SMALLHOLDER DAIRY DEVELOPMENT

drivers, trends and opportunities

A.P. Wouters and J. van der Lee, Wageningen UR Livestock Research
This article is accompanied by the complementary PowerPoint presentation .
The majority of the population in developing countries depends on agriculture for their livelihood.
Smallholder dairy production has been recognized for decades by governments, NGOs and other
development agents as a means to improve food security, nutritional status and family income. Dairy
development continues to offer opportunities for additional economic activity with a high added value
and extra employment opportunities. This article explores drivers, trends and opportunities for
smallholder dairy development, particularly in Africa and Asia.
Drivers for dairy development
Increasing demand Worldwide, the demand for milk and milk products keeps rising. Drivers for this rising
demand include increasing incomes (higher consumption of animal protein), urbanization with accompanying
westernization of diets (particularly in East and Southeast Asia), and population growth. The expectation is
that the current financial and economic crisis is merely causing a temporary decline in demand. Projections
indicate a large increase in demand for dairy products, particularly in Asia, Eastern Europe and sub-Saharan
Africa (Delgado, 1999). Multilateral (WTO) and other free trade agreements result in less protection for
traditionally protected dairy markets. This offers opportunities for areas with low cost milk production (like Latin
American countries), while milk producers in traditionally protected dairy markets will face less security as
world market prices will fluctuate more.
National interests - The hike in prices of food and feed commodities and the accompanying public unrest has
drawn attention of policy makers to the need for local food production. National governments can either satisfy
the growing demand by imports - at the cost of hard currency - or by increased local production. For
governments, increased self-sufficiency and food security (in terms of lower dependency on the world market)
are important drivers to increase milk production by smallholder dairy development and/or by large scale
investments.
Rural development - Smallholder dairy development assists in achieving both food security and poverty
alleviation. The nutritional value of milk is beyond doubt and is an important complement to energy biased
diets. Milk provides essential nutrients, in particular for young children and HIV&AIDS infected people. Poverty
alleviation through smallholder dairy development is an important driver for dairy development in many
developing countries (Millennium Development Goals). Dairy development improves and diversifies
livelihoods, creates a regular income and employment, and is likely to reduce urban migration. It offers
opportunities for empowerment, especially of women. Compared to other food crops, milk production is an
economic activity that provides a relatively high added value, although accompanied by a higher risk. In
addition, trade in milk and milk products assists in the transfer of capital from urban to rural areas.
In general, smallholder milk production leads to intensification of the smallholder production system, i.e. better
use of crop residues and other by-products, and increased availability of manure for crop production.
Trends in dairy development
Fluctuating milk prices as a result of reduced market protection Milk producers worldwide are and will be
confronted with fluctuating and often lower milk prices. The worldwide push for reduction of market protection
translates in lower producer prices in the traditional dairy markets of the EU and USA. New bilateral and
multilateral free trade agreements may result in lower milk prices due to cheap imports (for example free trade
agreements ASEAN countries).
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Higher feed and fertilizer prizes The growth of the world population and alternative uses of feedstuff may
continue to result in higher feed prices, affecting milk production if based on high use of concentrate feeds.
The use of grain for bio-fuel was one of the causes leading to high food and feed prices in 2007. Prices of
fertilizers are likely to be high in the long term, due to high fossil energy use and depletion, affecting long term
soil productivity and forage crop production.
Privatization Reduced involvement of governments in facilitating input supply and service delivery generally
increases the effectiveness and efficiency of services. However, it may reduce access of smallholders to these
services. Privatization of government services stimulates the organization of producer organizations, farmers
groups and/or cooperatives. Governments need to redefine their role in dairy development - from
implementation to facilitation. At present there is often still a mix of ineffective free services offered by
government and services of private parties for which farmers need to pay.
Value chains and safety standards - Urban demand for milk products stimulates the development of formal
supply chains in which a regular supply and product quality play an important role, as evidenced by
introduction of international food safety standards and quality control mechanisms. This is enhanced by the
rapid development of supermarkets (foreign investments and/or local chains) in many developing countries.
They require a constant flow and large variety of dairy products of good quality at competitive prices. In future
more consumers will buy from supermarkets. Investments of multinational food companies in developing
countries contribute to introduction of international quality standards. Large suppliers are comparatively at an
advantage over small scale producers when it comes to quality and reliability of supply while for many
smallholders it is still difficult to meet the required quality standards set by processors and/or supermarkets.
Increasing scale of processing and production Increased marketing of milk through formal supply chains
often leads to scaling up and mergers in the processing industry. Many countries show also a trend towards
establishment of large scale milk production units, to ensure a constant and quickly growing supply of high
quality milk. These production units are often owned by private investors or linked to milk processors (vertical
integration). Long term sustainability of such large operations can be questioned, but it is expected that in
many countries milk production will be based on both small scale and large scale operations. Milk produced by
large scale operations is likely to cater for urban demand and/or high quality products like baby food.
Participation of smallholders The main emphasis in smallholder dairy development has shifted from
introduction of improved technical packages and capacity building to linking of smallholders to markets/dairy
supply chains. Current interventions include formation of producer organizations, improvement of market
access and market functioning, and improvement of services and input supply by producer organizations or
private parties.
Major opportunities and challenges facing smallholder dairy development
Small scale milk producers in developing countries face a number of challenges in realizing the opportunities
offered by the growing demand for dairy products. These challenges can be grouped in market, production
and institutional related challenges:
Market - How can smallholder dairy farmers participate in modern dairy supply chains?
- Small scale farmers will be challenged to meet the quality standards of modern dairy chains, which
often are more difficult and expensive to implement at smaller scales. The strong emphasis on food safety
and quality results in introduction of standards and control mechanisms - demands are put on reliability of
supply, an efficient collection system with chilling equipment etc. Good Agricultural Practices have to be
applied that not only include aspects related to quality and food safety, but also aspects of economic,
social, and environmental sustainability (FAO, 2004). Multinational and national dairy companies like to
implement their corporate social responsibility strategy by sourcing milk in a responsible and sustainable
manner.

Small scale dairy farmers need to offset the higher transaction costs linked to collection and transport
of small volumes, by making milk collection systems more efficient. Several models have been used to link
smallholder dairy production to modern dairy chains. Successful models are characterized by good
economic returns (to which pooled milk collection and transportation contributes), conducive policy and
institutional support from authorities, and active involvement from private sector. One well-known
successful model is the Amul cooperative model promoted by Operation Flood in India, although
cooperative development is not a condition per se - Pakistan has successfully developed small-scale dairy
without cooperatives (Staal et al., 2008).
Small scale dairy farmers can add more value if they are able to process and market (part) of their milk.
Milk producers groups, dairy cooperatives etc. are important vehicles to start this process of adding value,
but it is essential that they are well-functioning. Successful examples can be found in India (Amul), Kenya,
Indonesia etc.
A more general marketing challenge is how to deal with fluctuations in supply and demand; these may
get out of balance due to reduced production in the dry season, fluctuations in demand like high
consumption in holiday seasons or non-consumption in fasting periods (e.g. Ethiopia). Milk processors and
marketing need to deal effectively with these fluctuations in order to offer smallholders a reliable market.

Production How can small scale dairy farming become/remain sustainable?

Small scale dairy farming faces a number of challenges regarding economic and environmental sustainability.
Intensification by increasing milk output per animal and per unit land may contribute to economic and
environmental sustainability of the overall farming system but aspects like nutrient cycling will need more
attention. Major limitations to be overcome to increase milk production at farm level are related to breeding,
feeding, and animal disease prevention and control:
- Breed improvement through cross breeding, imports etc. in many cases is a first requirement to transform
smallholders from subsistence farmers to commercial small scale producers that are able to market
tangible amounts of milk. New innovations (like use of sexed semen) may improve under certain
conditions availability of crossbreds for milk production. Maintaining the required genetic potential for milk
production through AI services, bull schemes, good breeding policies are challenges for all stakeholders in
the chain.
- Availability of good quality feed (forage/roughage and concentrate feed) throughout the year is a major
limitation for increased milk production, especially when better breeds have been introduced (Udo et al.,
2007). Forage production often is hampered by lack of or competing claims on land. Dry season feed
shortages lead to seasonal fluctuations of milk supply. Poor feeding practices also lead to poor
reproduction, long calving intervals, and as a result insufficient replacement stock, which limits the
opportunities for selection and breed improvement. New challenges in relation to forage production and
feeding include climatic change and reduction of green house gasses. A major challenge for small scale
farmers is the sustainable intensification of milk production to obtain higher milk production per animal,
which will improve economic competiveness and may contribute to reduction of green house gasses.
- Prevention and control of animal diseases is an issue that requires commitment of many stakeholders in
the chain. Especially at farm level, better prevention and control of mastitis could contribute to a much
higher milk output.
- Intensification of milk production puts significant requirements on knowledge and management skills of
farmers forage production, feeding, reproduction, breeding, young stock rearing, input purchase, and
prevention and control of diseases need to be fine-tuned to realize consistent output and a reasonable
profit margin.
Institutional arrangements A number of institutional arrangements shape the space for smallholder dairy
development. Strong representative producer groups and their federations are important in advocating
farmers interests. Private parties play an important role in backward and forward linkages. Governments role
often is underestimated, but can make an essential difference. For example, lifting market protection for the
dairy sector to honor international trade agreements can seriously affect the competiveness of smallholder
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dairy farming. Government policies related to dairy development are influenced by the competiveness of the
sector in comparison with other activities, its claims on resources like land and water, its contribution to food
security (particularly of the urban population), international agreements, rural development goals, foreign
exchange earnings etc.

The various public, civil society and private actors are in a position to influence the success of smallholder
dairy development through:
- A clear vision on the direction that dairy development should head (see figure 1). Important aspects are
the involvement of smallholders vs. domination by (multi)national corporations, the level of intensification
to be achieved (based on desired mix of people, planet and profit objectives), related technological,
infrastructural and capacity building investments, the availability and titling of land for dairying, and the
herd improvement strategy and related breeding goals (see further Schiere & van Mierlo, 2009)
- Supporting the set-up of working models of producer organizations (producers groups, cooperatives etc)
and their role in advocacy and in provision of services (including milk collection, input supply and services,
governance).
- Clarifying and regulating the roles of public, civil and private sector actors in various aspects of
smallholder dairy development and the dairy supply chain.
Successful inclusion of small scale milk producers in modern dairy supply chains requires an
integrated and long-term approach. It requires a joint effort of various actors in the dairy supply chain
to create an enabling environment for implementation of jointly supported interventions which should
include proven and new innovations and approaches.
References
Delgado C., H. Rosegrant, H. Steinfeld,S. Elui, C. Courbois, 1999, Livestock to 2020, The next food revolution, Food, Agriculture and the
Environment Discussion Paper 28, IFPRI, FAO and ILRI
FAO and IDF, 2004, Guide to good farming practice, A joint publication of the International Dairy Federation and the Food and Agriculture
Organization of the United Nations
Henriksen J. (2009), Milk for Health and Wealth, Diversification booklet number 6, Rural Infrastructure and Agro-industries Division, FAO, Rome,
Website: www.fao.org/docrep/011/i0521e/i0521e00.htm

Schiere, J.B., and J.F.A.M. van Mierlo, 2009, Livestock and Livelihood, Changes and Choices, Heifer Nederland

Staal S.J., A.N. Pratt and M. Jabbar (2008), Dairy Development for the Resource Poor, Part 1: A Comparison of Dairy Policies in South Asia and
East Africa, PPLPI Working Paper no 44-1, Pro-Poor Livestock Development Initiative, ILRI, FAO, Website: www.fao.org./ag/pplpi/
Udo H.J.M , H.A. Aklilu, L.T. Phong, R.H. Bosma, I.G.S. Budisatria, B.R. Patil, T. Samdup, B.O. Bebe, 2007, Livestock intensification in mixed
farms; benefits and trade-offs, In: Fish ponds in Farming Systems (Eds. A.J. van der Zijpp, J.A.J. Verreth, Le Quang Tri, M.E.F. van
Mensvoort, R.H. Bosma, M.C.M. Beveridge), Wageningen Academic Publishers, The Netherlands, pp 271-280.