TheDairySite.com - news, features, articles and disease information for the dairy industry

Featured Articles

International Competitiveness of 'Typical' Dairy Farms

03 October 2010

This report from the FAO, compares the international competitiveness of ‘typical’ dairy farming systems in selected countries,with special focus on the cost of milk production and main determinants thereof. It also seeks to determine whether small-scale dairy farms in developing countries are in a position to compete with large-scale dairy farming systems in industrialized countries.

Summary

Farm types and data

Thirty dairy farm types from 13 countries have been compared using the standard IFCN methodology. Farms representative of various dairy farming systems were selected in Bangladesh, Cameroon, China, India, Morocco, Pakistan, Peru, Thailand, Uganda and Viet Nam and subjected to detailed analysis. For the industrialized countries, similar analyses were conducted for farms in Germany, New Zealand and the USA. In general, the first farm ‘type’ represents the current ‘average’ farm, while the second represents either a larger farm type or a different, but relevant, dairy production system. A detailed description of the farms appears in Annex 5.

While production data usually refer to the calendar year 2005, data for the farms in Africa and China were obtained in 2006 when they entered the IFCN data collection system. For the farms in India (Orissa and Karnataka), Thailand and Viet Nam, the data were obtained in 2004. In order to make use of available information, 2005 exchange rates were applied to all financial farm data.

Comparison of dairy returns

Dairy farm returns derive from milk and/or non-milk items (sales of cattle and manure, government payments, etc.). Milk returns account for 55 to 95 percent of the returns of all farm types analysed, and range from US$12 to US$36/100 kg of ECM. These returns are mainly determined by three categories of farmgate milk prices, which were:

  • Less than US$20/100 kg: Observed in Pakistan and Uganda.
  • US$20-30/100 kg: Although most farms receive prices in this range, those in India, New Zealand Viet Nam are at the lower end of the range whereas prices in Bangladesh and Thailand are at the higher end.
  • More than US$30/100 kg: Farmers in Cameroon, Germany, Morocco and the USA all obtained similar milk prices of about US$36/100 kg of ECM.

Non-milk items account for US$2 to 38/100 kg ECM of the returns of the dairy farm types analysed. The main determinants of non-milk returns were the cattle/beef price levels; culling rates and, related to that, strategies for selling calves and surplus heifers; yields per lactation; the level of government payments coupled to milk production; and use of manure on the farm. Based on these factors, non-milk returns were very low for the farms in India and very high in Germany and Morocco.

Comparison of the cost of milk production

Lowest milk production costs (less than US$12/100 kg) were observed for both farm types in Uganda and for the larger farm type in Cameroon. Production costs on all farm types in China, New Zealand, Peru, Thailand and the USA were slightly higher (US$22 to 30/100 kg), but were highest in Germany (over US$35/100 kg).

Given major differences in agricultural wage rates between developed and developing countries, it might be assumed that developing country farms have a labour cost advantage. It is, however, interesting to note that this was found not to be the case when comparing labour costs per litre of milk, mainly because as a general rule regions with higher salaries also have a significantly higher level of labour productivity. Expressed in terms of per litre of milk, the labour costs of a nine-cow dairy farm in Punjab, India, are similar to those of a 350-cow farm in the USA. The key cost advantage of small holder dairy farming is the use of low-cost feed and the overall ‘low-tech’ approach to milk production. Cows fed on crop residues, such as straw, are lower-cost producers of milk than high-yielding, grain-fed dairy cows.

Economies of scale

In general, comparison of farm types within and across countries and regions supports the hypothesis that economies of scale exist in milk production. It was observed that in Thailand and Uganda lower milk production costs were incurred only by the smaller farm types, mainly because of their significantly higher non-milk returns per 100 kg of milk.

Cost comparison between developed and developing countries

To obtain a clearer understanding of their comparative position in terms of international and local competitiveness, a simple average of key indicators of competitiveness was calculated for farmers in both developing and developed countries. Although the method is very crude and there are very large variations within each group, the comparison is most informative.

Average milk production costs in the three developed countries covered by this study (Germany, New Zealand and the USA) stand at US$31.4/100 kg, or 56 percent above the average production cost of US$20.2/100 kg calculated for the ten developing countries (Bangladesh, Cameroon, China, India, Morocco, Pakistan, Peru, Thailand, Uganda and Viet Nam). The average price of milk in the three aforementioned developed countries (US$31.2/100 kg) is only 30 percent higher than that of the developing countries (US$24.0/100 kg).

Thus, the overall profitability of milk production appears to be higher in developing countries than in the developed ones, which may be one of the reasons why developing countries are increasing their shares in global dairy production.

Returns to labour

If dairy farming is to be sustainable, it is essential that it should be able to compete for labour on the local labour market. The indicator ‘return to labour’ quantifies the ‘value- added’ per hour of labour put into dairy farming. If this return is higher than the average local wage rate, then the farming system can afford to pay competitive wages and should be sustainable from the labour standpoint. The average return to labour observed in the developing countries covered by this study is US$0.45/hour, which is 45 percent higher than the average local wage of US$0.31/hour. In the three developed countries, the average return to labour is US$16.30/hour, which is still 22 percent above the average estimated wage of US$13.30/hour. These figures indicate that dairy farming can compete on the local labour market in both groups of countries. However, despite these favourable returns to labour from dairy farming, the figures also show that milk production can quickly lose its competitive advantage if local wages rise faster than labour productivity.

Impact of increasing feed prices on competitiveness Given the rapid increases in feed prices over the recent past, it is important to consider how this affects the small-scale dairy farmers in developing countries in terms of competitiveness. In general, as these smallholder dairy systems normally use much less compound feed per kilogram of milk produced than dairy farms in the EU and the USA, rising feed prices increase the cost of milk production in the latter countries much faster than in the low-yield systems predominating in the developing countries. As a result, small scale dairy farming becomes even more competitive as feed prices increase.

September 2010

Partners


Seasonal Picks

Managing Pig Health: A Reference for the Farm - 2nd Edition