Dairy Value Chains in Punjab

This piece was originally published on the India Food Security Portal.

The dairy sector provides an important source of livelihoods in India. However, for many small dairy producers, involvement in the dairy sector remains a subsistence activity due to a lack of resources and limited access to credit and markets. The growth of modern dairy value chains, supported by the Government of India, has the potential to improve the scale and efficiency of milk production and to mitigate risk for dairy producers, but only if those value chains are inclusive and efficient. In a new article published in the Journal of Rural Studies, researchers examine the inclusiveness and efficiency of both formal and informal dairy value chains at the farm level in the state of Punjab, as well as how producers finance their dairy activities both within and outside of the value chain.

In 2014-2015, milk production in India reached 146 million tons, according to the article; milk now accounts for one-fifth of the gross value of output of the entire agricultural sector, more than rice and wheat. The authors credit advances in livestock breeding and care, as well as changes in the milk marketing system that allowed for greater participation from the private sector, for this impressive growth. State-run dairy cooperatives also continue to play a major role in India’s dairy sector – in 2013-2014, the country had 162,000 dairy cooperative societies (incorporating cooperatives at the village, district, and state levels) that sourced 12.5 million tons of milk from 15 million individual dairy producers. India’s formal dairy value chain, incorporating dairy cooperatives and both domestic and international processors, procures 23 percent of the country’s total milk production and is often biased toward more resource-rich dairy producers. Small producers, on the other hand, more often interact with the informal value chain, which includes local vendors and traders, small-scale domestic processors, and neighboring households. While marketing and transaction costs are lower in the informal value chain, so, too, are the prices that producers receive for their goods.

The state of Punjab contributes 7.3 percent of the country’s overall milk production; average milk yield in the state is higher than the national average due to the comparative availability and accessibility of feeds and fodders and veterinary services. The state’s marketing system incorporates dairy cooperatives, domestically owned private sector processing facilities, and multi-national private sector companies like Nestle India Limited and Glaxo SmithKline; this strong marketing system provides producers with a stable market for their product, with lower marketing and transaction costs and less uncertainty about prices, according to the article.

The value chain study looked at a survey of dairy producers from May-June 2014. Two districts from each of Punjab’s three geographical zones were selected randomly for participation in the survey; in all, 612 dairy households were randomly selected, in proportion to the share of each zone in the total dairy-producing animals in the state.

The survey found that producers in the Punjab sell to a combination of dairy cooperatives, private domestic processors, multinational processors, vendors and local traders, and local consumer households. The amount of milk sold is positively correlated with the size of a producer’s herd; large producers (those with ten or more animals) sell 97 percent of the milk they produce, whereas small producers (those with between five and ten animals) sell about 86 percent of the milk they produce. According to the authors, these numbers show a relatively high degree of commercialization in the dairy sector in Punjab.

Regarding which value chain – formal or informal – producers choose to market their milk, the study finds that more than 62 percent of the total surveyed producers sell through formal value chains, most often through dairy cooperatives. Small dairy producers (those with five or fewer animals) tend to be more linked with informal value chains; 86 percent of producers selling to consumer households and 62 percent of producers selling to local traders are small producers. However, the study does find that small producers in Punjab still make up more than half of the total producers associated with formal value chains. The authors suggest that formal value chains choose to work with both small and large producers in order to spread supply risk.

The study does find, however, that land ownership plays a part in participation in formal value chains. Landless producers, who are usually the poorest, were found to be more associated with informal value chains, while producers with large landholdings sale more within formal value chains. This supports the idea that formal value chain actors prefer partnering with more resource-rich farmers, or vice versa.

In terms of the prices realized by different producers, the study found that the difference between the prices received large producers and those received by small producers were not statistically significant; on average, a dairy producer in Punjab received 24 rupees from the sale of one liter of milk during the study period. The prices realized did differ slightly across different value chains; however, that difference was not significant. Price realization was highest in chains driven by multinational milk processors; the prices received from local traders and from direct sales to consumer households were virtually similar, and did not differ much from the prices realized from chains driven by domestic processors or dairy cooperatives. The authors posit that the non-significant difference of prices across value chains is indicative of growing competition in the milk sector in Punjab.

The authors did find evidence of scale-based price discrimination, however. Large dairy farmers in value chains driven by multinational processors received 7.5 percent higher prices than small dairy producers in the same chains. The authors suggest that this could be due to larger producers’ better bargaining power, as well as to incentives from multinational processors for the reliable supply or large quantities or milk or better quality milk. In terms of profit, farmers selling to value chains driven by dairy cooperatives earned more profit than those selling to multinational processors or domestic processors; in the informal sector, profits were higher for producers who sold directly to consumer households than for those who sold to local traders.

Several other factors in addition to herd size and landholding appear to influence whether a producer will be involved in the formal or the informal dairy value chain in Punjab. The study found that producers who had a higher level of schooling, more training in dairy management, and higher awareness of food safety standards tend to be associated more with the formal value chains. In addition, producers who are in the upper echelons of the caste hierarchy are involved in formal value chains, indicating that social status also plays a role.

Financing for dairying activities in Punjab comes from both within and outside of value chains. Within-chain financing, or internal financing, means that producers borrow from value chain actors, such as processing companies. External financing means that borrowing is done from commercial banks or from moneylenders or family and friends. Fifty-three percent of the farmers surveyed borrow from one source or another to finance their dairy production. Credit from commercial banks appears to be more accessible to larger, more resource-rich producers, while small farmers depend more on informal loans from friends and family or moneylenders. The study suggests that small producers have more limited assets to offer a bank as collateral, thus making them less attractive investments for formal lenders. Within the value chain, financing tends to be limited to chains driven by domestic processing companies and local traders who provide short-term credit to producers in return for a commitment to sell their milk to the lender.

The paper’s findings have several important implications for policy. Within formal value chains, increasing access to technology, inputs, and training would help farmers improve their yields, reduce their production costs, and increase their profits. In addition, training farmers to better understand and address food safety concerns would allow them to meet the stricter food safety standards often associated with higher-paying markets. Providing such incentives, whether through government programs or through private sector actors themselves, could also help reduce the risk of side-selling (selling to actors offering a higher price, outside of a producer’s existing contract).

Financial institutions, such as commercial banks, also need to build a stronger partnership with formal dairy value chains; the authors suggest that lenders could recognize the dairy chain’s product market orientation as a type of collateral, rather than simply looking at a producer’s physical assets (land or animals). Strengthening this relationship between formal lenders and formal markets would help reduce transaction costs and risk, particularly for small producers, making the overall dairy value chain more inclusive.