Assessing the development strategies for the Malawian dairy sector: A spatial multimarket model

Transcription

1 Assessng the development strateges for the Malawan dary sector: A spatal multmarket model esar Revoredo-Gha and Luza Toma Invted paper presented at the 5th Internatonal onference of the Afrcan Assocaton of Agrcultural Economsts, eptember 23-26, 2016, Adds Ababa, Ethopa opyrght 2016 by [authors]. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes.

2 Assessng the development strateges for the Malawan dary sector: A spatal multmarket model Assessng the development strateges for the Malawan dary sector: A spatal multmarket model 1 esar Revoredo-Gha Food Marketng Research, Land Economy and ocety Research Group, cotland s Rural ollege (RU). Kng s Buldngs, West Mans Road, Ednburgh EH9 3JG, Unted Kngdom, e-mal: cesar.revoredo@sruc.ac.uk. and Luza Toma Behavoural hange and Innovaton, Land Economy and ocety Research Group, cotland s Rural ollege (RU). Kng s Buldngs, West Mans Road, Ednburgh EH9 3JG, Unted Kngdom, e-mal: luza.toma@sruc.ac.uk. Abstract Dary s a key nvestment sector for the Government of Malaw. The strateges proposed to develop the sector have been three: (1) renforcement of the formal supply chan (.e., farmers delverng mlk to mlk bulkng groups and these to processors, who pasteurse t and transformed nto a number of dary products); (2) generaton of mn dares (.e., mcro-processng of mlk delvered to a mlk bulkng 1 Ths paper derves from materal of the Dfd-ER proect Assessng contrbuton of Dary ector to Economc Growth and Food ecurty n Malaw (E/J009202/1). We are partcularly grateful to Mr. Bran Lews (HMPA), Mr Herbert hagona (MMPA) and Mr. Jonathan Kaphela (REMPA) for provdng part of the data used n the analyss. All the opnons n the paper are sole responsblty of the authors. orrespondng author: esar Revoredo-Gha, cesar.revoredo@sruc.ac.uk 1

3 group); (3) sellng drectly raw mlk to consumers. The purpose of ths paper s to explore the aforementoned strateges n terms of the sector economc growth and food securty. To study them a spatal multmarket model was constructed for the Malawan dary sector, whch consders mlk producton n the three regons (North, entral and outh), the dfferent processors, consumers and the nteracton wth the nformal market. The results from the smulaton ndcate that strateges (1) and (3) have more possbltes n terms outcomes than strategy (2). The paper also explores potental roles for the Government and donors. Keywords: Dary sector, Malaw, multmarket model, formal dary market, nformal market. I. Introducton Dary s a key nvestment sector for the Government of Malaw, and donors such Belgum, Japan, UA and the UK have also been commtted to ts development. everal value chan analyses (IMANI onsultants, 2004; YE onsult, 2009; Kawonga et al, 2012; M-Lvestock onsultants, 2013) have dscussed strateges to mprove the dary sector performance and rase ts contrbuton to poverty allevaton and food securty. The strateges dscussed by the aforementoned analyses have been three: (1) renforcement of the formal supply chan (.e., farmers delverng mlk to mlk bulkng groups and these to processors, who pasteurse t and transformed nto a number of dary products); (2) generaton of mn dares (.e., mcro-processng of mlk delvered to a mlk bulkng group); (3) sellng of non-pasteursed of good qualty mlk drectly to consumers. The frst strategy s based on the dea that there s the need to ncrease mlk producton n order to expand processors producton and to reduce the dle capacty n ther plants. The second strategy proposes that farmers stuaton could be mproved (.e., to get better returns) f ther cooperatves could drectly pasteurse, package and market the mlk (.e., skppng processors) as processors have olgopsony power and keep mlk prces low for farmers; the thrd one, ams also at mprovng the returns of farmers but elmnates the need of pasteursng the mlk, as ths s to be sold raw to consumers such as n Kenya. Ths strategy also responds to the fact that t s not possble to curb the nformal market for mlk. The purpose of ths paper s to explore the mpact that the aforementoned strateges could have on the sector economc growth and food securty. Ths s motvated by the fact that the three strateges may have dfferent effects on the smallholder agrculture (more than 80 per cent of the dary producton n Malaw s n the hands of smallholder farmers) and they mply dfferent roles for government polcy and governance of the dary sector. 2

4 To study the aforementoned alternatves a spatal multmarket model was constructed for the Malawan dary sector, whch consders mlk producton n the three regons (North, entral and outh), the dfferent processors, consumers and the nteracton wth the nformal market n each regon. Multmarket models have a long tradton n partal equlbrum modellng and partcularly n polcy evaluaton n agrcultural sectors (Braverman and Hammer, 1986 and adoulet and De Janvry, 1995 for a revew of models). They provde a way to represent the most mportant markets affected by a polcy, leavng asde other markets where the effects of the polcy would be neglgble. An example of ther use n an Afrcan dary market can be found n Katbe et al. (2010), where t s used to study the effect of the polcy change n the Kenyan dary sector. The results ndcate that assumptons of strateges (1) and (2) may be flawed. Moreover, there s enough producton of mlk for the formal market to operate at full capacty; however, the maor constrant s the demand for dary domestc products gven the low purchasng power of most of the populaton. Mcro dares suffer from two problems: frst, effcency n the pasteursaton of mlk n comparson wth processors, and second, the fact that they cannot offer hgher prces to farmers (at least ntally) because of they are concentrated on low value added products. Due to the latter, they cannot expand the supply of affordable of mlk products for the populaton. trategy (3), whlst has the potental of expandng the supply of low prce mlk to consumers, and therefore, mprove food securty, requres fgurng out how to ensure that good qualty mlk s delvered to consumers. The structure of the paper s as follows: t starts provdng a bref overvew of the dary sector n Malaw. Ths s followed by a descrpton of the multmarket model used to smulate the development strateges. Next, the emprcal secton of the paper presents the data, how the three strateges are mplemented and the methods used to calbrate the parameters of the multmarket. The next secton presents the results of the model and the fnal secton provdes the conclusons. II. A bref overvew of the Malawan dary sector The Malawan dary sector consttutes a small proporton of the country s agrcultural sector and lvestock sub-sector. The sector manly reles for mlk supply on smallholder farmers who normally own between one and four dary cows (htka, 2008). Most dary (smallholder) farmers are stuated around the three large ctes n Malaw: Blantyre (the outhern Regon), Llongwe (entral Regon) and Mzuzu (the Northern Regon). 3

5 The estmate of the number of dary farmers n the smallholder sector and the sze of the total dary herd n Malaw vares, not least because the nformal sector s often not ncluded n estmates. Based on the recent nformaton receved from sources at Bunda college of Agrculture, there are currently around 9,584 dary farmers n three mlk producng regons of Malaw, wth 61 per cent of them located n the outhern regon. However, a more recent bref from the vl ocety Agrculture Network (IANET, 2013) puts ths number at 16 thousand. It should be noted that the actual number of farmers may dffer from the one above as farmers regularly drop out of dary farmng due to the loss of anmals. The number also does not nclude farmers sellng mlk only outsde the formal sector whch s often the case n the Northern regon, where formal sector s largely under-developed. As regards the number of dary cows, accordng to the lvestock census, the total fgure for zebus (meat anmals) for 2014 was estmated at 82,964 cows for Malaw, of whch the North regon had 31 per cent, the entre 38 per cent and the outh 31 per cent. The non-zebu anmals (crosses and pure breed) were estmated n 42,293 cows of whch, 8.4 per cent were n the North, 19.5 per cent n the entre and 72.1 per cent n the outh. The Malaw lvestock census also allows estmatng mlk yelds per cow. The fgure for zebus (meat anmals) for 2014 was estmated at kg/head/year and these were the same for the three regons. The mlk yelds of non-zebu anmals were estmated (about 6 tmes the yelds of zebus) of whch, kg/head/year was n the North, kg/head/year was n the entre and kg/head/year was n the outh regon. oncernng mlk producton, the total producton of mlk for 2014 was estmated by the Malaw lvestock census n 64,747 tonnes, of whch about 25 per cent were produced by the zebu cows and the remanng by the non-zebus. Most of the producton s located n the outh, whch represented n 2014 about 58 per cent of the total producton; the entre and the North regon represented about 27 per cent and 15 per cent, respectvely. There are two marketng channels for mlk n Malaw formal and nformal, wth the latter beng domnant (Iman Development onsultants, 2004). The formal sector supplyng processed mlk to the consumers s manly dependent on smallholders for ther mlk supply. The two channels dffer n the way mlk reaches the fnal consumer. In the formal sector, mlk s processed and sold to the consumer va retal outlets, whereas n the nformal sector mlk s sold raw (and often dluted) to ether vendors or drect to the consumers (Revoredo-Gha and Renwck, 2016). Even though n Malaw t s llegal to sell raw mlk to the consumers due to the health rsks nvolved, ths s stll a common practce n the country (Barnard, 2006). The government advses smallholder dary farmers to sell mlk only through the formal 4

6 channel (.e. mlk bulkng groups, MBGs) as t provdes an establshed market, and reduces the rsk to publc health. A large proporton of farmers, however, stll sell mlk through the nformal market (Revoredo-Gha and Renwck, 2016). There are varous reasons for farmers beng nvolved n the formal and nformal markets. Accordng to htka (2008), smallholders sell mlk n the formal market to smooth out consumpton patterns as payments for the mlk n the formal market are monthly (unlke nstant cash receved n the nformal market) whch acts as some knd of savngs mechansm for the farmers. Further, n the formal market the farmers are able to sell hgher volumes of mlk. Apart from provdng relable markets, MBGs also play role n reducng farmer transacton costs n search for potental buyers (htka, 2008). The man reasons for beng nvolved n the nformal market are: sometmes hgher prces pad for mlk than n the formal market, nstant access to cash (no need to wat for one month), and almost guaranteed sale as no tests of mlk qualty are conducted n the nformal sector,.e. there s a lttle chance of mlk beng reected because of ts poor qualty (Revoredo-Gha and Renwck, 2016). In the Northern regon the stuaton s especally challengng, as the last remanng maor dary processor closed down n 2012, leavng the farmers wth lttle or no choce on where to market ther mlk (Tebug, 2012). Ths often leads the farmers to ether sell ther mlk through the nformal channel, or makes them move away from the sector entrely. The MBGs are coolng centres where farmers wthn a radus of 8-10 km delver ther mlk to keep t cool and for processors to collect the mlk. In the past, these were local farmer assocatons; however, snce 2009 an emergng group of ndependent MBGs has appeared (called traders ) and now represent more than 50 per cent of mlk delvery to processors n the outh regon. The MBGs are located around the three maor ctes (Blantyre, Llongwe and Mzuzu) (Revoredo-Gha and Renwck, 2016). Accordng to the most recent data receved from the mlk producers assocatons, there are currently approxmately 54 regstered MBGs n Malaw sellng mlk n bulk to the dary processors. These MBGs belong to the regonal mlk producers assocaton. The hre Hghlands Mlk Producers Assocaton (HMPA) n the outhern Regon has the hghest number of mlk bulkng groups - 25 (46 per cent of total). The entral Regon Mlk Producers Assocatons (REMPA) has 17 mlk bulkng groups. As of 2014, Mpoto Dary Farmers Assocaton (MDFA) n the Northern regon had the lowest number of MBGs from the three regons 12 (or 22 per cent of total). It s worth notng that not all regstered MBGs are fully operatonal, and therefore, the exact number of these MBGs s not clear. Partcularly, ths s the case n the Northern regon, where the last remanng maor dary processor went out of busness n 2012, breakng a fragle lnk between the farmers and the formal mlk market n the regon. The mlk delvered by the farmers (usually by bcycle or by foot) s bulked at the MBG coolng centres, and collected by the dary processors on a (usually) daly bass. 5

7 However, due to the poor road networks and frequent breakdowns of the collectng trucks, mlk can often be more than a day old before collecton (htka, 2008; YE onsult, 2009). A bonus s sometmes pad for hgher bulk quanttes (hagunda et al., 2006), although ths s not a regular occurrence. There s no bonus pad for a hgh mlk qualty or butter/fat content as ths s not checked at the MBGs. Further, no extra payment s made for mlk delvered durng the dry or low season when mlk producton normally decreases due to a shortage of feed (YE onsult, 2009). The MBG staff tests mlk for adulteraton (wth a lactometer) and acdty (wth an alcohol test). There s no testng currently beng conducted for bacteral count or fat percentage,.e. the qualty of mlk s not checked at the MBGs. The volume of accepted mlk s then measured and recorded aganst the name of the farmer, and all delvered mlk s mxed together nto the cooler. Mlk not passng the basc tests s reected and returned to the farmers, who later sell t to the vendors,.e. the mlk enters the nformal market (YE onsult, 2009). The dary farmers are pad for ther mlk (by the MBGs) on a monthly bass. There s a small deducton (0.5 Kwacha as of 2008) for each ltre of mlk n order to pay for the runnng cost of the coolng plant, mantenance and for the admnstratve costs of the mlk bulkng group (YE onsult, 2009). As MGBs also act as centres for veternary and lvestock feed supples, as well as farmer tranng and extenson advce, artfcal nsemnaton servces and credt, deductons are also made for any credt gven to the farmers or servces suppled. Fgure 1 presents the evoluton of the average nomnal and real prce of mlk pad to farmers (deflated by the Malawan consumer prce ndex base year 2000). Nomnal prces are set up by processors sporadcally, producng the observed pattern n real terms, namely that nomnal prces are eroded quckly by nflaton. Thus, whlst the nomnal prce shows a postve trends, real prces show a negatve trend. Dary processng n Malaw s very lmted n scale and extent. It stands between the farmers and ther MBGs and the formal dstrbuton system whch comprses street vendors and shops of varous scales. There are bascally three types of processor. ommercal Dares there are two of ths type n Blantyre n the outh (Darbord Malaw and uncrest reameres), wth a further two n the Llongwe area n the entral regon (Llongwe Dares and MDI). These enterprses prmarly draw mlk from MBGs. Prvately owned small scale dares - whch utlse mlk from ther own dary cow herds. There s one near Llongwe (Katete Dary Farm) and whch only uses mlk from ts own herd; and one at Blantyre (able Farmng) whch also draws mlk from a lmted number of MBGs. Mn dares whch are lmted n number and process mlk from smallholder farmers and are managed by the farmers themselves. Man products produced by the processors are pasteursed mlk, flavoured and plan yoghurt (chambko), cream, butter and cheese (ndan, 2012). 6

8 Metrc tonnes Percentage sold to nformal market Fgure 1, based on nformaton from Revoredo-Gha and Renwck (2016), presents the estmated dstrbuton of mlk n Malaw for the perod 1993 to The thck black lne represents the total producton of mlk; the lght gray lne shows the evoluton of the supply of mlk to MBGs. The dfference between the two lnes represents sze of the nformal market, whch clearly receves over 60 per cent of the mlk produced (the grey dotted lne measures the evoluton of the sze of the nformal market as a percentage of the total producton and t measured n the rght vertcal axs). 70,000 60,000 Total producton of mlk (FAO estmatons and GoM offcal data) Percentage of total producton gong to nformal market ,000 40,000 Mlk delvered to mlk bulkng groups n the three regons ,000 20,000 10,000 Mlk delvered to nformal market Mlk collecton at full processng capacty (50% more than current collecton) Fgure 1 - Malaw formal and nformal dary market. ource: Based on Revoredo-Gha and Renwck (2016). An nterestng mplcaton comng from Fgure 1 s that t would be possble for processors to expand ther mlk collecton and to be operatng at full capacty. Ths s shown by the grey dotted lne above the actual mlk collecton; however, to reach ths stuaton, hgher prces pad to farmers would be needed and ths would affect the dfferent varables of the sector. Ths s somethng that wll be explored later n the paper wth the help of the multmarket model. III. A multmarket model of the dary sector Let us consder the followng partal equlbrum model for the Malawan dary sector. The startng pont of the model s the producton of mlk, whch to smplfy wll be consdered to come ether from the natve zebu or from other breeds (these nclude exotc breeds or mxed breeds). Hence, the supply of mlk from zebus ( Y ) from regon, where =North (N), entral (), and outh(). The total producton of mlk from zebus s gven by equaton (1). 7 Z

9 1 Y y V Z Z Z Where Z y s the mlk yeld per zebu n regon and Z V s the number of zebus n regon. It s assumed n the model that all the mlk comng from the zebus s consumed n the farms (.e., t s not marketed). Therefore, ths s presented n equaton (2): 2 Z Z Y Z Y can therefore be consdered as mlk gong/consumed to the nformal market. The next step s to characterse the supply of mlk produced by non-zebu cows ( Y ). Ths s gven by equaton (3), whch s analogous to equaton (1). NZ NZ NZ NZ N N F NZ 3 Y y V y P,P,W V I NZ NZ Z Where y s the mlk yeld per non-zebu cow n regon and V s the number of non-zebus cows n regon. It s hypothessed that the yelds are a functon of the average prce pad by the MBGs ( P ), the prce pad by the nformal market n F regon ( P ), and the prce of nputs ( W ). The number of non-zebu cows s assumes I to be exogenous, as n the past t has depended on donors, Government polcy or the pass on programme. In the Northern regon t wll be assume that all the mlk from non-zebus wll go to the mlk bulkng group (MDFA) ( B ),.e., (4): N NZ N N NZ 4 B Y P,P Y N N N N I N Where N s the proporton of the producton of mlk from non-zebus n the North, whch s a functon that depends on P and P. Note that 1 because the N I remanng part goes to the nformal market. All the mlk collected n the North and pasteursed by MDFA s assumed to be sold wthn the regon. Ths s gven by (5): Where MDFA MDFA 5 YP B MDFA s the proporton of the mlk collected by the North mlk bulkng group for MDFA that s beng pasteursed. It s expected that ths proporton to be lower than 1 due to losses. N N 8

10 In the case of the entral regon, the amount of mlk that goes to the mlk bulkng groups whch delver to processor ( B ) s gven by (6): NZ NZ 6 B Y P,P Y I Where s the proporton of the producton of mlk from non-zebus that goes to processor n the entral regon and =Llongwe Dares (LD-1), uncrest reameres (-2), Darbord Malaw (DM-3), able Farmng (F-4), MDI (MD-5). mlar nomenclature s used for the prces pad to farmers by processor (.e., P ). Note that not all the ' s wll be greater than zero as some of the dary processors do not collect mlk n the entral regon. In addton, the sum of the part of the produced mlk wll fnd ts way to the nformal market. prevalent n the nformal market. ' s sums less than one, snce PI s the prce The equaton of the mlk gong to mlk bulkng groups n the outh s smlar to the entral regon and gven by (7): NZ NZ 7 B Y P,P Y I The quantty of mlk pasteursed by the processors ( YP ) s gven by equaton (8): 8 YP B B Where s the proporton of the mlk collected n MBGs for processor that s beng pasteursed. Note that s lower than 1 because some of the mlk s lost, and also the processors use part of the collected mlk to other purposes (e.g., chambko, lqud yoghurt, yoghurt, ce cream). The total supply of pasteursed mlk n regon ( P ) s gven by (9): 9 P J 1 s YP Where s s the share of the producton of pasteursed mlk from processor that t marketed n regon, where J s the number of processors sellng n regon. Fnally, note that the total consumpton/purchases of pasteursed mlk, can be n some cases understood as resdual demand, are gven by equaton (10): 10 P M I 9

11 Where s the total consumpton of mlk n regon, M s the total consumpton of powder mlk and I s the total consumpton of unpasteursed mlk comng from the nformal market. It s assumed n the model that whlst processors can sell n several regons, the nformal market can only sell mlk wthn ts regon. Note that the actual consumpton of pasteursed mlk depends on the retal prce set for the product. Ths prce, although suggested by processors, s ultmately set by retalers as shown n Akach et al. (2013). Therefore, the prce pad by consumers,.e., the retal prce n regon, ( P ) s gven by (11): Where R R W, 11 P P 1 m m s the retal marketng margn set by retalers up over the bass of the prces proposed by processor W, P. Gven the above expressons, the total sze of the nformal market (I) s gven by (11): Z NZ NZ NZ 12 I Y 1 Y 1 Y 1 Y N The total mlk marketed to the formal sector s equal to (13): N N NZ NZ NZ 13 M Y Y Y N N Let us consder that the plant of capacty (.e., engneerng plant capacty) of processor s equal to P, then the observed dle capacty of processor, as a rato of the plant capacty, can be expressed as P (13): 14 I Y NZ P Y NZ The structure of the model presented n equatons (1) to (14) s represented by Fgure 2. Three features are mportant to hghlght: The frst one s related to the dfferent types of consumers. These are those that demand mlk of hgh qualty (H), whch comes from the formal sector (.e., processors and retalers) and/or from mports; and those that consume raw mlk from the nformal market. The key dfference between both groups s there ncome (.e., ther purchasng power s dfferent). Moreover, 10

12 gven the country s poverty level, the group that demands mlk type L s much larger than the one that demands mlk type H. Northern producton upply to Retalers onsumers H MDFA MBG Informal market onsumers L upply to LLD MBG LLD processng entre upply to MDI producton MDI MBG processng Retalers onsumers H Informal onsumers L Imports market upply to LLD MBG upply to DML MBG DML processng outhern upply to Retalers onsumers H producton MBG processng upply to F MBG Informal market F processng onsumers L Fgure 2. Overall structure of the model The second feature s that Llongwe Dares, whch s the most mportant processor n terms of volume, processes mlk n the entral regon; however, t collects mlk from the outh and entral regon and they sell ther products all over the country (ther operatons outsde the entral regon are represented by dashed lnes). The thrd feature s the fact that retalers mports are destned to consumers who demand hgh qualty, and therefore, mports compete wth domestc processors products. IV. Data, development strateges and calbraton of the model The purpose of ths secton s to provde a bref descrpton of the data, the way that the dfferent development strateges were gong mplemented and the approach to calbrate the behavoural relatonshps n the model such as the producton of mlk, the supply of mlk to mlk bulkng groups and the demand for mlk n the nformal market. 11

13 IV.1 Data The data used for the model were compled from a number of sources and t s presented n Tables 1 to 3. The nformaton on producton, Table 1, s from the lvestock census carred out by the Natonal tatstcal Offce of Malaw. The nformaton s broken down by Zebus (meat purpose anmals) and Non-zebus (dary anmals), whch s the addng up of pure breeds and crosses. Table 2 consders the dstrbuton of the total mlk produced, shown n Table 1, and presents ts dstrbuton between the formal market (.e., to the dfferent processors) and the nformal market. The source of these data was the nformaton provded by the Malaw Mlk Producers Assocaton (MMPA), the entral Mlk Producers Assocaton (REMPA) and the hre Hghland Mlk Producers Assocaton (HMPA) (outh regon). Note that n Table 2, due to lack of nformaton, the mlk gong to the nformal markets nclude all the mlk produced and that was not been delvered to processors. Therefore, t ncludes, n addton, to raw mlk that s delvered by to consumers by nformal dealers, mlk that remans at the farms or that t s lost. Table 3 presents the average prces pad by processors to the MBGs and the prces receved by farmers after deductons by the MBGs. The dfference between the two prces covers the costs of the functonng of the MBGs as well as any tranng or nputs provded by the MBGs. The dfference also contans neffcences n the runnng of the MBGs. The source of these data s nformaton collected by HMPA on a monthly bass. To our knowledge there s no such nformaton for the North or entral regon (except on specfc cases). However, the outh regon produces most of the mlk that goes to processng (81 per cent of the total mlk collecton n MBGs n 2014). Anecdotal evdence ndcates that the prces n the entral regon are smlar to those n the outh regon, as expected by the fact that Llongwe Dares collects mlk from both regons. The prce pad by the MBG n the North regon seems to be hgher due to the dffculty to attract supplers (anecdotal evdence ndcates the prce to be about 30 per cent hgher than n the outh; however, t represents less than 1 per cent of the collecton). Table 1: Mlk producton nformaton by regon and country 12

14 Zebus 1/ Non zebus 2/ Total Dary Yeld Producton Dary Yeld Producton Dary Yeld Producton cows cows cows Heads Ton/head Tonnes Heads Ton/head Tonnes Heads Ton/head Tonnes Northern regon , ,341 2, ,798 25, , , ,496 2, ,054 26, , , ,635 3, ,320 27, , , ,114 3, ,501 28, , , ,006 3, ,723 29, ,729 entral regon , ,041 4, ,021 30, , , ,130 5, ,344 33, , , ,548 6, ,735 35, , , ,850 7, ,497 37, , , ,141 8, ,358 39, ,499 outhern regon , ,036 20, ,435 39, , , ,328 23, ,768 23, , , ,691 27, ,639 27, , , ,562 28, ,816 28, , , ,002 30, ,517 30, ,519 Total , ,418 27, ,254 95, , , ,954 32, ,166 82, , , ,874 36, ,694 89, , , ,526 39, ,814 93, , , ,149 42, ,598 99, ,747 ource: Based on Malaw Lvestock ensus. Notes: 1/ Refers to the beef herd. Number of cows estmated based on FAOTAT fgures (6% of the dfference of total zebu cattle mnus slaughtables). 2/ Refers to the pure and crosses dary cattle. ows estmated as the dfference between cattle mnus slaughtables. Table 2: Processors' and nformal market shares by regon 1/ 13

15 Processors' collecton share (%) 2/ Informal Total MDFA DML LLD able MDI Total sector share % % Northern regon entral regon outhern regon Total ource: Based on Malaw Lvestock ensus, HMPA and MMPA data. Notes: 1/ hares wth respect to the mlk produced by the non-zebu herd. 2/ MDFA=Mpoto Producers Assocaton, DML=Darbord Malaw, LLD=Llongwe Dares, = uncrest reameres, able=able Farmng ompany, MDI= MDI Llongwe. Table 3: Average prce pad by processors and pad to farmers (Kwachas/ltre) 14

16 Darbord uncrest able Llongwe Dares Ltd. MDI Regon Total Malaw reameres Farmng outh entral Total entral outh Ltd. ompany Thousand ltres ,153 1, , , ,258 10,716 11, ,660 2, , , ,403 13,834 15, ,987 2, ,260 1,288 8, ,704 15,834 17, ,521 2, ,614 1,179 9, ,465 16,564 18, ,776 2, , , ,140 16,526 17, ,621 5, ,447 1,073 9, ,341 18,701 20,041 hares (%) ource: Based on data provded by MMPA, HMPA and REMPA. IV.2 Implementaton of the dfferent development strateges Ths secton present the way that the dfferent strategy alternatves, namely (1) strengthenng the formal sector; (2) mcro-processng; and (3) sellng drectly raw mlk were mplemented n the smulaton. trengthenng the formal sector The assumpton behnd ths strategy s that the way to strengthen the formal sector s by expandng the MBGs collecton of mlk (.e., the mlk suppled to processors) n order to reduce the dle capacty of processors, whch should reduce processors average costs by reducng the average fxed costs. However, n order to ncrease the mlk collecton, ths smulaton assumes that processors need to ncrease the prce pad to farmers (through the MBGs) n such an amount that processors would operate at full capacty (about 50 per cent). Mcro processng It s dffcult to antcpate how ths strategy would operate because although several MBGs have aspratons to become mcro-processors of dary products, the Government do not have a plan to proceed wth the nvestment. The attempts to establsh mcro-dares have been supported by nternatonal donors (e.g., JIA n the case of Bvumbwe). In ths smulaton t has been consdered that mn dares are establshed n all the farmers MBGs (dsregardng the orgn of the nvestment funds and the total costs, aspects that although are very mportant, no nformaton s avalable). It should be noted that t s assumed that MBGs n the hand of traders wll contnue delverng to processors, whch s consstent wth the fact that n most of the cases processors 15

17 helped to establsh those MBGs. In addton, t wll be assumed, based on evdence observed at Bvumbwe cooperatve (one of the few mn dares that were n operaton for a whle) that mn dares would be producng ust pasteursed mlk n plastc sachets. Thus, the prce of the mlk that consumers wll pay s the pad prce to famers plus the cost of pasteursaton and marketng. Furthermore, ths also means that these MBGs wll not be able to pay a hgh prce to farmers because of the low value added of ther fnal product (.e., pasteursed mlk). As the transformaton of farmers MBGs to mcro dares, means that they cannot contnue supplyng processors. Under ths scenaro, t s assumed that processors ncrease the prce they pay for mlk n order to collect enough mlk from the traders MBGs. Ths s done by concentratng on products wth hgher added value. ellng drectly raw mlk Ths scenaro conssts of farmers sellng drectly raw mlk to consumers. Ths stuaton would be such as n Kenya, where ths s allowed. trctly speakng ths scenaro s not very dfferent to the current stuaton snce there s no enforcement of the law aganst sellng of raw mlk. To explore ths scenaro, t was assumed that the MBGs n the hands of farmers, stop collectng mlk to delver t to processors and nstead they wll ust be n charge of supervsng the qualty of mlk. It s because of ths that the prce of mlk sold as raw mlk wll be lower than the current prce pad for mlk to farmers at the farmers managed MBGs. As n the prevous scenaro, t s assumed that MBGs n the hands of traders contnue supplyng processors, and processors ncrease ther prce pad for mlk n order to capture a hgher quantty of mlk, whch goes to products wth hgher value added. IV.3 Model calbraton As explaned n the prevous secton, several of the possble results depend on how the dfferent stakeholders react to changes n prces under the dfferent scenaros. The purpose of ths secton s to brefly present the way that the man relatonshps were estmated/calbrated n the model. The relatonshps were calbrated usng nformaton avalable for Producton of mlk The aggregated producton of mlk for each regon was calbrated usng the postve mathematcal programmng approach (Howtt, 1995). The formulated dary model conssted of decdng the quantty of feedng gven to the dary cows. The feedng s assumed to be purchased by producers and ther quantty to have effects on the mlk 16

18 yeld per cow. Note that n ths problem the number of cows was left as an exogenous varable. The reason for above formulaton of the dary problem (n contrast of a more typcal one where yelds per cow are exogenous based on average yelds and the farmer decdes the number of cows to put under producton) s due to the structure of the observed producton n Malaw, where cows are gven to producers ether by donors, Government, and/or through the pass-on scheme; therefore, the number of anmal n each farm s to some extent exogenous, farmers wll collect all the mlk produced by the anmals. However, mlk prces constran the amount of purchased nputs that the farmers can buy affectng the yeld per cow. The problem s one of a household producton model and t can be more clearly apprecated n the followng answer by Mr. Bran Lews, advsor wth the hre Hghlands Mlk Producer Assocaton ntervewed n June 2013 to the queston what the man drver for producers (e.g., more cows, better feedng, better tranng) was. He answered: the man drver? s prce, when the mlk prce s good, farmers want to produce, they feed ther cows better, get ther cows n calf qucker, everythng works; there s money to pay for veternary blls, to rear the hefers properly, the whole thng works. When the prce of mlk s poor everythng s the opposte, farmers don t want to spend money on treatment for ther cows, so the cows don t do very well, the hefers grow n four years nstead of two years, the cows are producng eght ltres nstead of ffteen ltres after they calf. It comes the tme to do AI [artfcal nsemnaton] and they say I cannot afford t [ ] the fundamental thng s money. The mathematcal programmng model s gven by (15), whch assumes that yelds ncrease at decreasng rates wth the amount of purchased nputs: Where cows, (15) w F M F 2 Max P 0 1 F 2F s.t. s the gross margn n regon, F s the quantty of purchased nputs, NZ V w F NZ V represents the number of non-zebu F P s the average prce receved by the farmer, w s the purchased nputs prce, M s the money constrant for the purchase of nputs, and 0, 1, 2 are parameters of the average mlk yeld per anmal. upply of mlk to MBGs Results from Revoredo-Gha et al. (2013, 2015) ndcate that processors face a stable supply of mlk that s responsve to prces and they set mlk prces that are pad to 17

19 MBGs. Therefore, the nverse supply of mlk faced by each processor was calbrated usng nformaton from Table 2 and Table 3 accordng to: Where W W R 16 Max P Q B P B B R B P s the average wholesale prce for processor products. Q s the quantty of an aggregated retal dary product (measure n mlk quantty) made of the delvery of Bmlk; P s the prce of mlk pad by processor. To smplfy the problem, t wll be assumed that R B Q can be expressed as Q B B R, where s the converson factor from mlk to dary products and 1. The nverse supply of mlk faced by processor s assumed to be lnear and equal to Replacng the expresson (16) becomes (17): W 17 Max P 0 1B B B B Maxmsng processor profts (17) wth respect to Bone obtans (18): W 18 P 0 21B P B. 0 1 ombnng (18) wth the defnton of and 1 n terms of observed data: 19 P one obtans the calbrated values for W P P 1 B 0 P 1B 0 Demand for mlk at the nformal market There s no nformaton about the demand for mlk at the nformal market, besdes anecdotal nformaton, whch ndcates that the prce s around the prce of mlk pad by the MBGs for mlk, n some cases somewhat hgher and n other cases lower (htka, 2008). Due to ths, t was assumed that the nformal market s represented by a perfectly elastc demand where all the mlk not beng delvered to the formal market fnds ts way and the prce s assumed to be equal to the average prce pad by the MBGs of the regon. 18

20 V. Results and dscusson The full model, together wth the calbrated relatonshps, was mplemented n a M Excel Workbook and solved and smulated wth the ad of Vsual Basc routnes. 2 The results are presented n Table 4, whch consders the baselne result (2014 stuaton) and three dscussed strateges/scenaros: strengthenng the formal sector ( Formal market ); mcro processng ( Mcro dares ); and sellng drectly raw mlk ( Raw mlk market ), whch presented below: trengthenng the formal sector The column Formal market n Table 4 presents the results for strengthenng the formal sector. As shown n the Table, producers are encouraged to delver more mlk to the processors through hgher prces. The mlk collecton ncreases by about 50 per cent. The hgher prces pad by processors not only ncrease the collecton of mlk by MBGs but also encourage a rse n the total producton of mlk n the three regons. Producton n the outh ncreases the most wth respect to the baselne (14.1 per cent). Ths compensates the reallocaton of mlk from the nformal to the formal market such that the mlk destned to the nformal market stll grows. The growng n the producton of mlk mples that the per capta consumpton of raw mlk and processed mlk (from domestc orgn) wll ncrease (note that the hgh socoeconomc group n urban areas also consumes mported dary products). In the case of the raw mlk, ths s due to the fact that surplus mlk wll go the nformal market. Note that wholesale prces of processed products wll ncrease due to the rse n the cost of the mlk (processors are payng a hgher prce for t); however, t could be expected that not all of ths cost wll be passed to urban consumers (they make the demand for processors) due to the fact that the expanson of producton wll reduce the average fxed costs, whch are currently hgh due to dle capacty. It s mportant to pont out that under ths scenaro t beng assumed that the addtonal producton by processors wll be sold at hgh prces (f not n the domestc market, probably abroad n the neghbour countres). A potental role for Government and donors under ths scenaro s to mprove the publc nfrastructure (e.g., roads, energy), whch certanly would provde postve externaltes and reduce the operatonal costs of the dary processors. Although, not smulated, ths could brng an expanson of the domestc dary ndustry. 2 The smulaton workbook s avalable from the authors upon request. 19

21 Table 4: Results from the smulaton ummary of varables Baselne 1/ Development strateges trategy (1) trategy (2) trategy (3) Formal market Mcro dares Raw mlk market Result hange 2/ Result hange 2/ Result hange 2/ Total non-zebu producton of mlk (tonnes) North 4,723 4, , , entre 11,358 12, , , outh 32,517 37, , , Average prce pad to farmers (2014 Kwachas/ltr) North entre outh Per capta consumpton of domestc mlk - raw (kg/year) 3/ Malaw Per capta consumpton of domestc mlk - processed (kg/year) 3/ Malaw Total demand for mlk - processors North entre 1,316 1, outh 18,361 27, , , Demand for mlk - farmers MBGs 4/ North - MDFA entre - Llongwe Dares 1,316 1, , outh - Llongwe Dares 4,962 7, , outh - Darbord Malaw 4,439 6, , outh - uncrest reameres 2,530 3, , outh - able Farmng Demand for mlk - traders MBGs outh - Llongwe Dares 3,331 4, , , outh - Darbord Malaw outh - uncrest reameres 2,863 4, , , Total supply to the nformal sector (tonnes) North 4,633 9, , , entre 10,042 16, , , outh 14,156 14, , , Average wholesale prce (Kwachas/ltr) 5/ North entre outh Note: 1/ orresponds to the 2014 stuaton. 2/ hange wth respect the baselne. 3/ Raw mlk comes from the nformal market and s consumed n rural areas and by 80% of the urban populaton. 4/ In the case of strateges 2 MBGs operate as mcroprocessors and strategy 3 MBGs do not collect mlk only check qualty. 5/ Processors' prce. Mcro processng Under ths scenaro the mn dares wll compete wth processors on the supples of mlk. As explaned, all the farmers-managed MBGs are assumed to become mcro 20

22 dares. It s mportant to note that under the assumpton that they wll only produce pasteursed mlk (low value added product) these MBGs cannot afford to pay hgh prces to farmers for the raw mlk. However, as they slghtly ncrease the payments to farmers, there s a small rse n the mlk collected by those MBGs (about 7 per cent). The scenaro also shows that processors ncrease substantvely ther collecton from traders MBGs due to ther hgher prces. Ths s needed due to the fact that otherwse they have an enormous ncrease n ther dle capacty, whch was estmated n 30 per cent n the baselne scenaro. Nevertheless, as shown n Table 4, ther collecton s down due the loss of the farmers MBG. Ths stuaton affects partcularly Darboard Malaw, whch depended to great extent of farmers MBGs for ther mlk collecton. It s hghly probably that under ths scenaro, processors wll decde not to produce anymore pasteursed mlk and they ust concentrate on products wth more value added. Ths (and also the fact that the change n stuaton wll ncrease ther costs) s expressed on the rse n ther wholesale prce. In the medum term, there s the possblty that processors wll expand the number of MBGs under traders n order to capture more mlk. Under ths scenaro, t s expected that the consumpton of the per capta mlk wll decrease n both the raw mlk and the processed mlk market. The decrease n the raw mlk market s because the product mcro dares s pasteursed mlk, whch s more expensve than raw mlk and can only be afforded by the more affluent group. It should be mentoned although t s not capture n the model that there s the mplct assumpton that the mcro dares wll successfully make the transton from collectng mlk to processng and marketng t. Ths s a very mportant assumpton as experence shows n the case of the Bumbwe cooperatve, whch stopped operatng n 2012 due to low margns, management problems and the nablty to satsfy food safety standards (M-lvestock consultants, 2013). For ths scenaro to succeed, Government and donors wll requre sgnfcant nvestment not only on the facltes but also on tranng (ncludng busness management) to ensure the sustanablty of the enterprse. ellng drectly raw mlk The results of ths scenaro show that farmers MBGs wll stop collectng mlk but wll be n charge of controllng mlk qualty, whlst traders MBGs wll contnue supplyng processors. In ths sense, the scenaro has commonaltes wth the mcro dares scenaros. Under ths scenaro, farmers would be sellng drectly raw mlk avodng the cost of pasteursng (mlk wll be boled by households). Urban households, who can afford 21

23 t, wll probably substtute pasteursed mlk by mported dred mlk and the remanng of the urban populaton wll consume raw mlk. Processors are under ths scenaro to focus on dary products wth greater value added, whch as n the prevous scenaro wll ncrease wholesale prces. Furthermore, as show n Table 4, mlk collecton for processors wll concentrate n the outh of the country (assumng that n the short term no addtonal MBGs n the hands of traders are establshed). Due to the fact that the prces for sellng mlk are lower t s expect that the aggregated producton of mlk wll decrease, except n the outh, where could be expect to reman at smlar levels as n the baselne. Note that prces pad to farmers n the outh are hgher because processors wll concentrate ther mlk collecton there at hgh prces. It should be noted that under ths scenaro the amount of mlk sold raw ncreases, and therefore, the per capta consumpton of mlk of poor urban and rural populaton wll also rse; whlst the per capta consumpton of processed mlk from domestc orgn wll decrease. Ths scenaro shows a trade off between economc growth (va producton of greater value added) and producton destned to massve consumpton (food securty). A role for the Government and donors under ths scenaro s to create the condtons to ensure that the qualty of the mlk that s sold s good and safe. Gven the potental sze of the nformal market, ths could be a laborous and expensve task. The lessons from the Kenyan process wll be mportant under ths strategy. VI. onclusons The purpose of ths paper has been to explore the dfferent development strateges for the Malawan dary sector n terms of economc growth and food securty. The studed strateges have been three: (1) renforcement of the formal supply chan (.e., farmers delverng mlk to mlk bulkng groups and these to processors, who pasteurse t and transformed nto a number of dary products); (2) generaton of mn dares (.e., mcro-processng of mlk delvered to a mlk bulkng group); (3) sellng drectly raw mlk to consumers. To study the aforementoned alternatves a spatal multmarket model whch consders mlk producton n the three regons (North, entral and outh), the dfferent processors, consumers and the nteracton wth the nformal market was formulated. The model was calbrated usng the avalable data up to The results from the smulaton ndcate under the frst scenaro that f processors are able to ncrease the prces pad to farmers n order to expand ther mlk collecton, t s 22

24 possble to expand both the amount of mlk gong to processed products together wth the sales of raw mlk (ths s due to the fact that mlk producton reacts to prces). Under ths condtons, market prces of dary products (.e., wholesale prces) are expected to ncrease due to the hgher mlk prces pad by processors but probably not as much as the ncrease n mlk prces due to the reducton n processors average fxed costs (.e., due to the fact that there s a reducton n ther dle capacty). The ncrease n the mlk prces pad by processors s expected to rase the prce of mlk n the nformal market (f the former s a reference or ndcator for the latter) and therefore make mlk less affordable n the nformal market. Under the second scenaro, mcro dares, the stuaton ndcates that producton wll reman bascally the same except than n outh due to the hgher prce pad by processors to traders MBG to collect more mlk. Mcro dares, whch are an aspraton for farmers MBG, wll n the short term only be able to produce pasteursed mlk, whch has low value added and therefore pay farmers a low prce for ther mlk. Ths wll mply that producton n the North and entral regons, wll n the best case stuaton, reman the same (assumng that the mcro dares operate properly, whch mght be gven past experences, not very probable) and showng growth n the outh. The thrd scenaro, allowng the sellng of raw mlk, t s smlar to the second scenaro, the dfference s that farmers MBG wll only have the role of supervsng the qualty of mlk; therefore, the prce pad of raw mlk wll expected to be lower. Due to ths, the producton of mlk mght be expected to decrease n the North and entral regons and ncrease n the outh. The amount of raw mlk consumed s, as expected, found to ncrease. The scenaro wll therefore mply a substtuton of pasteursed mlk for raw mlk at lower prces. Ths could mprove food securty of those consumng raw mlk. Overall, what strategy should Malaw follow n terms of dary development? The results from the exercse ndcate that ether the development of the formal sector or the followng the Kenyan approach have possbltes, snce mcro dares would requre a potental hgh nvestment and wll brng a very uncertan outcome. It s mportant to note that gven the sze of the nformal market, sellng drectly raw mlk to consumers s an opton that t s already present. Ths means that the current stuaton s somethng n between the frst and the thrd scenaro. In ths context, probably the role of the Government and donors should be to ensure that the raw mlk that t s sold n the nformal market t s of good qualty and the formal dary sector beneft wth mprovement of nfrastructure (partcularly roads and electrcty power), whch wll reduce ther costs. 23