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evaporated and UHT milk and fresh milk. Fresh cheese accounts for 53% of raw milk from the valley with or without pasteurization, while evaporated and UHT milk accounts for 27% and direct consumption of raw milk for 3%. The remaining quantities are used for other dairy products such as majarblanco (a product based on the reduction of milk and sugar), yogurt or butter (chain 11). Farmers may consume their own production (chain 12) or sell raw milk directly to local consumers (chain 13).
These supply channels are composed at the processing level by a large variety of dairy processors:
multinational dairy industries, several local medium-scale dairies and artisanal cheese-makers, highlighting the active participation of both formal (from 1 to 6 in Table 1) and informal markets (from 7 to 10 in Table 4) in the dairy sector (Figure 5). Formal and informal channels follow their own structure.
However, it was observed that they are interdependent, since they have to deal with the same diversity of farmers who supply raw milk. This interdependence is amplified by the presence of intermediaries specialized in milk collection due to the absence of associations with milk collecting points in the area.
Figure 5 Dairy supply channels at Mantaro Valley. National industries and formal small and medium processors provide products to formal markets (dotted arrows); whereas informal dairy processors deliver to informal markets (solid arrows).
The combination of channels and interdependency between stakeholders, both vertical among farmers, milk collectors, processors and retailers, and horizontal between processors, has an impact on the farmer-processor relationship and performance of the dairy supply chains in the area.
a) Between dairy farmers: Despite the fact that smallholder farmers account for around 60% of the dairy farms in the area, only 16% of farmers from the sample stated that they participated in a farmers’ association. Indeed, there are few farmers’ associations in Mantaro Valley. Previous bad experiences of collective organization such as the lack of trust among members, problems of mismanagement from the board members in charge of the association, and the obligation to work in the communal lands and disregard their own farms have limited small-holders’ desire to be involved in farmers’ associations.
Farmers’ organizations started to increase in number when the National and Regional Government decided some years ago to support farmers with artificial insemination stations, training and subsidies provided they are grouped in such organizations. Nevertheless, farmers who do not participate in an association do not believe that these types of organizations can work by themselves. They think that their existence is dependent on external subsidies and interventions and that they will disappear when these projects finish.
b) Small-holder farmers and dairy processors: Milk transaction between small-holder farmers and dairy processors is closely to a “spot market” system, even when large quantities of milk are exchanged.
Payment is usually done every weekend and by cash, since farmers do not have any type of contracts with their milk collectors or processors. Dairies which sell dairy products to the social program Qali Warma are an exception to this pattern. Qali Warma pays attractive prices to processors but only operates from April to December. This program requires dairy processors to have written contracts with farmers and fulfill high quality standards. Although processors delivering milk to Qali Warma pay 15-20% higher price per liter of milk when the program operates (from April to December), there is a constant risk that farmers will choose to break the contract and sell to parallel spot markets if the latter price rises above the contract price.
Formal processors pay 0.37 $/l in the rainy season and 0.40 $/l in the dry season, while informal ones pay 0.41$/l and 0.44 $/l respectively. This price difference reflects the strategy adopted by the informal sector in order to attract dairy farmers following the development of the formal sector in the area. The volume of milk bought at the farm gate and the distance between the farm and dairy also influence the final price. Only one multinational dairy company applies a payment system that includes quality criteria (level of total solids and microbiological content). It also adds the General Sales Taxes in the payment if its suppliers demand it, something scarcely asked for by farmers since most of them are not constituted as companies and prefer to remain informal and unknown by the national tax system.
c) Small-holder farmers and milk collectors: Farmers usually sell their milk to a collector who may retain their loyalty based on a better price, punctual payment, security of milk collection or services furnished. Without any formal arrangement, the trust and reliability between actors is central to securing commercialization and supply regularity on both sides. Indeed, farmers with less than 100 l/day deliver milk to the same collector every day. But medium and large-scale farmers with 100 up to 500 l/day prefer to deliver milk to several milk collectors/processors at the same time, in order to reduce the risk of non-collection when the demand decreases or of nonpayment if the collector disappears.
d) Milk collectors and dairy processors: Milk collectors deliver milk to dairy processors based on a verbal agreement. They can work for a processor by (i) collecting milk from farmers that have a prior arrangement with the dairy plant and receiving a fixed payment for the transportation of the milk from farm to plant gate; or (ii) collecting milk themselves and selling it at a given price per liter. Seventy-nine per cent of the collectors prefer this second alternative, using part of the milk collected every day to produce fresh cheeses and selling the rest of milk to other collectors or processors. This balance varies according to demand for cheese in Lima. For instance when cheese commercialization increases in January or between May and August (Figure 6), collectors process more milk on their own. However, they sell all the milk to an industry collection center when it decreases e.g. from
quantities supplied by a given collector during the year.
Figure 6 Processors’ strategies according to the period of a year, considering average level of dairy products commercialized at national level and milk price, milk production in the area and seasonal effect (precipitation) at Mantaro Valley. Data source: MINAG, 2014; SENAHMI; 2014.
A: Complementarity between processors during rainy season; B: Competition during dry season; C: Fluctuation in commercialization of dairy products due to low level of milk production; D: Competition at the beginning of the rainy season In general dairy farmers, milk collectors and dairy processors at Mantaro Valley interact without formal contractual relations. The high milk demand in the area provides to stakeholders the possibility to change buyers if they are not satisfied with the milk price offered. Moreover, it reduces the pressure of dairy farmers and collectors to achieve high milk quality standards. This circumstance creates an unfavorable situation for formal dairy processors who supply dairy products to supermarkets and retailers demanding high quality products.
medium-scale dairies and artisanal cheese-makers varies throughout the year, according to the season (Figure 6), the quantity of milk they are able to collect and the market demands. These facts cause a constant flow of raw milk between stakeholders based on a mix of competition and complementary process. In the rainy season, milk production is high in the Valley due to good forage production in terms of quantity and quality. This situation favors, at the beginning of the season, a competition between processors for collecting the largest possible amount of milk (beginning of the period D; figure 6) and compensates for the smaller amount of dairy products produced during dry season.
Nevertheless, since informal and formal medium-scale processors are willing to buy only enough milk to satisfy their process capacity (end of the period D; Figure 6), the two multinational dairy companies are then able to collect more (by themselves or by buying from collectors) and use the extra milk to produce evaporated and UHT milk (Period A; Figure 6).
This flexibility between processors and the two multinational companies provide the security that dairy farmers require to sell their milk at a reasonable price, even in times of high production. It also reduces the risk of milk spoilage at farm level if there is a surplus of milk production that exceeds the manufacturing capacity of cheese makers. This particular situation provides an answer to the perishable feature of raw milk when the cold chain is broken, as is often the case in the Mantaro Valley. In the dry season, when milk production is lower, local processors compete to collect enough volume and offer higher prices per liter of milk than the two multinational dairy companies (Periods B and C; Figure 6). This result emphasizes the fact that milk prices paid to farmers in Mantaro Valley is more related to the production of milk in the area than the commercialization of dairy products in the capital. Moreover, the dynamic of milk distribution between processors allows the local production to be aligned with the variability of the demand for dairy products in Lima throughout the year, amplified locally by specific actors like Qali Warma during school periods.
In this context, the type of interaction between formal and informal sectors varies depending on the season of the year and the level of consumers demand. When the price of unpasteurized fresh cheese
sector (Periods B and C; Figure 6). They have to compete against informal processors for milk supply by offering a higher price to their farmers, which results in a reduction in profits. In contrast, the lack of label or origin differentiation makes informal processors sensitive to a decrease in retailers’ demand, despite the fact that these processors align their processing and marketing practices with consumers’ needs and their willingness to pay.
2.2.3. Impact of the type of market supplied on economic performances of stakeholders Profits from farmers delivering milk to both formal and informal markets show differences according to the type of market channel supplied. Results obtained using a budget simulation tool for two specialized dairy farms (60% of their land is used for forage crops), showed that profits per day of a large dairy farm (F1) are significantly higher than for a small-farmer (F2) due to the large amount of milk produced. However, large farmers normally have higher milk production costs and, as a consequence, lower profit per liter of milk produced compared to small-farmers (F2). F1 profit per liter is increased by nearly a factor of three if they sell to informal processors and can be doubled in the case of F2. This result is explained because F2 have already better profits per liter than F1 when they sell to formal processors (0.082 vs. 0.030 respectively). In any case, the higher profit in the formal chain corresponds to their positive GST balance (they sell more than they buy). Therefore farmers do not get any advantage from being part of the formal sector (Table 5). Small differences in the farmers’ profits per day were observed when the seasonality effect was considered. In the case of F1 only, a reduction in milk production was significantly compensated by an increased price during the dry season.
Table 5: Farmers’ production costs, profits per liter and per day ($) when they sell to formal and informal dairy processors, and General Sales Taxes (GST) balance per liter of milk at Mantaro Valley*
Compared to formal processers, informal processors take advantage of the limited demand for quality controls in the supply chain and the reduced transport and marketing costs. They collect the milk by their own mini trucks, do not label their products and do not refrigerate their dairy products. Moreover, they have lower fixed costs compared to the formal processors. Additionally, the formal processors’ profit decreases to 0,061 $/l when they get milk from farmers who are not interested in paying GST. In this scenario the formal processors cannot recover the GST through the milk price charged to the consumer (Table 6). Informal processors achieve a better profit per liter of milk than formal ones in every scenario. Indeed their cost difference with the formal chain (after GST deduction) is only 0.042 $/l while their product difference is 0.078 $/l. Informal cheese-makers value milk at 0.472 $/l compared to 0.514 $/l for formal processors before GST deduction.
*Formal dairy buying milk from a formal farmer. For 8 litres of milk at 11.4% TS (total solids) required for producing 1 kg of pressed cheese sold 5.50 $/kg and GST discount on sales and purchases including milk **Formal dairy buying milk from an informal farmer. For 8 litres of milk at 11.4% TS required for producing 1 kg of pressed cheese sold 5.50 $/kg and GST discount excluding milk *** Informal cheese maker. For 5 litres of milk at 11.4% TS required for producing 1 kg of fresh cheese sold 3.30 $/kg and no GST discount **** Considering an average milk collection of 700 liters/day GST: General Sales Taxes So, in the current context of production costs and milk/cheese price structure, the informal chain achieves better profits per liter of milk than the formal one. In the context of competition for milk at
season when milk production is lower. This economic result pushes many stakeholders to remain in the informal sector, especially since GST management demands more administrative work.
2.3. Discussion 2.3.1. Ensuring a constant milk supply: Spot market or formal contracts?