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4/22/2019 (PDF) CHARACTERIZATION OF DAIRY VALUE CHAIN IN PAKISTAN'S PUNJAB: A PRELIMINARY ANALYSIS

CHARACTERIZATION OF DAIRY VALUE CHAIN IN PAKISTAN'S PUNJAB: A PRELIMINARY ANALYSIS

Conference Paper (PDF Available) · September 2008 with 571 Reads


Conference: First Annual Conference of the Indian Society of AgriBusiness Management (25 th to 27 th September
2008), At University of Agricultural Sciences (UAS), Bangalore, Karnataka State, India

Cite this publication

Hassnain Shah

11.48Pakistan Agricultural Research Council

Nadeem Akmal

6.36Pakistan Agricultural Research Council

Muhammad Sharif

Abstract

Value chain analysis plays a key role in understanding the need and scope for systemic competitiveness,
upgrading and achieving efficiency which allows entry into global markets. As a survey paper, it presents
the importance of livestock and dairy sector in the economy of Pakistan and attempts to characterize the
dairy vale chain of Pakistan's Punjab. Livestock accounts for 52.2 percent of agriculture value added. Small
dairy farmers account for 80 percent of the marketed milk. The average farm gate price of milk was 19

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Rs./liter while production cost was 13.4 Rs./liter. The informal sector still holds 90 percent of the market.
Milk collectors margin varies from 1.5 to 2.5 Rs./liter while khoya makers and de-creamers were getting
margins of 10-20 Rs./kg of the produce. Difference in purchased and sale price of UHT milk was about 30
Rs./liter. Demand and supply are the main factors for determining price of milk. There is gap in demand and
supply of milk. Due to the central development role played by the dairy value chain, a more comprehensive
analysis of its operations than presented in this paper is required.

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CHARACTERIZATION OF DAIRY VALUE CHAIN IN PAKIS


PUNJAB: A PRELIMINARY ANALYSIS 1

Hassnain Shah, Nadeem Akmal and Muhammad Sharif


Social Sciences Institute, National Agricultural Research Centre, Islamabad, Pakistan hassnainshah1@gm

Abstract
Value chain analysis plays a key role in understanding the need and scope for sy
competitiveness, upgrading and achieving efficiency which allows entry in
markets. As a survey paper, it presents the importance of livestock and dairy s
the economy of Pakistan and attempts to characterize the dairy vale chain of Pak
Punjab. Livestock accounts for 52.2 percent of agriculture value added. Sm
farmers account for 80 percent of the marketed milk. The average farm gate
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milk was 19 Rs./liter while production cost was 13.4 Rs./liter. The informal s
holds 90 percent of the market. Milk collectors margin varies from 1.5 to 2.5
while khoya makers and de-creamers were getting margins of 10-20 Rs./kg
produce. Difference in purchased and sale price of UHT milk was about 30
Demand and supply are the main factors for determining price of milk. There
demand and supply of milk. Due to the central development role played by t
value chain, a more comprehensive analysis of its operations than presented
paper is required.

Key Words: Characterization, Dairy value Chain, Milk, Pakistan

BACKGROUND

Agriculture continues to be the single largest sector of Pakistan, a dominant


force for growth and the main source of livelihood for 66 percent of the
population. It accounts for 21 percent of the GDP and employs 44 percent of
work force. Within the agriculture sector livestock is now a major sector as it
for 52.2 percent of agriculture value added – much more than the combined cont
of major and minor crops (45.3%), 11 percent of GDP and affects the lives
million people in rural areas. Average household holdings are 2-3 cattle/buf
sheep/goats and 10-12 poultry per family which contribute 35 to 40 percent
income {Government of Pakistan-(GOP 2008a)}.

Share of livestock in agriculture growth has jumped from 25.3 to 49.6 percen
last decade. Total number of animals increased by 30 percent in 2006 since
Similarly milk production of cows increased by 42 percent and of buffaloe
percent in same period (GOP 2007a). Pakistan is ranked fifth in the world
production, attributable largely to the sheer number of diary animals, it has a ver

1
Paper presented in the first annual conference of the Indian Society of Agri-Business M
"Emerging Trends in Agri-Business Management" 25-27 September, 2008 Bangalore, I
by International Food Policy Research Institute and the Indian Society of Agri-business

presence in the global market (FIAS 2006) and there exist gap in supply and d
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of milk for local consumption (Sharif et al. 2007). Under this scenario the curre
seeks to characterize how activities are performed and to understand how va
created and shared among participants along the dairy value chain. Value
analysis plays a key role in understanding the need and scope for sy
competitiveness, to upgrade and achieve efficiency and hence allows to ent
global markets (Kaplinsky and Morris 2001).

METHODOLOGY

Punjab is the major milk-producing province in Pakistan, was chosen for thi
Punjab province has nearly half (43%) of the livestock inventory including cattl
buffaloes (65%) and account for 53 percent of total milk production (GOP 2
rapid reconnaissance survey was conducted to collect field level info
substantiated with secondary sources. Field level information from the key
producers, milk collectors, Khoya makers, de-creamers, village milk collection
contractors and representatives of some of the milk processing industries (
Noon, Engro, Haleeb, Halla) was collected through individual and group di
during field visits in different milk producing areas of Sargodha, Multan, K
Sahiwal, Okara and Lahore. Volume of milk and price variations along the valu
was estimated. Brief role of different stakeholders involved in dairy sector is de
with the purpose of understanding their organization and functioning so tha
research activities could be planned accordingly.

DEMAND SUPPLY SITUATION

With overtime population growth, urbanization, income growth and diversificat


towards high value agricultural products, per capita milk consumption has in
from 51 liters per annum to 211 liter per annum. As a food item, all milk (both
milk equivalents) is second only to cereals in level of per capita consumption in
(Sharif et al 2003). The estimated urban demand for liquid milk equivalents for
was 11.35 billion liters; estimated market demand for all Pakistan was 33.76 bill
in 2006. In dairy items, fresh milk in loose form, packed UHT milk and yogurt
dairy consumption items. The preference of fresh milk through out of Pakistan
on consideration of good quality, taste and affordability (Sharif et al. 2007).
being the world fifth-largest producer of milk, produced 38.33 billion liters of m
from buffaloes (66%) and cow (34%) during 2006 (GOP 200 6a). After deductio
harvest losses and animal feed (@20%), the milk supply for 2006 was 30.67 bill
resulting in gap of about 3.1 billion liters. This gap is filled by import and by add
(Sharif et al 2007). The import bill of milk cream and milk food for infants fr
February 2008 was 3.24% higher in rupees term than the same period of 200
2008).

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VALUE CHAIN ANALYSIS


Milk Producers

There are about 8 million farm households with herd size of 50 million milch
Majority of them (43%) had only 1-2 animals and 28 percent with 3-4 animals.
25 percent of the total milk output is channeled into urban marketing system
dairy farmers account for 80 percent of the marketed milk (GOP 2001, FIAS 200

The average farm gate price of milk was 19 Rs./liter and varies from 16 to 25 Rs
June 2008. Variation in farm gate price was mainly due to geographical l
farmers’ access to different buying agencies, access to urban areas, number of m
animals (fodder availability such as in barani areas) and season
arrangements, services including the advance payments determine the farm gate
With the increase of milk prices and pressurized by higher cost of productio
small scale milk producers sell part of their milk after their household consumpt
family's decision to sell milk and the amount to sell is clearly poverty drive
farmers sell milk only because they have no other source of cash income (Kha
1999, Ali 2007).

To estimate the milk production cost 3 data on the input/feed along with m
activities and labor involved was also collected from farmers. The animal hu
cost 88 (85-90) percent and decreases with the increase of animal heads. It in
mainly the feeding 4 cost, 67 (55-80) percent, labor 30 (18-41 ) percent and vet
percent. The other cost was cost of milking by hand (6%), electricity/fuel (
depreciation (5 percent). Including all these cost of milk were calculated at 13.4
with an average milk production of 8.4 liters per animal and heard compositio
milking buffalo and cow.
The milk supply chain/system can be classified into two groups.

A. Informal Milk Supply Chain

It was assessed during the reconnaissance survey that if taken into account th
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supplied at the milk collection centers by dodhies or milk collected through co


and mini suppliers for processing industry then the share of milk collected
informal/traditional/dodhy system is more than 90%. Umm-e-Zia (2007) has
similar results. Actors involved in the informal system are as under:

Milk Collectors/Dodhies
5
The traditional milk collectors, known as dodhies , play the dominant mid
between millions of subsistence and commercial dairy farmers and consumers (B

2
The companies categorize milk collection in two seasons, flush and lean. During flush season, since there is a lot of m
down and during the lean season, milk production goes down and prices of milk increase.
3
These estimates were done for the small market oriented farmers with 3-7 milking animals and having mix crop and livestock farming.
4
Fodder, wheat straw, cotton seed cake/balance feed, etc including cost of production of fodder i.e. input, irrigation cost along with the la
for producing fodder at own farm
5
While the exact number of dodhis is not known, Pakistan Dairy Development Company (2006) notes that about one million dodhis are at work in Pakistan

al 2004). Fresh unprocessed milk passes through different channels before it re


the consumers. This length of chain varies for different consumers. In case
non-farm (no milk animals) there may be no or 1-2 intermediaries involved in s
milk. Dodhies collect milk at the competitive prices with other market playe
have more social and family links with the milk producers and had more tr
family bonds with the farmers. Besides supply of milk to local consumers the
supply is sold to other milk collection agencies (including large dodhies, khoya
confectioners/bakers, village milk collection centers (VMCC) of processors, r
Their margin varies from 1.5 to 2.5 Rs./liter. Most of these dodhies collect morn
Collection cost mainly involves labor and transportation charges. They mai
bicycle/motorcycle. Volume of their business is less than 250 liters per day.

The medium scale milk collectors supply milk to a variety of milk users
bakeriesm khoya makers, retail shops and urban consumers at their door
Skimming of milk was also performed according to the demand or for mixing m
sold to the urban consumers. The large dodhies purchase milk from small dhodi
also directly from farmers and supply to big cities. They had different clients an
long term contract. Skimming was also done according to the requiremen
demands.
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There is huge difference between purchase and sale price of these urban sup
However the difference in margin per liter remains very small between small a
dodhies due to high collection and transportation costs. But large volume (250
liters/day) results in high profit. In the informal milk supply chain the
increasing as processors had expanded its milk collection system to the remote
The demand pull factors had increased the milk prices for the dodhies while
their margins resulting in adulteration and malpractices. Mixing the skimmed
and water are the main practices. Absence of cold chains and cooling tanks (chi
the informal system had also resulted in the mixing of chemicals (unhygienic
preservation particularly when transported for long distances.

Khoya Makers

A large number of khoya makers are also working in rural areas where ch
(sugarcane leaves, bushes etc) is available. They purchase milk from farm
dodhies. Small khoya makers collect milk at their own in the morning and ma
afterwards at their house/farm and had only one burner (bhatti). Large players ha
than one points. The product is sold in the city to the confectioners/bak
sometimes at khoya shops.

The conversion factor of milk for khoya is 5:1 i.e. it takes five kg buffalo milk
one kg khoya. The cost price of khoya ranges between 90 to 97 Rs/kg and i
labor charges and fuel charges 5 Rs/kg each). The remaining is the cost of m
present it is being sold in the small towns at Rs. 100 to Rs. 110 while it is sup
other major cities including Lahore and Peshawar between Rs. 110 to Rs. 120
Small khoya producers also sell their produce at khoya shops in cites who get a

of about 10 Rs/kg. Most of the khoya producers had regular customers (b


confectionaries, halwaies). The price structure of khoya depicts that it is being p
in the remote areas where both milk is available at low price and also labor a
material is easily available at low cost.

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De-creamers (Skimming-Ghee making)


Extraction of cream is one of the important activities in urban supply chain of f
skimmed (seperata) milk is used for yogurt. However dodhies also performed s
for a portion (1/2 to1/3 rd part) of milk and sell the cream at these centers. The p
price of cream ranges from 80 to 100 Rs./kg and sale price 90 to 20 Rs./Kg. H
the service charges along with the profit was 10-20 Rs./kg. There is also var
scale of business of de-creamers. Some also convert/process this cream into desi
They also had contracts/demands of milk from shops/hotels/bakers and purcha
from dhodies and supply milk at their own to their points.

Figure 1. Informal Milk Supply Chain

Rural Dairy farmer


16-25 Rs. /Liter

Dodhi Village
16-25 Rs. /Liter 17-26 R

Khoya Makers
16-22 Rs. /Liter
Local C
16-26 R
De-creamers Backers
service charges 2 Rs./Liter
18-26 Rs. /Liter

Urban Retailers/Hotels
18-27 Rs. /Liter

Urban Consumers
20-35 Rs. /Liter

Source: Rapid Reconnaissance Survey 2008

B. Formal milk Supply Chain

In the formal/processed/packed milk supply chain the key players are Coop
(Halla/Idara-e-Kissan only), Private Dairy Sector (National Dairy Compa

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Haleeb, Noon) and Multinational (Nestle only). There are 24 units processing f
well as dry milk in private and corporate sector in the country (GOP, 2007b). T
estimated installed processing capacity of 2.42 billion liter per annum. The maj
of the country includes Nestle, Nirala, Halla, Noon, Milac, Dairy Bell, Da
Premier, Haleeb, Prime, K&K, Engro and Pak Army. The industry i
concentrated in Punajb with only 2 units in Sindh. Dairy industry processed 992
liters of fresh milk of buffalo and cow and 12.5 million kg of dry milk durin
2005-06. Dairy industry is producing various products namely: UHT, Low fat,
Pasteurized, flavored, Powder and Condensed milk, cream, Yogurt and But
Pakistan fresh milk processed is 3.23 percent of the overall net milk producti
buffalo and cow in the country where the share of large units is 99 percen
2007b).

Presently most of the processing industries has increased capacity for example
expanded from 1.3 to 2.4 million liters and would further increase to 3.0 millio
day, Nurpur Noon from 0.15 to 0.25 million liters and now installing anoth
plant of 0.2 million liters capacity, HFL from 0.9 to 1.8 million liters during th
years. The Cooperative system has not increased its capacity during the recent pa
Although the capacity of the major players in the industry has almost doubl
huge gap was found in the full capacity and actual processing. When averaged f
flush (70-80%) and lean (30-40%) period, the industry was running at its ha
capacity for whole year. Along with the expansion of processing capacity and c
network, competition between the industry has increased. The wet market is als
a tough competition to the industry. Resultantly the milk prices are increasing
the remote areas.

The purchase price ranges from 21 to 25 Rs./liter for 14 TS or 6% fat. The


price received by farmers for their milk (cow, mix and buffalo) ranges from
Rs./liter after adjusting for TS. The informal system is also purchasing on a com
price and providing services in form of advance payments to the farmers. T
prices in most of the areas (milk producing rural and near town areas) is even
than the purchase price of milk by the industry which implies that the indus
face a tough competition in the near future and also milk prices for both fr
processed milk would increase.

The data to calculate the margins in the formal sector were not provided how

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difference in purchased price and sale price of UHT milk was about Rs. 30 per
Garcia et al 2003, has reported that margins in the formal sector in the UHT m
amount to US$ 0.18 to 0.36 per kg fresh milk (6 percent fat milk). The val
extracted cream lies between US$ 0.05 and 0.09 per kg of fresh milk with a 6
fat content.

Milk Collection System

Milk collection system for processing sector varies from company to company.
speaking it can be categorized into three groups: direct/self, indirect and contrac

Direct Milk Collection System

It can be defined as the collection of milk by the industry from the farmers di
employing its own personals through establishing milk collection net work in th
VMCC and sub-centres. In case of Cooperative (Halla) Village Milk Collection
(VMCI) works as sub-centre agent. The VMCI was charging up to Rs. 2 per
collection and transportation to the VMCC. The Noon Dairies gave only 0.25
incentive to its sub-centre agent as transportation cost above the price offe
VMCC. Haleeb has also started direct milk collection system just recen
incentive structure of Nestle for its sub-centre agent varies from 1700-7800 Rs
with distance (2-4 Km) from VMCC and volume of milk (75 to above 250
supplied.

VMCC are established by the company. VMCC agent gets pay and other incen
meeting the targets. Some companies pay commission to VMCC agent on milk
Milk is supplied by different sources and VMCC incharge/agent is responsib
and purchase quality milk only. At Halla VMCC no direct purchase of milk is
all the milk is to be collected through the VMCI. Milk from the VMCC is tran
the company or contracted vehicles to the plant directly or through PHE to get it
long travel.

A di N l i i f ilk VMCC b i 10/15


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According to Nestle criteria, sources of milk at VMCC or sub-centre inclu
farmers (DF) who have small volume and bring milk at the VMCC or sub-cen
get only base price. Second are progressive farmers (PF) who supply 20-40
milk daily. They get incentives (0.50 Rs./liter) above the base price. Those farm
supply more than 40 liters milk per day are classified as Commercial Farme
Almost same classification was also done by Haleeb and Engro for farmers und
collection system. CF supply milk at the VMCC and are also facilitated to get
collected directly from farm and partial advance payments. The incentives g
Nestle to CF included 0.50 Rs./liter higher price and on adoption of per b
practice (BFP 6 ) 0.20 Rs./liter/practice. If the CF adopts eight BFPs he could
Rs./liter additional price. Haleeb is now also focusing on progressive and com
farmers through incentives and agri-services. The additional price incentive for
by Haleeb ranges from Rs. 0.50 to Rs. 0.75 per liter. Cooperative (Halla) an
dairies were offering the same price to farmers irrespective of their volume o
farm category

6
Best farm practices include, free water acces s, vaccination and de-worming, balance feeding, artificial Inseminat ion (AI), calf rearing sy
record keeping and farm mechanization

Figure 2. Formal Sector Milk Supply Chain

Rural Dairy farmer


16-24 Rs. /Liter

Sub. Centre Agent Dodhies


16-24 Rs. /Liter 16-24 Rs. /Lit

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Village Milk Collection Centre


16 22 Rs /Liter Mini Contracto
17-25 Rs. /Lit
PHE
Contractors
17-26 Rs. /Lit

Processing Plant
16-26 Rs. /Liter

Consumers
UHT 48-56 Rs. /Liter, Pasteurized 35 Rs. /liter

Source: Rapid Reconnaissance Survey 2008

Indirect Milk Collection System

Under the indirect milk collection system a third party is involved to collect an
milk to the company. Main players involved in the indirect milk collection are
and mini suppliers. Dodhies supply milk at the VMCC and get the base price. T
suppliers collect milk at their own collection points and vehicle collects milk
point after testing. Mostly mini suppliers have only milk tanks without any c
use ice for getting it cool. They are given price margin above the prices being of
VMCC of dairy company in that locality. Normally the mini suppliers offer sim
and fat or TS criteria to the farmers like other VMCC in the area. However the c
has no bindings on the mini supplier regarding the purchase price from farmers.

Contract Milk Collection System

It is based on the contractual arrangements with some individuals who collect


their own (purchase from farmers, dodhies, mini suppliers etc) and supply mil

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industry (at its processing plant by own transport). They get higher prices
Rs./Liter) than prices paid to the farmers along with the allowance for transp
Some contractors are also given milk tanks, chillers etc and partial advance paym

Figure 3. Available Milk Collection Systems


Direct Milk
Farmer Processor
Farmer VMC Agent Processor
Indirect Milk
Farmer Dodhi Processor
Farmer Dodhi Mini Supplier Processor
Farmer Dodhi Mini Supplier Hilux Contractor Processor

Farmer Dodhi Mini Supplier Hilux Contractor Contractor Processor

Comparison of Milk Collection Sources

Milk processing industry has some advantages and disadvantages from d


sources in relation competition, price, ensured supply, quality, reliability,
establish a system of milk collection and sustainability of the system. The indu
many positive aspects from direct milk collection from farmers as there
competition (large number of small producers) with minimum price and hig
milk. However the volume available is very small resulting in higher cost
collection and small farmer could supply milk to any other competitor. Futu
industry relies on it as it is more sustainable and major share of the market
comes from this source. Similarly progressive and commercial farmers ga
higher competition with high price than the direct small farmers but their
available is more economical. The other indirect sources gave higher competiti
high price of milk and low quality. Along with quality issue the relia
sustainability of the system is also questionable.

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7
The prices vary from contractor to contractor depending upon the area of milk collection, milk price in that area and volume of milk sup

Figure 4. Milk Collection Sources and their Comparison


Indicators Sources of Milk
DF PF CF Dodhies Mini
supplier
Competition Low Medium High High Medium
Price Min Ave High Ave Max
Volume available Min Min Ave High Max
Quality +++ +++ ++++ ++ ??
Time to establish Min Ave Max Ave Min
Reliability Ave Ave Ave ?? ???
Sustainability Max Ave Ave ?? --

Price Mechanism

Demand and supply are the main factors for determining/establishing the pu
price of milk in different milk producing areas. At producers level the distance
urban areas along with the infrastructure affects the price of milk. The pres
VMCC also affects the milk price due to higher milk demand and competition
the processing and wet market. However the price offered by the wet marke
major force behind the milk price offered at VMCC. The price of powder m
international market also plays its role in establishing the purchase price of milk
industry.

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The prices offered by different dairy industries remain almost same within sam
However prices vary from area to area. Under the direct collection system pric
VMCC remained in the range of 21 to 24.5 Rs./liter during 2007-08 for 14 TS o
The prices for contractors and mini suppliers involve additional incentives for
and transportation charges paid. The contractors and mini suppliers were gettin
to 2.0 Rs./liter higher than the prices offered to farmers.

Conclusion
A snapshot of dairy value chain of Pakistan’s Punjab has been presented in this
Milk production in Pakistan has increased by 35.6 percent from 1996 to 2006 m
a growth in the number of dairy animals. Traditional dairy value chains have hig
share backed by strong consumer preferences and low price of for fresh milk
face of the supply demand gap, it is likely that domestic demand will absorb a si
portion of any increase in milk supply. The processing sector is expanding its
and network. Increasing competition among the market actors would result ris
price. Although large farmers would get higher margins due to economies of sc
more bargaining power yet the small farmers, who are providing 80 percent of
would also be benefited as the future of the industry lies upon this segment. The
issue is still unresolved as most of the milk supplied in the formal sectors is als

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