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5.1. Managing milk supply in a smallholder farming context Results generated in the present study showed the complexity of the dairy sector in a context such as Mantaro Valley. The co-existence of a large variety of stakeholders, regrouped in formal and informal markets, has an effect on the way the first part of the dairy supply chain is managed and how the different stakeholders participate in the supply chain. First, it allows smallholder farmers and artisanal cheese-makers to be included in the dairy sector without making big investments: avoiding barriers in the form of food safety requirements, grading criteria, bans on side-selling and high rejection rates for not achieving high quality standards (Vorley, 2013). Second, it gives small-scale dairy farmers the choice to avoid formal agreements and change buyers if they are not satisfied with the milk price offered. Third, it increases the competition between formal and informal dairy processors for having a constant milk supply: offering higher milk prices or being less demanding in quality aspects. Fourth, it makes both markets self-regulated according to the free demand-supply of the milk and dairy products. Finally, it forces formal processors to demand high milk quality levels from their milk suppliers in a context where there is a lack of support and incentives from the State but an active participation of informal processors offering better prices to farmers due to their lower production costs and profit structure.

This situation provides more benefits to the informal markets over the formal ones. Nevertheless, trading in an informal environment can also have disadvantages for the stakeholders in the informal sector. Farmers may face problems such as delayed or no payment for volumes delivered, and dairy processors may also be affected when their suppliers, either farmers or collectors, change frequently and deliver poor quality milk, sometimes adulterated, that they cannot control without any formal milk analysis system. It is aggravated by the absence of effective legislation regarding product origin and technical transformation (Aubron, 2007) and the consumption of poor quality dairy products that can be detrimental for urban consumers, since sanitary and health issues are frequently found as critical in these contexts. However, the loose control of the informal sector may be seen as a way for the State

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and to keep pace with rising food demands from the capital.

The limited involvement of dairy processors in terms of contracting farmers or more formal arrangements generates a particular type of interaction between stakeholders where milk supplied is adjusted through verbal arrangements with no incentive for farmers to improve milk quality or processors to support farmers technically. The current situation pushes both farmers and processors to reduce their operational costs, to have much lower entry costs, and to offer milk and dairy products at lower prices. But it limits the implementation of milk quality standards.

Some arguments against contract farming are the unequal benefits obtained by both players, with the producer being the weaker party, and the high costs incurred by negotiation, monitoring and enforcement of contracts with a large number of smallholders (Singh 2002). However, contract farming under the Mantaro context cannot only be considered as an important form of vertical coordination, it also could be seen as a way to increase the competitiveness of the formal sector. Formal processors that are under a contract have lower transaction costs. Benefits of contract farming are skewed toward large producers mainly due to economies of scale in the use of family labor in production and disposal of milk. But at similar scales of production, smallholders derived significant benefits from a reduction in transaction costs due to contract farming (Birthal et al., 2008).

The combination of low investment in training and poor access to land on the small-scale farmers’ side, uncertainly in the supply of dairy products through the year on the informal processors’ side, and the loose organization at both parts of the supply chain could explain why the relationship between processors, collectors and farmers seems unstable. Fluctuating behavior is observed from many farmers who supply several operators, and from processors who try to convince farmers to supply to them rather than their colleagues. This competitive supplier-client relationship reduces incentives for implementing stricter milk quality controls and improving milk quality, since it means more constraints for farmers who may choose to supply processors or collectors with low quality demands.

Nevertheless, to overcome this situation, higher milk prices have to be offered in parallel to the implementation of transparent milk quality payment systems.

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Milk quality at Mantaro Valley is often mismanaged in relation to the application of husbandry practices. Although several studies have highlighted the influence of farm management practices on the physico-chemical and microbial composition of raw milk (Elmoslemany et al, 2010; Millogo et al., 2008; Sant’Anna and Da Costa, 2011; Kamieniecki et al., 2004; Sraïri et al., 2005), dairy farmers in the study showed poor application of husbandry practices. Moreover, direct relationships between feeding practices and chemical milk composition were not apparent based on on-farm observations. Botaro et al. (2013) reported similar constraints regarding changes in milk composition after rewarding dairy producers. The transformation of feed into fat and protein remains a complex process, depending on many factors (breed, lactation stage, daily quantity produced) that may overshadow the diet’s nutritional effects (Schroeder, 2009). In such a context, the chemical quality appears rather an uncontrolled output than a targeted and managed component of the farmer’s business.

Hygienic quality is better correlated to dairy farmer’s husbandry practices. However, it was observed that the access to infrastructure and milking equipment did not necessary mean better milk hygienic status. Indeed, gathering cows in a waiting yard, use of a milking parlor or milking by mechanical means were negatively associated with high hygienic values. The poor cleaning regime of these buildings (less than once a day), or a lack of a deep cleaning of milking equipment could explain this result. On the contrary, some hygienic practices such as cleaning barns at least once per day, using a disinfectant to clean the udder before milking, and filtering milk before pouring it in churns demonstrated better effectiveness in improving milk hygienic status. Similarly, values of milk somatic cells showed positive association with low cow dirtiness scores. Moreover, a decreased level of somatic cells was also obtained when the animal house was cleaned at least once per day and when dairy farms had permanent access to a source of potable water.

Application of these practices can have a positive impact on the improvement of milk quality.

Nevertheless, problems of lack of bonus for producing high quality milk (Radder et al., 2011), labor constraints, and the lack of training and education limit their application. Indeed, the adoption of husbandry practices is a complex process that depends on the balance between the rewards farmers

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costs they face when implementing such practices. Until recently, it was quite costly to assess milk quality for each farmer, especially when only small quantities are involved. Today, cheaper quality testing devices like ultrasound milk analyzer allow dairy processors to assess quality individually for each farmer, which is a key requirement for traceability, quality management, and incentive pay (Saenger et al., 2013). In that respect, implementation of quality-based payments by processors using new technologies to control milk quality like UMA would be a major innovation to support the sustainable improvement of milk quality. But it requires accurate technical, economic and social evaluation because of its impacts on farmer-processor interactions.

5.3. Alternatives for the dairy supply chain The dairy supply chain at Mantaro Valley has to be reorganized to deal with aspects of milk quality.

First, written contracts have to be implemented by the formal sector. They can provide buyers with a greater degree of certainty regarding the availability of supply (Gow et al., 2000), a prospect of higher milk prices (Sauer et al., 2012) and of higher profits to farmers (Miyata et al., 2009). As it was explained, it also increases the competitiveness of the formal sector due to the reduction of the transaction costs. Other benefits associated with contract farming include the access to new markets, technical assistance, specialized inputs, and financial resources. However, it should be inclusive, otherwise if smallholders are mainly excluded from contracts it may serve to exacerbate income and asset inequalities (Key and Runsten, 1999). Second, the establishment of farmers’ organizations can be suggested as a way to manage and somehow control the milk supplies of their members who deliver small quantities of milk every day; to reduce logistic costs along the chain (Vijayalakshmi et al.,

1995) and to provide services close to farmers’ needs (Faysse et al., 2012); to increase farmers’ bargaining power (Sauer et al., 2012; Valentinov, 2007); and to facilitate the relationships with dairy processors by limiting the intermediaries between farmers and processors.

Finally, providing support regarding strategic issues such as market orientation and design of payment systems can increase dairy processors’ competitiveness. The first attempt of this approach was done with DairyPlant, which allowed the assessment and comparison of various alternatives, the acquisition

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implementation of quality-based payment systems will depend of the application of attractive incentives to discourage unfavorable changes in chemical milk composition and the clear understanding of the rules from all the stakeholders involved (Lejars et al., 2010).

5.4. Research perspectives This research highlighted the potential of small scale dairying for contributing to rural development and improving smallholder livelihoods. By focusing our investigation on relationships between farmers and processors we could identify ways of improving farmers’ capacities to react to different constraints at Mantaro Valley. We observed that empowering small-scale farmers is essential to make them more competitive. Nevertheless, more investment in marketing and safe milk production is also needed. The

state could also intervene to strength the supply chain; however, first it is necessary to determine:

What policies can be implemented by the State to regulate and support the sector in improving its efficiency?

By introducing an innovation in the current supply system we could analyze the impact of the availability of new information regarding milk quality on the relationship between farmers and processors. These changes were carefully managed with both stakeholders to then introduce the idea of implementing renovated milk payment systems. However, we couldn’t motivate enough dairy processors to establish milk quality controls or quality payments systems in the study area that could provide us a deeper analysis about the impact of possible changes in milk quality management on the supply chain. This situation will probably change in the future, if the consumer’ concern about milk quality increases. In that sense, should be necessary to know : How the dairy supply chain has to adapt itself in order to satisfy new consumers demands in terms of quality?

All the information obtained was useful to better define quality standards to be achieved, to motivate processors to measure milk quality, and to nourish the stakeholders’ reflections regarding the design of new payment systems at each supply area level. We supported the co-design process not even by monitoring changes stimulated by these new perspectives, but also by providing information on the

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approach with formal processors due to their willingness to improve milk quality. Further study regarding alternatives for a better management of milk quality in the informal sector is necessary to design appropriate interventions that can improve the current quality status of dairy products without affecting the downstream part of dairy supply chain. Hence it would be interesting to establish: How the informal sector should deal with milk quality issues and the pressure of the formality without affecting their revenues?

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The demand for dairy products in Peru has been growing in the last decades. Mantaro Valley experiences the simultaneous presence of formal and informal supply chains, showing the dynamism of the dairy sector in the area. In the capital, formal processors’ dairy products are sold in supermarkets, in some restaurants or in small retailers; whereas informal dairy products can be found in local fairs and shops on the street. In both cases, however, there is still a poor knowledge by most of the consumers about how the quality of dairy products is managed before dairy products arrive to the markets.

Behind the dairy products offered in the capital, limited control of milk quality and the unstable relationship between farmers and dairy processors are common problems for ensuring high quality standards. Indeed, lack of organization and high competition between stakeholders render difficult an adequate milk quality management. This situation is aggravated by the lack of state involvement to avoid the risk of interfering with the constant supply of dairy products to the capital. As a consequence, formal and informal markets are self-regulated according to the free demand and supply of the milk and dairy products. This promotes the active participation of informal processors in the supply chain, since no entry barriers or regulations are applied; but reduce farmers’ incentives to supply high standards of milk quality and increases the pressure on formal processors to find effective strategies to compete with the informal sector.

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