusions for smallholder dairy development
The various analyses and case studies presented in this
document indicate that:
small-scale milk production not only improves the food
security of milk-producing households but also helps to
create numerous employment opportunities throughout
the dairy chain, i.e. for small-scale rural processors and
intermediaries; and
small-scale milk producers incur low production costs.
Thus, if well organized, they should be able to compete
with large-scale, capital-intensive ‘high-tech’ dairy farming
systems in industrialized (and developing) countries.
Dairy development may therefore serve as a powerful tool
for reducing poverty. Devising a viable dairy development
strategy for smallholders calls for a detailed analysis of strengths,
weaknesses, opportunities and threats posed by the external
environment. The strengths of smallholder dairy systems
are low production costs; high profit margins; low liabilities;
limited liquidity risk; and relative resilience to rising feed prices
– strengths that enable smallholders to serve as a competitive
source of milk supply. However, smallholder milk producers are
also beset by a number of weaknesses: lack of knowledge and
technical know-how; poor access to support services; low capital
reserves and limited access to credit; low (labour) productivity;
and poor milk quality – all of which limit their ability to take
advantage of market opportunities.
Major opportunities for smallholder producers engaged in
dairy production are: (i) growing demand for dairy products
in developing countries; (ii) probable milk price increases;
(iii) potential to increase milk yields through relatively few
additional inputs; (iv) potential to increase dairy labour
productivity; and (v) employment generation in the dairy
value chain (for example, absorbing family labour released by
higher on-farm labour productivity). However, smallholders
in developing countries also face major threats, namely (a)
policy support for (and competition from) dairy farmers in
OECD countries; (b) increased consumer demand for food
safety; (c) environmental concerns (low-yield dairy systems are
estimated to have higher carbon footprints per 100 kg of milk
produced than high-yield systems); (d) increasing local wage
rates; (e) intergenerational discontinuity (children of the betterperforming
farmers leave the system); (f) under-investment
in dairy chain infrastructure; and (g) inappropriate dairy
development policies and investment plans.
Given the increasing ‘interconnectedness’ of global agriculture,
the ability of smallholder milk producers to participate in the
dairy market in a profitable manner will depend not only on their
own competitiveness, mainly determined by production costs,
but also, and to an increasing extent, on the efficiency of the
dairy chains of which they are part. Therefore, recommendations
for smallholder dairy development must include strategies
to increase the competitiveness in all segments of the dairy
chain, namely, input supply, milk production, processing,
distribution and retailing. In other words, to be successful, any
dairy development strategy must be based on the principle of
‘creating value’ in each and every segment of the dairy chain. This
makes formulation of a dairy development strategy a complex
task, involving a large number of stakeholders and requiring
comprehensive analysis and continuous reassessment.