Emerging Changes in the Indian Dairy Industry Meeta Punjabi Meeta. punjabi@fao. org UNFAO, New Delhi Presentation Outline • Context of the Study • Overview of the Indian Dairy Sector • Critical issues in development of Dairy Sector • Comparative Analysis of Emerging Dairy Chain Models ? Private Sector Model ? Modern Co-operative under MACS Act ? Traditional Co-operative • Way Forward Context of the Study Context of the Study Indian Dairy Industry is at cross roads • Industry strongly dominated by the government sector and working in co-operative mode is going to face keen competition from private sector • Co-ops performed well in some states, but in many states, they are functioning as a parastatals, weak representative of farmer interest • Currently co-op prices serve as a bench mark for pricing of dairy • Weak co-ops competing with private sector may severely affect farmer interest • Growth potential is tremendous, can the farmers benefit from this opportunity?
Context of the Study Critical Questions • What is the implications of these changes on the farmers – potential threats and opportunities? • Which models better serve the interest of the farmers? • How can the co-operatives be strengthened to meet the emerging changes? Overview of the Indian Dairy Sector Overview of the Indian Dairy Sector Production and Productivity • Largest milk producer in the world, 100 million MT • Value of output Rs. 1179 billion (2004 -05) (Almost equals combined output of paddy and wheat!! • 1/5th of the world bovine population • Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) • Very low productivity, around 1000 kg/year(world average 2038 kg/year) • Large no. of unproductive animals, low genetic potential, poor nutrition and lack of services key factors for low productivity • Different regions – Developed, Average, Below average (eastern states of Orissa, Bihar and NE region) Overview of the Indian Dairy Sector Tremendous Growth through Operation Flood Stagnant milk production during 1950s and 60s • Major changes in the dairy policy (Operation Flood) • Linking-up rural producers with the urban consumers • Large public investment in milk processing sector through cooperatives • Growth rate of agriculture is stagnant, below 2%, livestock sector growth rate is more than 4. 5% • IMPACT ON RURAL NUTRITION, EMPLOYMENT, INCOME, WOMEN EMPOWERMENT Overview of the Indian Dairy Sector Dairy and Livelihoods (Pro-poor impact) Small and marginal farmers own 33 % of land, and about 60% of female cattle and buffaloes (pro-poor impact) • 75 % of HH have 2-4 animals on average • Dairying is a part of the farming system • Feed is mostly residual from crops – cow dung used as manure • Source of regular income, crop income is seasonal – risk minimization (suicides) • Comprises about 1/3rd of the rural incomes • Livestock is a security – asset to be sold in times of crisis • KEY TO INCLUSIVE GROWTH Overview of the Indian Dairy Sector Marketing 15 % of marketable surplus goes through organized sector, rest traditional unorganized sector • Organized sector until recently was only the co-operatives • Replication of the AMUL model in the rest of the country, NDDB lead agency • 3 Tier structure : Village society, district unions federated at state level (headed by IAS officer) • Model adopted with some variations in different states • Co-operatives have achieved limited success in many states Overview of the Indian Dairy Sector Regulatory Environment Dairy sector was de-licensed in 1991 • Milk and Milk Products Order 1992: some controls ? Collection areas/milk sheds specified ? Processing capacity fixed • Revised MMPO in 2002: controls stand withdrawn • Private sector investment in dairying has increased considerably • Previously, co-operatives did not have any competition from the private sector • To strengthen co-operatives (MACS Act,1995): reduce government interference in mgt. • farmer freedom to govern the organization Overview of the Indian Dairy Sector Livestock Services Agriculture is a state policy in India • Center cannot enforce policies, driven by the ideologies and interests of the state government. • Department of Livestock is with the Ministry of Agriculture • Department of livestock has a network of veterinarians providing livestock veterinary services • Partial Cost recovery now initiated in several states • Efforts to enhance coverage through paravets & CBAHW • Feed distribution at subsidized rate through co-operatives Overview of the Indian Dairy Sector Future Potential Dairy demand is income elastic • Increase in Income and increase in population- high growth rate for dairy • High potential for enhancing farmer incomes from dairy enterprise • In this situation it is important to assess the critical weaknesses in the dairy value chain. • Identify approaches to enable farmers to capitalize on these opportunities Critical Issues in Dairy Value Chain Critical Issues – Input Breeding/health/extension • Large majority of indigenous cattle (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows) • National Cattle and Buffalo Breeding Program • Only small percent is covered by AI, est is dependent on natural breeding; Performance of AI is not up to mark • State veterinary departments, co-operatives, NGOs, private veterinarians, and paravets are the service providers. • Regions with high producing dairy animals –good coverage • Other areas still lack adequate coverage of services • Extension: Lack of extension – poor feeding practices does not enable farmers to capitalize on potential Critical Issues – Input Feed • Availability, quality and cost of feed is an issue. Land is largely rain-fed or dry land (70%), low output of dry fodder • Availability of land for fodder grass • Subsidized feed is available through co-ops, but quality and affordability are issues Credit • Poor access to institutional credit • Credit through informal channel has very high loan rate, and results in exploitation of farmer through lower milk prices Critical Issues – Production • Dairying is a part of the farming system, not dairy as enterprise • Two to four animals on average, milk production is scattered through out the country • Low productivity, large no. f unproductive animals poor genetic resources, low affordability of feed as well as poor feeding practices • Farmer has low interest in dairying at times when crops are good • Many areas do not have access to health and breeding services Critical Issues – Marketing • Two major channels – Co-operative, traditional • Milk prices are set by the co-operatives • Premium on fat content hence buffalo milk fetches higher price, cow milk pricing based on total solids • Farmer price is Rs. 11 for cow milk and Rs. 14 for buffalo milk (0. 25 USD & 0. 35 USD) (1 liter bottle of water costs Rs. 2) • The trader usually pays a small amount higher than the co-operative price (co-op price is the benchmark) • In a large part of the country, there are no testing facilities at the village level, transparency in pricing • Quality of milk, amount of time taken for milk to reach to bulk cooling/chilling center Critical Issues – Competitive Environment • In recent years, private sector competing with co-ops • Need to strengthen co-operatives to compete with the private sector • Regulatory changes in the co-operative sector – MACS/ “Producers company” • MACS (Mutually Aided Co-operative Societies) ?
Two tier, village level and union level ? 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) ? So far implemented on the ground only in Andhra Pradesh Comparative Analysis of three value chains in Dairy • Andhra Pradesh state in South India is a leader in dairy activity and has experimented with various new models and has very active large private sector dairies competing with each other ?
Leading Private Sector Dairy ? MACS at a district level ? State Co-operative in a lagging state Emerging Value Chains for Dairy • Private Dairy in HQ in Andhra Pradesh ? Initiated in 1992 after MMPO permitted private dairies ? Traded on the stock exchange ? Collecting milk about 7 lakh liters per day/ 1,50,000 HH/3500 villages ? Leading well recognized brand, also have own supermarket stores ? 3 Metros, Hyderabad, Bangalore, Chennai, and now enter Mumbai Emerging Value Chains for Dairy • Business model of Private Dairy ? Has agents in the village for milk procurement (agent rel. with villagers) ?
No direct company involvement with farmers ? The company has negotiated price with agent, but is not involved with what price the agent gives the farmers (slightly above co-op) ? Farmer price at least state co-op price ? Agent often times gives loans to farmers to maintain loyalty ? Competing with other private players for procurement ? Employees are previous dairy co-op employees ? Collection areas depend on milk density and areas in which district co-op is less active Emerging Value Chains for Dairy • MACS Society in Andhra Pradesh ? Dairy activities started in 1971 in the district ? Changed to MACS society in 1998, (MACS Act, 1995) ?
Collecting milk from 650 villages in the district ? Milk collection is 60,000 liters per day, likely to go up to 1,00,000 in the coming 2-3 years Emerging Value Chains for Dairy • Business Model of MACS ? As per MACS norms, 2 tier operation, village level and district level ? Village level managed by village society, district level by BOD ? Elected members every year ? The village level society itself is registered as a separate MACS society and has the freedom to use its own profits ? MACS has the freedom to set own farmer prices, higher than co-op ? District Union managed by professionals Emerging Value Chains for Dairy
State Co-operative • Is an apex level Dairy Cooperative Society registered under Cooperative Society Act – 1962 • Milk procurement from 12 district unions • 3,22,000 liters per day/3800 village societies • 2,24,000 farmers • Not much competition with private sector in the area as YET Emerging Value Chains for Dairy • Business Model of Co-op ? As per co-op norms, 3 tier operation, village level and district level, and state level ? Village level managed by village society president ? State level managed by bureaucrat ? No democratic election at village level ? Profits of village level society not distributed to farmers, no ownership ?
Prices set by co-op (low prices because of services and bonuses) Comparative Analysis of the three models Input Supply • Private Dairy ? No provision for input supply except for loans given to farmers sometimes • MACS Society ? Breeding and health services tie up with NGO/state dept. ? Own manufacturing of quality feed at subsidized rate ? Organized thrift and credit co-operative for credit for animal purchase ? Medicines available at cost/Farmer meetings for extension • State Co-operative ? Limited Breeding and health services ? Feed available at subsidized rate through village society ? Not much facility for loans ?
Medicines available at cost, availability is sometimes a problem Comparative Analysis of the three models • Production ? At the farmer level, there is not much difference between the three models, because there is not much extension activities carried out by any of the three agencies ? As an hypothesis one can say that the MACS society because of extension and availability of feed may be using higher feed as compared to crop residue which is not very nutritious ? Need to look at the data closely to confirm this. Comparative Analysis of the three models Milk purchase from farmer • Private Dairy ?
Done through the agent (governance issue) ? Agent decides what price he will give, usually competition with agents of other companies ? Testing is done in very few cases, that is also not transparent • MACS ? Done through Village MACS society (democratic functioning) ? Prices declared by the Union, higher than Co-op pricing ? Testing of milk through electronic milk-o-testers • State Co-operative ? Done through village society (Society president has a lot of power) ? Prices declared by co-op (lowest prices) ? No testing, average prices for cow and buffalo milk, strong dominant people in community get better prices
Comparative Analysis of the three models Primary Processing and Transportation • Private Dairy ? Clean milk practices at village level ? Efficient transportation ? Good infrastructure for bulk coolers/Chillers • MACS ? Clean milk practices at village level ? Efficient transportation ? Has developed a very good infrastructure for bulk/chillers ( govt. subsidy on infrastructure NOT AVAILABLE TO MACS) • Co-operative Dairy ? Limited attention to clean milk practices ? Inefficient transportation ? Has not availed of the government funds to develop this infrastructure
Comparative Analysis of the three models Processing/Quality/Variety of Products Private Dairy • ISO certified plant meeting all quality requirements, • Has a variety of quality products catering to children and younger generation (yoghurt, flavored milk) • Selling mostly in metros, market expansion in urban areas MACS • Good quality products, but no certification as yet • Traditional products • Tapping the rural markets as well, through village societies (small packets, 250 ml) Co-operative • Quality of products is an issue, though has improved • Traditional products • Tapping only the urban market
Comparative Analysis of the three models Future growth • Private Dairy ? Not involved in dairy development activity, only procurement, will have to move to newer areas for expansion ? In future if MACS becomes strong in these areas, procurement will be affected • MACS ? Involvement in dairy development activity will help them to grow ? Face competition from private sector because of community tie up • Co-operative ? Low involvement of community will make it an easy target for private sector entry ?
Lack of variety and quality of products will make it difficult for them to compete with private sector Way forward • MACS Act was passed to make the co-operative strong in face of competition • However, the act is most practiced only in AP, the other states have yet to implement this Act • 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 • However, in the past few years, about 650 MACS societies have registered in the state. A closer look at their functioning before taking this to other states Way forward • What should be the regulatory role of the government in times when private sector is becoming increasingly active? • What are some options for enhancing availability of livestock services
