Primary finding of that study – namely, steep production cost for rural-subsistence households (with average herd size of less than two animals) - was replicated by a UN-FAO report conducted in mid-2000s. Interestingly, that study also found that cost per litre was cheapest for farms with average herd size between three and ten milking animals.
Crucially, the report noted that rural farms with ten buffaloes and six hectares of land (referred to as PK-10R) were one of the most competitive dairy farms as analysed by IFCN in 2002 and had production costs lower than farms in Australia and New Zealand. Based on this finding, it could potentially be argued that Pakistan’s average cost of milk production could become cheapest in the world with an increase in average herd size.
That was then. Pakistan’s agricultural sector, and especially the livestock segment, has witnessed a sea change in the two decades since. Average farm size – measured in milk animals per farm – has increased from just one animal in mid-1990s to nearly 3.4 animals today. Back then, over 80 percent livestock farms owned less than two milking animals – whose share has since been reduced to under 25 percent. In fact, modal herd size now lies between >2 – 10 animals (over fifty percent), as per findings of the International Farm Comparison Network (IFCN) annual report for 2019.
The structural shift in domestic herd size, however, was not accompanied by a commensurate reduction in average cost of milk production. According to Jorge Montero of Tetra Pak, “farmgate milk price is [still] one of the most expensive when compared to other countries.”
Why did Pakistan’s dairy farmers fail to achieve the promised economics of scale? According to IFCN, between 1996-2012, annual milk yield also grew from 1.4 tons to two tons per animal. In sharp contrast, cost of production remains one of the lowest for neighbouring India, despite its lower average herd size which remained unchanged during the 1996-2012 period at two animals per farm. This is in addition to far lower annual milk yield of just 1.2 tons, growing from 0.7 tons back in 1996.
The culprit, according to IFCN, is ‘a very unfavourable milk to feed price ratio’, which remains under 1x. The view was echoed by Montero, who in his conversation with BR Research noted that “when you are getting an expensive raw material, it makes it very difficult to give a competitive price to the public”.
The low milk to feed price ratio is a result of both supply and demand-side distortions. On one hand, regulatory tilt towards food crops, especially support price interventions, create an opportunity cost for growers using limited available land for cultivation of silage.
On the other hand, according to IFCN statistics, feed prices are close to world average in absolute terms (although still higher than in India), but become uncompetitive due to control on final price of milk due to arcane price control laws. Both the ‘Price Control & Prevention of Profiteering & Hoarding Act, 1977’; and the still older regulation called ‘West Pakistan Foodstuff (Control) Act, 1958’ –place milk, including powdered milk and milk food for infants, in the schedule of ‘essential commodities’.
The next column in this series will analyse sector’s pricing challenge, and its impact on constraining investment in formalization of dairy value chain.