1. The Smallholder Dairy Revolution or Smallholders and the Livestock Revolution? Steven J. Staal International Livestock Research Institute IFCN Dairy Conference, May 2003

2. Research Centers of the Consultative Group on International Agricultural Research (CGIAR)

3. Issues Small scale dairy farms dominate production in most developing countries Why? Can they compete internationally? Can they compete with that larger farm down the road? What factors influence competitiveness? (What is competitiveness??!)

4. Outline of presentation The Livestock Revolution Milk markets and consumption in developing countries Characteristics of smallholder dairy production Nutrients for the land Nutrition for the family Competitiveness Economies of scale Non-market benefits Opportunity costs of labor Comparing large vs small scale systems

5. The near future: the Livestock Revolution Expanding populations, incomes and urban households across developing countries particularly in Asia This is driving greatly increased demand for livestock products, including milk Much greater demand growth than for most crop products

6. Predicting the Livestock Revolution Recent study by C. Delgado et al, IFPRI/FAO/ILRI (1999, 2001) examined the trends for livestock demand and production to 2020 Uses IMPACT model, global food model of 18 commodities including 7 livestock, 37 regions/countries, and annual iterations to 2020 Market clearing prices, and levels of production, consumption, and trade

7. Developing countries Developed countries % increase in demand Percentage Increase in Total Demand for Livestock Products 1993 – 2020

8. The continuing Livestock Revolution: projected growth in milk demand SSA China India Developing C Developed C Million MT/yr 19972020 1735 1023 60132 194372 251276 Kg/capita/yr 19972020 3037 816 62104 4361 194203 %/yr 3.3 3.5 3.2 2.7 0.4 Adapted from Delgado et al., 2001

9. Implications of the Livestock Revolution for milk production in DC’s Model predicts that deficit countries will generally import feed rather than livestock products Increase in production will thus occur mostly near where increase in demand occurs As a consequence, Developing Countries will produce 52% of global milk in 2020, up from 32% in 1993 Presents huge apparent opportunities for milk producers in Developing Countries (if they can compete)

10. Sources of change in cow milk production, 1985-1998 -10 0 10 20 30 40 50 60 70 ChinaIndiaSE AsiaSS Africa % of change in cow's milk production Herd% MilkingProductivityInteraction Source: ILRI using FAO statistics Herd growth likely to mean growth in numbers of farms, in absence of major structural change

11. Informal dairy markets and actors Informal/unorganised Liquid, often raw, milk and traditional products Sometimes formal – may pay taxes, licenses Wide variety of actors Direct sales Small-scale traders Traditional processors Small-scale retailers Generation rural/urban employment 2-5 jobs per 100 L daily

12. Informal dairy markets globally Informal market share % SSAKenya88 Tanzania98 Uganda 90 L. America Mexico33 Nicaragua86 Costa Rica44 Brazil44 S. AsiaIndia85 Sri Lanka40 Pakistan98 Sources: ILRI Collaborative Research & FAO E-Conference  Primary market for both small producers and poor consumers

13. Demand factors driving informal markets: elasticities of demand (Kenya) Largely driven by low cost and traditional preferences Partially driven by relative demand for food safety and quality Income (expenditure) elasticity of demand Raw milk0.13 Pasteurised milk0.50 Price elasticity of demand Raw milk0.12 Pasteurised milk0.70 Household income level LowMediumHigh 0.26 0.12 0.93 0.21 Source: ILRI 2002

14. Markets and scale of milk production Spatial and household analysis of farm-gate milk price formation in Kenya Informal markets charge penalty on higher volume Formal market pay premium to higher volume Market outlet options condition farmers incentives for scaling up Source: Staal et al, 2000

15. Dairy production’s role in sustaining mixed small farming INPUTS Fertiliser Seeds Natural Inputs OUTPUTS Harvest Losses Field INTERNAL FLOWS Feed / Fodder Organic fertiliser (Manure) System boundaries OUTPUTS Milk BW gain Manure Losses INPUTS Feed Fodder Cattle

16. Scarce nutrients – farm and family Farm nutrients – problem is nutrient deficits, not surpluses West Kenya – only farms with cattle had positive (small) nutrient balances Central Kenya - more than 40% of fodder materials gathered from off-farm – nutrient channel Family nutrition – problem is under nutrition, not over nutrition Coastal and Central Kenya – hhs with cattle have significantly lower % of children exhibiting stunting (height for age) a measure of long-term under nutrition (Nicholson et al 2002)

17. Economies of scale in dairy production Can smallholder farmers compete against larger neighbors? Several new studies (IFPRI, ILRI) using stochastic frontier analysis to examine economies of scale (Bangladesh, India, Kenya, Thailand, Brazil) Qualifier: uses enterprise approach, excluding some non-market benefits

18. India (Punjab, Haryana, Gujarat) Average Yield Per Animal Source: Sharma and Delgado, 2003 6.2 7.6 6.3 7.6 7.4 7.8 9.7 8.4 0 2 4 6 8 10 Rs./Lit. SmallMediumLargeCommercial NorthWest

19. India: Average profit per liter of milk (with family labor) -0.1 0.1 0.3 0.5 0.7 Rs/litre <=2020-4040-8080-150>150Avg. Farm scale - liters of milk/day Source: Sharma and Delgado, 2003

20. India: Mean Farm Efficiency by Size group 0.80 0.87 0.94 0.86 0.83 0.85 0.1 0.3 0.5 0.7 0.9 Index <=2021-4041-8081-150>150Average Farm scale - liters of milk/day Source: Sharma and Delgado, 2003 Key distinguishing factors: information** and credit* Does not include most non-market benefits

21. Capital costs? - financing and insurance roles of livestock Limited or no smallholder access to formal insurance (health, household) nor to formal credit. Dairy cattle can provide both. E.g forced savings - lower milk price to accumulate payment Opportunity costs of capital - Smallholders may also have few alternative inflation-proof savings/investment opportunities. Financing Sale of animals to meet planned lumpy expenditures Value accrues at sale Insurance Keeping of animals to meet emergency expenditures Value accrues daily

22.  Tested using tobit analysis of age of sale of culled cow  What is competitiveness? 0 200 400 600 800 1000 1200 1400 WithoutWith US$/yr Total revenueTotal costsProfits Comparisons with and without non-market benefits – Western Kenya Benefits of finance and insurance are based on contingent valuation of WTP Source: Ouma 2003 18%  15%  14%  Extensive dairySemi-intensive dairy Intensive dairy WithoutWith Increase in “profit” due to finance and insurance benefits

23. Opportunity costs of labor and herd size: comparison of typical herd size and rural wage rates, 12 selected countries in SSA, Asia and LA Source: Project on Transregonal Analysis of Crop-Livestock intensification, ILRI 2002

24. Large/formal/rich vs small/ informal/poor dairy systems Large/formal/richSmall/informal/poor Production profile Nutrient and nutrition profile Human over-nutrition, threat to human health (?) Human under-nutrition, sustaining human health System nutrient surpluses, threat to environment System nutrient deficits, sustaining natural resources Few outputs/objectives, enterprise model Multiple outputs/objectives, farm-household model Capital intensiveLabor intensive Strong economies of scaleWeak economies of scale Often subsidizedFew subsidies, may be taxed indirectly

25. Large/formal/rich vs small/ informal/poor dairy systems (cont) Demand and product profile Value added products, highly processed Low cost products, traditional processing High relative demand for food safety/quality Low relative demand for food safety/quality Large/formal/richSmall/informal/poor Policy profile Highly regulated and monitored Largely unregulated, unrecorded Over-represented: loud voice in domestic and international policy Invisible: little voice in domestic or international policy Growth and opportunity profile Stagnant future prospects (??)Growing future prospects (??)

26. Thank you