There are two key drivers of the welfare of small dairy farmers: milk productivity of their cattle and the price per liter of milk that they can fetch.
While the productivity of cattle can be enhanced by improving the gene pool of cattle through artificial insemination, providing better quality feed and improving the farm management practices, increasing the revenue per liter of milk sold would require relatively more radical changes in the value chain of the dairy industry.
With the price for milk, small farmers face a daunting challenge. They own less than 5 heads of cattle individually and are scattered across the rural landscape – hence their bargaining power versus the middleman and the milk processor is substantially less. Also, the small dairy farmer especially in the rural areas do not have direct access to markets where milk can be sold and neither do they have the capital to invest in chillers to prevent milk from souring. Hence, they are compelled to sell their daily produce to the middlemen at relatively low prices. While more and more middlemen have been knocking on the farmers’ doors for their milk produce owing to the surge in demand for quality milk and value added dairy products in the fast modernizing urban centers of Pakistan, the competition between middlemen and processors has hardly benefited the small, rural farmer. This has been because of a silent cartelization amongst the middlemen who ensure that the status quo on the offer price to the small farmer remains intact for the collective benefit of their trade-men.
In Pakistan, it is estimated that the small farmer gets only 30% of the retail price of the milk produced, but in neighboring India, the tale has changed over the last several years. With the success of dairy cooperatives, like Amul, Indian dairy farmers fetch up to 70% of the retail price of the milk produced. This has meant increased prosperity for the small dairy farmer.
While the global prices for milk have plummeted this year with prices falling from $19 to $11 per 100 pounds between July 2008 and July 2009, milk prices in Pakistan have been on the increase due to a huge gap between supply & demand. Nonetheless, the rewards of this price increase have benefited large farmers more than the small ones as is typical in our ‘non-market functioning’ of the ‘market system’. With the structure of economic muscle heavily tilted in favor of the middlemen and the milk processors, the rewards of this price increase have not been distributed equally. Larger size dairy farms set up by deep pocket investors have bargained for significantly higher prices to sell their milk to large milk processors with the threat of directly entering the retail market as a competitor brand. On the other hand, the prices for the small farmers have remained sticky given their weak bargaining position.
This situation calls for a replication of the cooperative model in Pakistan. This is where the role of not-for-profit local community organizations in organizing farmers needs to be leveraged. An effort in this regard is being made by the Pakistan Dairy Development Company (PDDC) however, the focus there is more on mid-sized farmers with 20 or more cattle than on the small farmers with 4-6 cattle.
While efforts towards enhancing the productivity of livestock farmers are important, efforts around altering the relative bargaining power of the small farmers versus the middlemen is also critical to ensuring a more equitable distribution of economic benefits.
The movement towards using market based approaches to solve problems of poverty seems to be gaining increasing momentum and the idea of pushing the frontiers of the market systems into the realm of poverty alleviation (beyond profit maximization) seems to serve a noble cause, however, we, as global partners in this movement, can also significantly address the chronic problems of poverty by attempting to ‘fix’ the ills that have crept into the functioning of the market system itself and which prevent an equitable distribution of economic benefits. The important question then becomes, to what extent can market based (as opposed to regulatory) approaches be used to address some of these ‘non-competitive practices’ prevalent in the ‘market system’? What can we do using market based tools to create a more equitable distribution of welfare?
In my view, the movement should be redefined to include not only pushing out the frontiers of the market system to address problems of poverty but also moving the market system itself closer to its ideal, where the distribution of economic benefits is more equitable.
Also, while we attempt to use market based solutions to solve problems of poverty, we need to increasingly leverage the impressive work that some of the non-profits have done in organizing and uplifting of poor communities. These non-profits often provide the most effective and cost efficient channels of reaching these impoverished communities and organizing them as a collective, as we are increasingly seeing with some of our investments in Pakistan e.g., FMiA, the micro-health insurance agency depends on Local Support Organizations in the Northern Areas of Pakistan to market and distribute critical health insurance products; also Thardeep Rural Development Program (an NGO) working in the most impoverished areas of Sindh, Pakistan is a key distribution partner for Micro Drip which is attempting to sell low cost drip irrigation to small farmers which should help them increase their output by at least 50%.
The success of some of the new market based solutions will depend quite heavily on leveraging the infrastructure of non-profit community organizations and hence this movement should be seen as more of enhancing the welfare of the poor through building bridges between the world of market based solutions and non-market solutions rather than an encroachment of a new ideology over a traditional one.
There’s hope in sight for the small farmers as one just can see in Europe where milk prices are rising. My fear is instead that soon there won’t be enough fodder to feed the animals so the out-put per liter will decline – that would be a real catastrophe.
Why is it necessary to make subsistence farming viable? Certainly we can make them marginally more competitive, but on a macro level, we should expect more efficient farms to put smaller farms out of business and broadly this is a good thing. Shouldn’t the objective also be to achieve the best returns (economic and social) on each dollar invested?
To be the devil’s advocate for a moment, the uncomfortable reality is that with industrialization comes urbanization which means smaller farms are shut down but it is in cities that there are greater economic opportunities. Why fight the inevitable? Maybe this is a case where the markets are sending strong signals that at least many of the poor should seek more viable enterprises?
While it’s true that in development we’ve seen a shift from agriculture, to manufacturing, to services (and one day we’ll all just sit and stare at screens for a living), the progression need not be one that leads to massive poverty and human indignity. My observation is that small scale farmers are eager to generate surpluses primarily so that they can give their children new opportunities through education and non-agricultural work. It’s one thing for this to happen across generations as families use incomes to expand their own opportunities, but another for families to be forced to migrate at the risk of starvation or because they are stuck in a poverty trap. As we’ve seen, this is too much for developing world cities to bear, and the overcrowding of slums can perpetuate cycles of poverty rather then help people build assets.
Thanks for sharing your views on my blog.
In my view, if we have learnt anything during the last 3 decades of economic development and progress, it is that its extremely important to not only look at the growth in the size of the economic pie but also how that pie is distributed. A highly skewed distribution of economic benefits can lead to social and political unrest, jeopardizing sustainability of economic progress.
The point I am trying to make here is not that small farms are inefficient and that they need to be protected nonetheless, but that large processors are not allowing the benefits of increased pricing to be passed onto the small farmer due to a monopsony kind of behavior. Free competition is a key underlying assumption for the efficient functioning of the market system and this is what is being undermined by the milk processors with their monopsony behavior. Now should we call for government regulation to correct this exploitative behavior or should we use market based solutions like cooperatives, where farmer while remaining individual producers would become collective sellers and hence yield greater bargaining power versus the large processors? I propose the later since regulation has its own inefficiencies and distortions.
In addition, while small enterprises might always be relatively inefficient than larger ones yet we know that a dollar earned by the poor is more efficiently spent/invested than a dollar earned by the rich. So, now, the question becomes, is the efficiency generated by the spending of the poor greater than the inefficiency of their smaller operations? I think the world has come to the conclusion that perhaps the efficiency and economic welfare impact of greater income for the poor is bigger in magnitude than the inefficiency of their cottage enterprises and hence the increasing focus on micro-finance and micro-lending in developing economies.
Fair point! I agree that migrations to the cities in search for better lives has led to higher crime rates in the urban centers and sub-standard living conditions for many. It is therefore, imperative to invest in the rural economy and enhance farmers’ welfare to check rural-urban migration.