PRAN-RFL GROUP

Since-1981 Property Heights 12 R K Mission Road Dhaka-1203

REPORT ON
THE DEVELOPMENT OF DAIRY INDUSTRY IN BANGLADESH

DECEMBER 2007

THE DEVELOPMENT OF DAIRY INDUSTRY IN BANGLADESH

CONTENTS I. Executive Summary 2-3 II. Current Industry Scenario. 4 The Nature of the Industry.. 5 Milk Prices.. 5 III. Government Assistance to the Industry. 5 Direct Subsidies to Farmers. 6 Indirect Subsidies Through BMPCUL 6 IV. Why is Reform Needed.. 6 V. Factors Restricting Development in the Industry... 7 1) Subsidies to Milk Vita 7 2) Extension and Training Services... 7-8 3) Breed Management 8 4) Feed Management & Education.... 8 5) Public Awareness and Economics. 8-9 VI. Recommendations. 9 1) Remove Subsidies for BMPCUL (Milk Vita) 9 2) Target Subsidies That will Bring About Expansion.. 9 3) Improve Extension Services 9 4) Genetic Improvements 10 5) Education Programs... 10 6) Dairy Development Board. 10

VII. Conclusion..... .. 10 Appendices.. 11 Appendix 1: Bangladesh Milk Production.. 11 Appendix 2: Prices of Local Cows Milk and Imported Powdered Milk.... 12 Appendix 3: Major Investments and Assistance to BMPCUL by the Government and other Agencies 13

I. EXECUTIVE SUMMARY
The cow is a domestic quadruped animal. Thats the first line of the first essay in all grammar textbooks in Bangladesh. The importance of a cow in the popular psyche cannot be overestimated. Even in matters of national policy the cows importance is emphasized. However despite the intentions of the policy makers and the business community, the dairy industry has not developed as rapidly as one would like. The past decade was one of phenomenal growth for the agro industry. The poultry industry has registered over fifty percent growth year over year for most of the decade. New agro products, like mushrooms and baby corn, have been introduced in the market. Maize has taken over significant acreage as demand for compound animal feeds have increased. Flowers have become a significant crop in the domestic and export markets. However compared to other agro industries, the growth of the dairy industry has neither been substantial nor has it been consistent. However, unlike poultry, and other sectors dairy has not shown significant growth. In fact per capita consumption of milk which was showing an upswing in the 90s has gone down in the last decade. While there has been some private sector investment in post harvest storage and processing, the overall number of heads of cattle has not shown significant increases. The growth of the cattle population as well as private sector investments has been concentrated in the Baghabari, Sirajganj area. Dairy industry is one of the best suited sectors for the generation of employment and thus ameliorating poverty in rural areas of Bangladesh providing jobs to the whole family, ie men, women & children alike. It is a most profitable occupation too as no part of the bovine is wasted live or dead. Support to the dairy industry lacks appropriate focus in our PRSP strategy primarily due to aggressive lobbying by importers of subsidized milk powder on the one hand and skewed price structure of locally marketed liquid milk by Bangladesh Milk Producers Cooperative Union Limited (BMPCUL) Milk Vita holding a commanding market share due to undeserved financial support from the Government. BMPCUL trade name is Milk Vita. This study was undertaken to get an understanding of the slow growth or stagnation of the dairy industry. In the course of the study we have identified several factors that may be contributing to this scenario. We also propose some policy changes to boost the growth of the industry: 1) Incorrectly targeted subsidies: Subsidies to the dairy industry whether from the government or NGOs have targeted the processing side of the equation and that too to a particular organization. The actual producers of milk received very little by way of subsidies. Subsidies to BMPCUL (Milk Vita) have prevented other processors from effectively competing in the market creating significant barrier to entry and preventing growth in other areas of the industry as well. 2) Single area focus: Baghabari area has traditionally produced milk and milk products. With BMPCUL investing heavily in the area over time, productivity has improved significantly. However the area is already saturated and for the industry to expand, new 2

areas will have to be targeted for development. With BMPCUL receiving large subsidies, it becomes cost prohibitive for private companies to take on dairy development work in new areas. 3) Lack of research: While genetics have been improved by creating local/imported hybrids, there is further potential to improve the genetics by setting up a breeding program to fine tune the bovine characteristics to suit our climate and available feed. 4) Lack of credit: The lack of credit to farmers has also discouraged milk production. Investing in a cow is a major investment for most small farmers and without proper access to credit farmers are not encouraged to invest.

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II. CURRENT INDUSTRY SCENARIO

The importance of bovine livestock to our economy cannot be over stated. Even though the subsector contributes only 3% to the GDP, it provides full and part time employment to about 20% of our rural population and accounts for 18% of our agricultural export earnings1. While the focus of this paper is dairy, meat is also an important contributor to our protein needs. Furthermore the trade and export of leather products, bones and offal also have a significant contribution to our economy. Draft power is still a significant source of power for cultivation saving imported energy cost. The consumption of milk and milk products in Bangladesh is very low even when compared to neighboring countries2. The average daily consumption is 42ml per day/person against a recommended allowance of 250ml/day. Bangladesh would currently need to import or produce five times its current production if it is to meet the WHO recommended daily requirement. Thus there is a huge requirement. Milk imports in Bangladesh has increased from 2.2 billion takas in 1996 to about 8 billion takas today. The EU has gradually removed subsidies on its milk products. In addition the devaluation of the taka has also negatively impacted our balance of payments for dairy products. In the retail market the price of powdered milk has more than doubled in the past decade. All this should point to a strengthening of our local production base. In fact local production has increased. However after a sudden jump in the early 90s, milk production has registered a very gradual growth. The double digit growth between 1991 and 1996 has tapered off to an average growth rate of 1.3% between 1996 and 2004.

The Nature of the Industry

Traditionally the industry has been dominated by the Ghosh community who collected milk from farms and processed them into Ghee, curds, sweets and other products. Liquid milk only had informal supply structure and in fact constituted a small portion of the total market. However with the development of the collective model of BMPCUL, the market for milk began to expand and surplus milk made its way to the cities as a processed package product. The average Bangladeshi dairy farm has 3.5 heads of cattle. Dairy is still considered a secondary profession even for farmers with 5-10 heads of cattle. Part of the reason may be that most dairy farmers also have another source of income. Another reason for this may be that milking and tending the cows has traditionally been the womens job and is therefore given less importance than farming the fields even in households whose major source of income is dairy. Baghabari area in present day Sirajganj district was a traditional milk producing area. A large community of Ghoshs collected the milk and supplied chaana, ghee, curds and sweets to sweet sellers across the country. In 1965, the then East Pakistan government created the Eastern Milk Producers Co-operative Union Limited (EMPCUL). This was renamed to Bangladesh Milk
1. 1 Source: Department of Livestock Services (DLS) See Appendix 1: Bangladesh milk production

Producers Cooperative Union Limited (BMPCUL). BMPCUL is popularly known as Milk Vita the brand name of its product. Milk Vita organized farmers in the Baghabari area into cooperatives and started collecting milk in the area. It set up a pasteurization plant. Among its other products are butter and ghee. Milk Vita achieved significant success in increasing the milk production in Baghabari area by providing training and extension services. However its impact and success outside the area has been limited. In other areas farmers still operate on an individual basis selling milk mostly to sweet manufacturers. Milk prices are also high in most other parts of the country limiting access to common people. The high price of milk has relegated liquid milk to luxury food item status thus reducing its demand. In addition there are no preservation and storage systems for milk in other areas. Thus besides local demand, there isnt a significant surplus that can be used to export milk to urban areas. Milk Vita enjoyed a virtual monopoly for two decades before new entrants such as BRAC dairy and PRAN entered the market. All the private companies also focused their efforts in the Baghabari area as milk production has not taken off in other areas. Milk Vita by far dominates the industry.

Milk Prices
Milk price in Bangladesh is the highest in the region. In addition the quality of the milk is also poor. Farmgate prices are currently around 22 takas per litre3. Retail prices in Dhaka average about Taka 35 per litre of milk. Until 2005 the price of imported powdered milk was significantly lower than the price of local milk in Dhaka. Moreover the ability to preserve imported milk has led to ever increasing imports. With the gradual withdrawal of milk subsidies especially by EU countries, the price of local milk has once again become competitive. To keep the price competitive the industry has to grow to keep up with demand. As incomes rise consumption of milk can be expected to rise. Without growth in the industry imports will increase as will the price of local milk. Thus there is no alternative to increasing consumption without increasing local production of milk.

III. GOVERNMENT ASSISTANCE TO THE INDUSTRY

The Bangladesh government has set up quite a few agencies to cater to the needs of the livestock industry. First there is the Ministry of Fisheries and Livestock which is responsible for the overall direction of the industry. In addition there is the Department of Livestock Services (DLS). This department is responsible for providing extension services to farmers. A third body is the Bangladesh Livestock Research Institute (BLRI) which is responsible for conducting research on genetics and feed.

See Appendix 2: Prices of milk

Direct Subsidies to Farmers

In 1993 a subsidy was introduced by the government to increase cattle population. A total of 5 crore per year was allocated and the subsidy amount was Taka 6000 per head of cattle for up to 5 cows. In subsequent years the subsidy was reduced and finally eliminated in 1996. The subsidy was again reinstated in 2002 though it was reduced to Taka 3000-5000 per head depending on the number of cattle. The subsidy was discontinued soon after.

Indirect Subsidies Through BMPCUL

BMPCUL has also received subsidies from the government in the form of low interest loans, grants, project funds coming out of the revenue budget. Over the years Milk Vita has received over 100 crores in direct and indirect subsidies from the government, and foreign governments and donor agencies. In addition as a collective it is also subject to a more favorable tax structure in its milk collection efforts. Most of the infrastructure investments in Milk Vita were made through special low interest loans or direct grants from the Government and Donor Agencies. Much of the government loans have also been converted to equity over the years.

IV. WHY IS REFORM NEEDED

It is obvious that there is a huge untapped market for dairy and dairy products. Only about 20% of our dairy needs are being met. The only limitation for the expansion of the market is price. Milk is still considered a luxury good and the price is the single most limiting factor preventing increased consumption. At todays prices the daily requirement for each person can be met at a cost of Taka 12. While this may not seem like a large sum of money, it is significant in a country with a per capita income of Taka 70 per day. There is also very slow growth in the dairy industry thus limiting supply and keeping an upward pressure on prices. The population of milching cows has not increased significantly outside Sirajganj, Pabna belt. Small holder farms and farming cooperatives have been proven a successful model both in the dairy belt of Bangladesh and in India. There is no reason that the model cannot be replicated in other areas. Employment in the rural areas is also declining, and there is limited scope for womens employment in this conservative country. Small dairy farms can provide that much needed employment for women and supplement the incomes of farmers with little land. Cattle not only provide milk but can also provide meat, leather, bio-gas and organic fertilizer. They also provide a higher value addition for rice husks, plants and other agricultural by products that they consume. The alternative use for these by products is fuel.

V. FACTORS RESTRICTING DEVELOPMENT IN THE INDUSTRY

Through the course of this study we have interviewed farmers, small processors, large corporations and officials of the government agencies charged with the development of the industry. We are listing the factors that we feel are limiting the growth of the industry.

1) Subsidies to Milk Vita

BMPCUL (Milk Vita) must be credited with creating the modern dairy industry in Bangladesh. In the Baghabari, Sirajganj area they have organized the cooperative with over 100,000 members. They have improved the livestock genetics in the area through their breeding and extension services. They have also developed market for packaged pasteurized milk. To accomplish all this Milk Vita has been given a significant amount of grants, loans and capital investments by the Bangladesh Government, donor agencies and NGOs. It is because of these very subsidies that the dairy industry has stopped growing. Because of low interest loans and grants, Milk Vita can afford to reduce their margins to a point where competition becomes non viable. Another effect of the subsidies that Milk Vita gets is that it makes large scale milk production cheaper at Baghabari than anywhere else in the country. Thus all the private entrepreneurs focus on that area for their supplies and dairy production in other regions remain limited to meeting only local demand. It is only due to inefficiency and corruption at Milk Vita that private entrepreneurs have been able to enter and compete in the market. But unless the playing field is leveled new entrants will be discouraged from investing in the industry.

2) Extension and Training Services

BMPCUL offers extension services such as Artificial Insemination, veterinary care and other services to its members. However as they are subsidized, they can offer the services at much cheaper cost than their competitors. Tying up the services with milk collection effectively blocks out new entrants to the business. Milk Vitas services are also focused around Baghabari area. Thus there is no new dairy development in other areas. The DLS also offers extension services to farmers in a more neutral manner. However the DLSs budget and manpower that in can dedicate to dairy is very limited. In fact the DLS is chronically understaffed and under budget. The DG of DLS stated that they have not had any changes to their organogram since 1962. The DLS needs at least 11 people per Upazilla for extension services if they are to be effective. DLS has a budget of 0.30 taka per cattle whereas Milk Vita has a budget of Taka 3.0 per cattle.

Milk Vitas extension services also only focus on improving the quality and quantity of Milk. Services are also needed for Foot and Mouth Disease and other common bovine problems to improve the overall quality of our animals.

3) Breed Management
Bangladesh has some of the least productive cows in the region producing on average 206kgs/head/year of milk compared to almost 800kgs for India and 7000 kgs for the US4. The most common local cow, Bos Indicus, has very low productivity. Attempts have been made to create various cross breeds to increase productivity. Common ones are Local and Bos Taurus cross, Sahiwal-Pabna, Frissian-Pabna and Sahiwal-Frisian-Local cross. The results have improved productivity significantly. However in addition to a cross breeding program a selective breeding program is needed to try to obtain the best possible lines for milk production. Artificial insemination services are provided by a number of organizations, including DLS, Milk Vita and BRAC. However there is no breeding program to selectively breed a few generations of acclimatized cows. The BLRI (Bangladesh Livestock Research Institute) is tasked with developing the appropriate technologies and breeds that are suitable to our environment. In addition they are charged with researching diseases and epidemiology of the bovine population. However BLRI has also been hampered by a shortage of manpower and finances. Since 2001 the BLRIs budget mostly went to paying staff and scientists with only 6.5% on average left over for research related activities. In addition to research on cows, other milk producing animals like goats and buffalos also need to be researched. A selective breeding program to improve the efficiency of existing breeds, and a cross breeding program to create new breeds is essential for the development of the industry.

4) Feed Management and Education

Poor quality feed has been one of the major reasons for the low productivity of our cattle. The low productivity of our cattle heads in turn has also prevented our farmers from investing more in feed. Most cows are still fed with crop residues and cereal byproducts. Some cow farmers grow high yielding varieties of grass and supplement it with oilseed meals, broken rice and other by-products. However in most cases this is done in an unscientific manner. Along with breed research optimum feed research should also be conducted and the results used to educate and train our farmers.

5) Public Awareness and Economics

More than half the milk produced in Bangladesh is used to make desserts or ghee. The culture of drinking milk has almost vanished from our society. This is partly due to the price of milk. While milk products are a good source for essential nutrients like calcium and protein, the high fat and sugar in further processed products is also harmful to ones health. Public awareness must be created to promote a culture of drinking milk.

1997 figures.

VI. RECOMMENDATIONS
1) Remove subsidies for BMPCUL (Milk Vita)
As a matter of policy the government should absolve itself from any business responsibilities and create opportunities for businessmen to grow the private sector. While Milk Vita played a vital role in the creation of a dairy industry it now stands as an obstacle to further development of the industry. Even though Milk Vitas executives are now hired on the open market, it still somewhat operates as a government entity and like all other government companies, the lack of oversight and accountability has plagued it. While Milk Vita is currently marginally profitable, that profitability would also vanish if their cost of funds were the same as commercial entities. Since Milk Vita is a business it should focus on profitability and competitiveness. If the government decides to provide subsidies to the dairy industry, they should not be targeted to one company. Singling out one entity for subsidies will prevent the development of other companies which have the motivation and the capability to grow the industry further.

2) Target Subsidies That will Bring About Expansion

The Government should make a policy decision on how it wants to expand the dairy industry. The current Dairy belt is already nearing saturation. It will be impossible to increase dairy production if the bulk of extension services, training, and subsidies are available to that belt. The Government should encourage farmers in other areas to rear cows. This can be done with extension services, training and subsidies directly to farmers. If the supply of milk can be ensured in an area, private entrepreneurs will automatically invest in chillers and other processing facilities. Subsidies should not be targeted at large corporations but rather the small farmer. We have seen the effect of the direct cash incentive between 1993 and 1996. In fact that was the only period of significant growth in dairy production in the last two decades. Compared to the billion takas or so in subsidies and loans received by Milk Vita the 150 million takas spent on direct subsidies to farmers had a greater impact.

3) Improve Extension Services

Extension services are also best left to the private sector. Most companies already offer such services to their suppliers. However the government should start offering extension services in areas where they want to encourage dairy development but are still outside the reach of private companies. Moreover extension services should target overall well being of the bovine population and not just aimed at improving dairy yields.

4) Genetic Improvements
The private sector in Bangladesh have not reached the technological sophistication or have the financial power to conduct research on improving the genetic potentiality of the animals. Moreover the benefits of genetic improvements should not be limited to single corporations. Thus the Government and universities should take the initiative to conduct research on improving the quality of our livestock. A properly funded and monitored cross breeding program as well as a selective breeding program is essential to create climatized breeds that will produce optimally in our environment. 9

5) Education Programs
A new breed, especially highly productive breeds, need very precise management for optimum output. They also need a nutritionally complete food. Thus with the creation and dissemination of a new breed of bovine farmers also have to be educated on the care and management of the animals. A private-public joint effort to educate farmers on nutrition and management is essential to break out of the vicious cycle of poor feed and poor output.

6) Dairy Development Board

A Dairy Development Board should be formed to promote the production and consumption of dairy. This should be an industry body that also passes recommendations to the Government. In addition one of its primary responsibilities should be to market milk and increase awareness of its benefits. It should also increase awareness about dairy farming. The Dairy development board should not limit itself to cows milk but should promote goat and buffalo milk as well.

VII. CONCLUSION
We stand on the threshold of a great opportunity and a great threat. With improvements in breeds, private investments and interest in the processing sector, the right policy will take our dairy production to a higher level. On the other hand if our policies discourage further investment we will continue to relegate milk as a luxury food at the cost of the health of our citizens, especially our children. World milk powder prices have been increasing with the removal of subsidies. Prices will go up further & at stake is the nutrition level of our new generation. Investment in the dairy sector is beneficial all the way, creating jobs in the rural areas for the entire family, affluence thus reducing poverty & malnourishment. No other investment provides such rewards taking all factors into consideration As the first step we need removing subsidies to Milk Vita which tends to skew the price structure in the market for milk & milk products thus inhibiting other entrants. No business should subsist on subsidies indefinitely. Contrarily it is the dairy farmers who need help with financing & extension support urgently for ameliorating poverty & hunger through creation of employment in rural areas where they live. Three cheers to Milk Vita for doing a fine job, but now they should thrive on their own steam & not crowd out the market place.

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APPENDICES
Appendix 1: Bangladesh Milk production
Availability of milk products ,000 metric tons
Local Imported Total annual consumption Annual per capita (kg) Per capita per day (g)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

774 790 924 1064 1215 1552 1573 1594 1615 1636 1658 1680 1702

184 152 75 80 92 104 84 96 136 124 97 97 64

958 942 999 1144 1307 1656 1657 1690 1751 1760 1755 1777 1766

8.5 8.3 8.5 9.5 10.7 13.3 13.1 13.2 13.5 13.5 13.3 13.3 13.0

23.28767 0.02274 0.023288 0.026027 0.029315 0.036438 0.03589 0.036164 0.036986 0.036986 0.036438 0.036386 0.035661

Source: Bangladesh Statistical Yearbook 2005

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Appendix 2: Prices of local cows milk and imported powdered milk

Cow milk / litres

Nationwide price

Price Dhaka

in

Price of imported milk (litre equivalent)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

15.58 16.98 17.83 17.17 18.21 18.35 18.88 20.01 19.47 18.77 20.26 22.16 22.01

25.6 24.96 25.13 27.32 28.08 28 28.5 30 30.2 29 32 33.2 35

18.125 20.625 21.875 25.625 34.375 37.5

Source: Bangladesh statistical handbook 2005 Prices of imported milk was obtained by examining the sales records of retail shops. Prices of liquid milk in Dhaka after 1998 was obtained from sales records of retail shops

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Appendix 3: Major investments and assistance to BMPCUL by the Government and other agencies
Major investments in BMPCUL
Grants/Subsidies Cost taka) funds) ('000 (own (ooo)

19731978 19731974 19791982 19821983 19821985 19931994 19941997 20032005 20032005 20032004 20032004 20042005 20042006 20052006

Established 5 dairy plants with DANIDA assistance Australian government grants for powder milk and butter project Consolidation of dairy complex project Reserve fund made with an EEC donation of Skim milk Balancing, Modernization, Rehabilitation and Expansion project Loan interest writeoff by Bangladesh government. Debt converted to a 50% government equity. Set up 22 Chilling centers, a Milk powder plant, and ice cream plant. Funds provided through the national budget Set up condensed milk plant with its own funds Set up candy plant Interest free government loan (revenue) ADB loan through government at 8% interest Government Cattle loan at 5% interest Set up Can making plant for condensed milk. Project was funded by the government Set up UHT plant Total

129,000 4,312 25,930 145,048 108,640 155,050

363,700 210,000 40,000 120,000 122,531 5,000 240,000 100,000 458,640

1,310,571

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