Small-scale dairy farmers suffer declines as prices remain sour

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In a typical rural economy of a country like Pakistan, milk production is considered an outcome of livestock enterprise mainly run by small-scale farmers. The daily sale of milk enables these poor or lower middle class families to improve their livelihood by obtaining cash earning through such single income source. The engagement of smallholder dairy farmers at initial level of dairy farming system provides them an opportunity to gradually increase their income through orientation from subsistence to market-based dairy system. But all this can happen only if these farmers are given equal opportunity to thrive by ensuring a level playing field.

According to a study, such improvement in living standards of small-scale dairy farmers has been witnessed in some developing countries where they are given due return, giving impetus to major expansion in small-scale milk production. However, small scale dairying has largely stagnated as far as productivity of milk business is concerned.

The purpose of analyzing trend of farm gate price and retail level milk price is to assess the economics of dairy farming in an effort to reflect real situation being faced by the small-scale dairy farmers owning very few milking animals.

The economic viability of about nine million farmer families involved in small-scale dairy farming in the country mainly depends on their returns on milk sale. But, unlike upward trend being witnessed in almost all the commodities and fair level of margins for the processors, dairy farmers continue to see squeezing returns every passing year, especially during the last decade. More worryingly, there has been steep decline in their returns in the last five years or so, making this profession unviable for dairy farmers. No considerable new investment in dairy farming is an obvious but unwanted outcome of such unfavourable business terms.

More precisely, 2018 has been the fifth consecutive year with an operating margin decline for small dairy farmers especially if compared with their rising cost of production and almost stagnating selling prices. It is a double whammy of rising cost including escalating rates of fodder and feed and stagnating sale price that have virtually played havoc with the productivity of small-scale dairy farming business.

As per findings of a report, about 95 percent of all milk is produced from small-scale rural and peri-urban holdings with less than 10 milking animals. The farm gate price offered by dairy processors acts as benchmark for the whole dairy sector.

Although the bad luck of dairy farmers continued to haunt them since early 21st century, their suffering due to bad business practices prevalent in the dairy sector however became more and more adverse for them in recent years. In the last ten years, farm gate price increased by Rs23.10 per litre while ultra-high temperature (UHT) pasteurised consumer price jumped by Rs76 per litre.

In the last five years, farm gate price increased by meagre Rs4.76 per litre, while UHT consumer price swelled by Rs40 per litre. The problem of diminishing income of small dairy has become so acute that in the last three years, farm gate price barely increased by Rs2.43 per litre while UHT consumer price swelled by Rs20 per litre.

If we look into the overall trend of farm gate milk price during the last 15 years (2004-2018), it emerges that smallholder dairy farmers are continuously on the receiving end. In 2004, when farm gate price for small-scale farmers stood at Rs14.5 per litre, they got 43 percent of retail milk price of Rs34 per litre. However, their income reduced to just 36 percent of retail price in 2018 if we compare Rs46.50 farm gate milk price with retail price of Rs120-130 per litres being witnessed, as per data of Pakistan Dairy Association (PDA) and market-based information. To make matters worse for the small dairy farmers, gap between farm gate price and retail price of packaged milk widened to about 75 percent in 2018 in contrast to about 43 percent recorded in 2004.

According to another statistical perspective, farm gate price during 2004-2018 shows a not-so-good annual average increase of Rs2.28 per litre against the robust average per annum increase of Rs6.85 per litre in the retail price of packaged milk. Such varying degrees of increase in milk prices at different levels led to windfall return to powerful dairy processors at the cost of smallholders, who are already stuck in the poverty trap mainly due to cash crunch.

The bleak situation becomes more evident for dairy farmers if we add negative impact of depreciation of rupee and factor in inflationary pressure on their income during the period under review. The agony of dairy farmers does not end here. Apart from dwindling returns on milk sale, their rising cost on the other hand showed upward trend whether it is cost of feed or green fodder, making it another source of concern for them. The cost of production of small dairy farmers during last one and a half decade (2004-2018) continued to erode, as average annual feed prices augmented by 26 percent against average annual rise of 2.28 percent in farm gate price during the same period. The green fodder price was also on the rise during this period with fluctuating trend. In a nutshell, it is really a worrying development that the returns to dairy farms selling milk to the processing industry were 32 percent more in 2005 relative to farms who were selling to informal milk collectors. In sheer contrast, now the dairy farms selling milk to dairy processing industry earn 12 percent less than others. Owing to this vicious circle, the livelihoods of 40-50 million people have been at stake.

Being a perishable item, the sellers of fresh milk face challenges in selling produce at his or her terms. The case of small farmers and powerful dairy processer makes it worse for the former. The federal government last year did take some bold steps to attract further investment in the dairy sector, protect the small dairy farmers and the corporate dairy sector, besides discouraging import and mitigating use of synthetic milk and recipe products. For this purpose, regulatory duties to the tune of 45 percent have been imposed on import of skimmed milk powder (SMP) and whey powder (WP). The dairy farmers however deem it insufficient and want to raise it to 80 to 100 percent. Commenting on the situation, various bodies of dairy farmers have expressed concern about increase in the use of imported dry milk in the country and asked the government to offer incentives to local farmers to improve production of quality milk to eliminate substandard dairy products. Their representatives regretted that prevalent circumstances and business conditions were driving small-scale dairy farmers out of business. Hundreds of thousands tons of skimmed and whey milk powder have been imported during the last five years in the country in addition to similar quantity of smuggled consignments, posing a growing threat to the viability of the local dairy farmers. Dairy farmers suggested imposition of hefty duties on import of milk and whey powder with a view to protect the local dairy farmers.