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Contractual arrangements in milk production

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 Final Draft

Contractual Arrangements for Milk Production and

Marketing by Dairy Producers in Bangladesh

M.A. Jabbar
International Livestock Research Institute, Nairobi, Kenya

S. K. Raha, M.H. Rahman and R.K. Talukder

Bangladesh Agricultural University, Mymensingh
 Table of Contents

1 Introduction
Background of the study
Objectives of the study

2 Sources of Data and Methods of the Study

2.1 Identification of types of contract arrangements and market actors
2.2 Selection of the study areas and samples
2.3 Conducting the field surveys and analysis of data

3 Typology of Contract Arrangements for Milk Production and Marketing

3.1 Review of secondary information
3.2 Informal output marketing contract between producers and milk traders
3.3 Formal production-marketing contract of Milk Vita with producers
3.4 Formal output marketing contract of BRAC Dairy with milk traders
3.5 Grameen/Community Livestock and Dairy Development Project (CLDDP) with
producers
3.6 Summary

4 Determinant of Participation in Commercial Dairy and in Contract Arrangements

for Production and Marketing
4.1 Choice of models to explain market participation
4.2 Hypotheses on factors having influence on decision to undertake commercial
dairy and in joining contract arrangement
4.3 Factors influencing participation in commercial dairy
4.4 Factors influencing participation in contract arrangement

5 Performance of Commercial Dairy Enterprises and Dairy Input Traders

5.1 Performance of dairy enterprises
5.2. Performance of dairy input traders

5.2.1 Trading practices and performance of AI service providers

5.2.2 Structure and performance of feed markets
5.2.3 Trading practices and performance of veterinary drug traders
6 Summary and Conclusions
6.1 Summary
6.1.1 Typology of contract arrangements for production and marketing of milk
6.1.2 Factors influencing participation in commercial dairy and in contract
arrangement
6.1.3 Performance of commercial dairy enterprises and dairy input traders
6.2 Conclusions and implications of the findings
References

ii
Acknowledgements

The authors are grateful to the International Livestock Research Institute for funding
this work out of European Union grant to ILRI. Chris Delgado, Steve Staal, Lucy Lapar
and Fakhrul Islam made useful comments on the study proposal and methodology. Lucy
Lapar made very comments and suggestions as reviewer of the final draft. Ismat Ara
and Fakir Azmal Huda have been very helpful in field survey, data management and
analysis. The authors alone are responsible for the content of the paper.

iii
1 Introduction

1.1 Background of the study

During the last three decades a structural transformation has taken place in the
Bangladesh economy. The country has achieved self-sufficiency in food grain
production due to a strong growth rate in the sector but the share of agriculture in GDP
has declined relative to other sectors and within the agriculture sector, the share of
livestock sub-sector has increased relative to crop, fisheries and forestry. Livestocks
share of agricultural income increased from 7.6% in 1973-74 to 12.9% in 1998-99 and
is projected to increase to 19.9% in 2020. During 1973/74-1989/90, livestock output
grew at 5.2% per annum compared to 1.7% for crop output and 2.6% for agricultural
output in general. (Hossain and Bose, 2000). These changes have been prompted by a
rapid growth in demand for livestock products due to income and population growth
and urbanisation. This is part of a phenomena called livestock revolution observed
throughout the developing world. (Delgado et al., 1999).

In Bangladesh, dairy is the most important livestock product produced by smallholder

crop-livestock farmers. According to FAO, total production of cow and buffalo milk in
the country increased from 800, 000 tons in 2000 to 822,800 tons in 2006, an increase
of only 2.8%. On the other hand, goat and sheep milk production has apparently
increased from 1,334,610 tons to 1,441,130 tons between the two years, an increase of
7.5%1 (http://faostat.fao.org/site/573/DesktopDefault.aspx?). However, current national
production is inadequate to meet demand so about 30% of total consumption of milk is
imported, mainly in the form of powdered milk. The income elasticity of demand for
milk is estimated to be 1.62 compared to 1.19 for meat and eggs in 1995-96, and these
are projected to be 0.65 and 0.63 respectively in 2020. Milk production in the country
needs to grow by 4.2-5.6 percent per annum to meet increased demand (Hossian and
Bose, 2000). Attainment of such a high growth rate in the sector has the potential to get
millions of smallholder producers and others involved in milk processing and marketing
out of poverty through employment and income generation. Dairy generates more
regular cash income and dairy production, processing and marketing generate more
employment per unit value added compared to crops (Asaduzzaman, 2000; Omore et
al., 2002). Small scale commercial dairy production and related backward and forward
linkage activities in marketing, input supply, etc. have the potential for significant
employment generation and poverty alleviation.

About 70-80% of national milk output is produced by smallholder producers owning an

average of 1-2 local cows giving 1-2 litres of milk per day, the remainder is produced
by larger farms owning 5 or more cows. About 50% of the cows of smallholders are
also used for draught purposes as poor farmers cannot afford to raise both dairy and
male draught cattle due to feed shortages (Jabbar and Green, 1983; Alam, 1995).
Consequently the milk yield and reproductive performance of these cows do not reach
their full potential yet they are perhaps the most important assets of these farmers
performing important economic functions including provision of food, power, cash
income, savings and security against risk of crop failure and natural disasters. Generally
local non-descript cattle are raised but there are a few pockets in the country, which

1
The figures for goat and sheep milk production should be interpreted with caution..

1
serve as milk sheds for the Dhaka city, where improved Indian breeds like Haryana and
Tharparker and later Pakistani breeds Red Sindhi and Shahiwal were introduced either
as pure breed or for improving local breeds through crossing. In these areas, a small
number of commercial dairy farms have emerged in recent years. In more recent times,
exotic blood of Jersey and Friesian has also been introduced rather indiscriminately in
many parts of the country through artificial insemination with a view to improve milk
yield. A survey in 2000 in Pabna and Mnikganj districts, which are part of milk sheds
of Dhaka showed that about 80 % of the sample herds in these areas had less than 5
dairy cows, mainly crossbred (Jabbar et al., 2005). Therefore, any dairy development
initiative that will target or at least include the smallholders for increasing the
productivity of their cows and increasing their access to market for milk and production
inputs and services will have significant impact both in terms of the volume of
aggregate output produced to meet increased consumer demand as well as reduce
poverty and malnutrition in the country. Significant backup research and development
work will be required for long-term dairy development in the country through the
participation of all categories of farmers, not just rich ones. The challenges have been,
and still are, to increase market participation of small dairy producers, increase
productivity of dairy animals, and provide access to markets for inputs, services and
outputs at remunerative costs and prices.
Utilization of milk can be broadly divided into four segments: home consumption by
producers (raw and/or processed product), raw milk sales to consumers directly or
through various intermediaries, raw milk sales to traditional processors (who make
sweets and curd) directly or through intermediaries, and raw milk sales to formal sector
processors. Accurate statistics on the volume of milk used by each of the four segments
is not available. The formal milk processing sector includes enterprises like Milk Vita,
BRAC Dairy and Pran Dairy, which collect milk for processing to serve large urban
markets. Milk Vita is a producers Cooperative, BRAC dairy is an enterprise of the
largest NGO in the country, and Pran Dairy is a private sector enterprise. Grameen
Motsho Foundation, a dairy initiative run by the Grameen Bank, also collects a small
amount of milk from its members for processing and preferably selling primarily in the
localities from where milk is collected. Rangpur Dairy and Akij Dairy are new private
sector enterprises which have just started functioning. These enterprises together collect
and process about 15% of national production of cow milk, the remainder is shared by
other three segments including the informal sector, which is organized around local
markets for fluid milk as well as traditional local processing to produce sweets and curd
to meet local demand (Haque, 2007). Therefore, it is obvious that the formal milk
market covers a tiny share of the overall output, and how to link thousands of small
scale milk producers in rural areas to the urban markets is a major problem to be solved.
Remunerative market participation by smallholder milk producers is constrained by low
volume of output and marketable surplus and limited access to larger markets. Although
traditional milk traders buy and bulk products to supply local and distant markets, their
reach is limited due to the perishability of milk and lack of infrastructure to handle and
transport large volume.
To overcome these types of constraints to smallholder participation in markets, a variety
of organisational arrangements that allow small production units to benefit from various
forms of collective action, such as producer groups, input and output marketing
cooperatives and product collection schemes have been supported in a number of
countries by government organisations and non-government organisations with varying
degrees of success. Contract farming is one such institutional organisation that is
considered to be useful in facilitating market access of smallholders in high value

2
supply chains that require specialised inputs to produce and standard quality outputs to
sell to urban markets. Strengthening the supply chain through contracting as an
instrument has been used in various economic activities for a long time with varying
degrees of success and impacts (Covey and Stennis, 1985; Glover, 1987; Runsten and
Key, 1996; Farrelly, 1996; ERS, 1997; Berlin, 2001; Eaton and Shephard, 2001;
Delgado and Tiongco 2003; Delgado et al., 2004; Binh et al., 2005; Shivramkrishna and
Joytishi, 2007). A summary of the incentives for contract farming is presented in Table
1.1. A summary of the pros and cons of contract farming based on a review of different
studies can be found in Jabbar et al. (2007).

Table 1.1 Incentives for Contract Farming

Risks/hazards in Benefits of Contract Farming to

livestock Integrator, Buyer, Contract grower
Trader (contractee)
No capital Access to investment Access to capital
opportunities in
livestock; facilities
construction
Loss of capital Incentive to contract Protect against
grower to renew capital systematic loss
Loss of animal Protection against Protection against
careless labour diseases
Quality of animal Assurance of product Access to better stock
Reliability of output Reliability of supply Reliability of outlet
price
Quality & price of Quality gain for Quality assurance,
inputs integrators availability, credit
Timing/availability Timing and availability
of outputs of management
Timing of output Timely outlet
sales
Labour supervision Absence of issue Absence of daily
supervision
Land tenure Access to land
Environmental Avoid legal
regulation responsibility for
pollution
Knowledge Access to extension
deficiency
Free-rider risk Better health control Better health control
Source: Delgado and Tiongco 2003.
Given the nature of the problems of small scale dairy producers in the country and the
small size of the formal market as well as 30% of consumption being dependent on
import, one way to overcome problems of market access and market participation to
expand share of domestic production in consumption is for them to engage in some
form of collective action such as cooperatives or some other form of group action for
bulking supplies to derive economies of scale in marketing. Getting involved in
vertically integrated contract farming arrangements may also allow access to assured
market for products and access to inputs and services for producing quality products

3
depending on the type of contract arrangements being pursued. Alongside promoting
private sector roles in the expanding livestock industry, the Government of Bangladesh
is also trying to create opportunities for the poor to participate in these markets.
Contract farming is one of the options under consideration in these initiatives. Contract
farming has been emerging as a market institution in Bangladesh, initially under
government initiative in cereal seed production, then in the production of some
horticultural crops. Contract farming in poultry has been developed by the Bangladesh
Biman for producing poultry products for its catering services, by Aftab, a private
sector company, and BRAC, an NGO, and informal contracting arrangements in poultry
and egg marketing also exist (Jabbar et al. 2007).

In the dairy sector, Milk Vita has been operating as a producer dairy cooperative with
milk collection, processing and marketing facilities as well as provision of some dairy
inputs and services (AI and concentrate feeds) in some parts of the country since the
mid 1970s. BRAC and Pran Dairy are also engaged in milk collection for processing
and marketing in the cities and in some cases provision of inputs and services. Informal
dairy traders also traditionally practice forward purchase and other purchase
arrangements with milk producers. Whether any of this contracting arrangement by
formal and informal milk marketing agents can be considered as contract farming per se
or whether the contracting arrangements they practice have other characteristics, and if
they are functioning efficiently for the benefit of smallholder dairy producers are not
clear (Raha and Talukder, 2004).
Introduction of successful contract farming arrangements requires information on the
form of contracts that should be promoted to enable small and poor entrepreneurs to
engage in income earning activities. And also information is needed on factors that may
prevent the realization of the contracts and lessons that can be learned for wider
application of contract farming or other institutional forms of contracting and business
organization helpful for the poor. However, not much is known about how contract
farming works for different commodities under different socio-economic, technological
and policy regimes with what impacts, especially on the smallholders in the Bangladesh
context. This study will provide empirical evidence based on detailed field studies on
some of the issues mentioned above with respect to the dairy sector so that future efforts
to promote contract farming or other contracting arrangements may benefit from them.

The usefulness and relevance of such a study to identify institutional forms including
contracting arrangements for enhancing market access and participation by
smallholders in dairy markets can be appreciated in the context of the recent sharp rise
in commodity prices including dairy products globally as well as in Bangladesh. The
impact of higher international price is easily and directly transmitted to the urban
consumer market due to high dependence on imported powdered milk but high
consumer price is not easily transmitted to the producers if liquid milk market is not
well organized as in Bangladesh. If government policy in such circumstances is directed
at protecting urban consumers through price controls or tax relief on imports, rural
producers are further disadvantaged not only in the short run; long run production and
welfare of smallholders may also suffer adversely due to lack of incentives (Morgan,
2008). Smallholders in Bangladesh produce about 80% of the output but formal sector
collects only 15% of total output for processing, and 30% of total consumption is
imported, which is primarily used in urban areas,. Therefore development of
appropriate institutional arrangements to link large number of smallholders to the urban

4
market has the potential to reduce import dependence, moderate overall domestic
consumer price yet give adequate incentive price to smallholders to increase production
and income and improve their livelihood.

1.2 Objectives of the study

The goal of the study is to identify forms of market institution or coordination that will
allow smallholder dairy producers to commercially produce dairy to raise their household
incomes under rapidly differentiating livestock product markets in Bangladesh.
The specific objectives are to:
Document the range and extent of contract farming and other organisational or
contracting arrangements used in smallholder dairy production and marketing in
Bangladesh;
Identify the factors that influence participation or non-participation in contracting
arrangements in dairy production and marketing;
Compare the production and marketing costs and net income of dairy farming under
independent and the identified contracting arrangements for production and
marketing;
Compare income of participants and non-participants in identified contracting
arrangements;
Analyse determinants of cost per unit output and net income under independent and
identified forms of contracts;
Analyse the structure and conduct of the artificial insemination service, feeds, drugs
and equipment markets serving the dairy sector.

The hypotheses to be tested are the following:

In a given area or environment where there is a choice between independent and
contracting arrangements for dairy production and/or marketing, the decision to
participate in dairy production and choice between independent and any contracting
arrangement will depend on differences in ownership of various assets - physical,
human, financial and social.
Farmers engaged in some form of contract arrangements have better access to
information, technology, inputs (breeds, concentrate feeds, equipment,) and services
(health, extension, credit, market information) compared to independent farmers due
to specific contract agreements, market conditions, and public and private sector
policy or practice that explicitly or implicitly account for such differences.
Contract and independent farms incur significantly different production and
marketing costs and earn different margins.
Contract dairy farms earn more income per unit of family resources compared to
independent dairy farms and non-commercial dairy farms.
Cost per unit output and net income differ significantly due to differences in assets
(physical, human, financial and social) and business practices in buying inputs and
services, and selling products.

5
 The input market for the dairy input industry is competitive.

The report is organized as follows. Data sources and methods of the study are discussed
in section 2. In section 3, typology of existing contracting and other institutional
arrangements in dairy production and marketing prevailing in the country are discussed.
In section 4, factors influencing participation of farm households in commercial dairy
farming and in contracting arrangements are analyzed. Section 5 analyses the
performances of commercial dairy enterprises and dairy input traders. The results are
summarized with conclusions in section 6.

6
2 Sources of Data and Methods of the Study

2.1 Identification of types of contract arrangements and market actors

Contract farming is a specific type of market institution within the general framework
of contracting as a tool or institution for linking various parties in any production or
marketing activities. Moreover, there is no single way of defining contract farming. The
term is commonly used in the context of contracts or arrangements between parties
involved in various activities within a vertically integrated enterprise. The integrated
enterprise may be a public, private or cooperative entity. Form of contract farming may
be defined by using a set of criteria, e.g. types of partners involved (farmers,
intermediaries, credit agencies, private investors, public sector organisations,
cooperatives etc); how the contracting parties share risks, benefits, responsibilities and
liabilities; how contract agreements are made, enforced, and monitored and how
disputes are settled. Some elements of contract farming are common in other forms of
collective action or organisational or institutional arrangements, e.g. cooperatives.
Therefore, a distinction needs to be made between contract farming per se and other
forms of collective action. How various elements of contract farming are incorporated
in contract agreements and how they are practiced in reality may largely depend on the
prevailing legal and regulatory framework in a country, especially company and
business laws and related laws and regulations. The prevailing legal and regulatory
framework and related facilities (infrastructure, information, services, legal procedures)
may promote the use and spread of various forms of contract farming by creating a
favourable and equitable incentive structure or prevent the spread of contract farming
by creating an unfavourable and inequitable incentive structure (Jabbar, 2004). Other
than contract farming under a vertically integrated enterprise or cooperative, there may
be various formal or informal contract arrangements to link different parties in any
production or marketing activity.
In order to identify prevailing types of contracts in dairy production and marketing in
Bangladesh, a few definition of terms are in order. For the purposes of this study, a
commercial dairy farmer is defined as one raising dairy cows for milk production
primarily for regular selling in the market though a small amount may be kept for
household consumption. A non-commercial dairy farmer is defined as one who may
keep one or two milk producing cows primarily for home consumption of milk and for
occasional sale if there is a surplus. An independent dairy farmer is the one who runs
farming business without any contractual arrangement with a third party, bear all
production expenses and risks and derive the benefits as a consequence of the decisions
taken. A contract dairy farmer is the one who has formal or informal contractual
arrangement with a third party - an integrator, a cooperative or a trader- for purchase of
inputs and/or for supply or sale of outputs at a pre-determined price or at a price to be
negotiated at the time of final transaction. Thus a contract farmer in this study is defined
in a more general way than is done in the case of classical contract farming under a
vertically integrated enterprise. In this study, independent dairy, and dairy farms linked
to BRAC dairy and Milk Vita are considered together as commercial dairy farms.
In order to collect initial information on types of contract farming or other contracting
arrangements being practiced in the country and to identify various types of market
actors involved in the commercial dairy industry, a stakeholder consultation was held in
February 2006. Representatives of various segments of the dairy industry were present

7
along with livestock experts and policy makers. Key informants present at the
consultation provided initial information on firms or enterprises which have been
involved in contract farming or other contractual arrangements in dairy production and
marketing and on various types of actors involved in the industry.
The workshop reported that three dairy enterprises are involved in some kind of formal
or informal contract arrangements in the dairy sector. Milk Vitaa milk producers
cooperativeis a vertically integrated organisation that practices formal contract
arrangements for milk production and marketing. However, in reality, Milk Vitas
operation is focused principally on contracting purchases of outputs produced by its
members and provision of AI and feeds to some extent but not so much on contracting
production per se as observed, for example, in case of poultry contract farming. BRAC
(Bangladesh Rural Advancement Committee) is the largest NGO in the country and it
has recently established a dairy processing facility for which milk is collected through
formal contract arrangements with milk traders who establish informal contract with
producers, thus BRACs contract or connection with producers is indirect. Pran is a
private sector food processing company that has recently established a dairy processing
unit for which milk is collected from producers through some informal contract
arrangements. These enterprises operate in different geographical areas but they also
compete for supplies in some areas. However, the principal output market is Dhaka and
other major cities for all of them. In the informal market sector, some milk wholesalers
or aratdars (stockists) operating in Dhaka city are also involved in informal input
supply or output purchase contract arrangements in Sirajganj, Manikganj and Tangail
districts, which are not far away from Dhaka city. They are principally involved in
forward purchase agreements with independent producers with or without getting
involved in the provision of inputs and services. In each category of contract
arrangements, there are various other elements which will be discussed later.
The following categories of actors are involved in the dairy input supply chains:
Artificial Insemination: DLS, Milk Vita, BRAC
Feed: Feed millers, Wholesalers, Agents, and Retailers
Equipment: Wholesalers and Retailers
Drug: Distributors and Retailers
Wholesalers are large traders dealing with one or more inputs (feeds, drugs, equipment)
and/or products (milk). They are licensed full time traders having fixed business
premises in the wholesale market and they handle large volume of transactions mainly
in bulk. They purchase products from producers and small traders and sell to the
retailers.
Aratdars are licensed larger traders compared to wholesalers, who buy and store
products for varying periods of time for temporal arbitrage. The storage or stocking
function primarily differentiate them from wholesalers. This is one of the basic
institutions in the traditional market system in Bangladesh. In case of milk, installed
storage capacity is not very large and the storage period is relatively short as it is a
perishable product.
Input retailers are small traders with or without a permanent stall or shop dealing with
one or more inputs and they operate in local markets or convenient places close to
producers. They mostly buy materials from the wholesalers and sell to the ultimate
users.

8
2.2 Selection of the study areas and samples
In order to develop a typology of contract arrangements being practiced in the country,
the firms or enterprises involved in contract arrangements identified at the stakeholder
workshop constituted the sample for detailed survey. These include Milk Vita and
BRAC, and selected milk producers.
In order to compare farm practices and performance under independent and different
contractual arrangements, it was decided that those locations would be selected where
independent and different types of contract arrangements or different contractors were
simultaneously present. It was further decided that to understand the functional
mechanism of the input and output marketing arrangements in the dairy industry and
their performance, input market agents would be selected from the same areas where
farm samples would be drawn as input market agents basically serve producers.
However, at the stakeholder workshop described above, it became clear that all types of
farms or contract operators were not present in all locations. Initially commercial dairy
used to be practised mainly in milk sheds of Dhaka comprising Pabna, Sirajganj,
Tangail and Manikgonj districts but over time it has spread to other districts far away
from Dhaka. Keeping these points into consideration, Pabna, Rangpur and Faridpur
districts were selected where commercial dairy production and contract arrangements
for dairy production or marketing were practiced by Milk Vita and/or BRAC. Pabna
district has high concentration of dairy farms and has a long history of small scale
commercial dairy production. It is one of the earliest operating areas for Milk Vita.
Rangpur is located further away from Pabna.

In order to fairly spread the sample over the entire study areas, at first a list of dairy
farms of all types was made with the help of officials of Milk Vita and BRAC in their
respective operational areas. Then 250 commercial dairy farms (90 contract farms
related to Milk Vita, 60 informal contract farms related to BRAC, and 100 independent
farms) and 50 non-commercial dairy farms were selected randomly. Size of dairy
enterprise was not considered as sampling criteria. It was decided that sample farms
would be classified ex post according to size based on information on actual number of
cows reared. After the final survey, 86 contract farms related to Milk Vita, 60 related to
BRAC, 101 independent and 53 non-commercial farms provided data for analysis.

For analysis of input marketing arrangements, 10 feed retailers, 10 feed wholesalers,

five drug retailers and five drug wholesalers, seven AI service providers were surveyed
in the same districts where producer samples were surveyed. Where large number of
actors was not available in a category, some case studies were conducted to get an
understanding of that enterprise.

2.3 Conducting the field surveys and analysis of data

For collecting data on all types of dairy farms and market actors, structured
questionnaires were used. Graduate students having knowledge about field-level data
collection were recruited and trained for conducting the surveys. Each type of survey
questionnaire was developed, improved and pre-tested during February-March 2006.
Final surveys were conducted primarily during April- July 2006 and case studies of
some trader categories continued until August 2006. As the initial sample size for
BRAC related farms was small, data from an additional sample of 30 BRAC (informal

9
contract) farmers maintaining dairy cows in Pabna were collected in May 2007 to
supplement the previously collected data. This did not affect estimated prices and costs
as there were negligible variations in costs and prices at farm level between the time
points for data collection. Detailed data were collected for one year on a recall basis.
The sample farmers like most newly emerging commercial farmers in Bangladesh were
not yet accustomed to keeping systematic accounts of their business operations, but
some of them especially contract farmers had kept some records of their market
transactions, so the recall data were reported partly from memory and partly from
partial records.
SPSS was used for data entry and analysis. During the period of data collection and data
management, the work of enumerators was supervised by the team members.
Descriptive statistics was used extensively to analyse characteristics of various samples.
In the analysis of input and output markets, in the absence of adequate sample sizes for
econometric analysis, descriptive statistics complemented with case study approaches
were applied. Probit and Logit models were applied to explain participation in
commercial dairy farming and in contract farming. Farm budgets and production
functions were used to assess performance of dairy farms. Specific concepts, statistics
and functional forms used for the analysis of specific issues are discussed in more detail
later.

10
3 Typology of Contract Arrangements for Milk Production and
Marketing
3.1 Review of secondary information
In order to identify existing contract arrangements in production and marketing of milk,
a general picture of the marketing channels for milk and milk products is shown in
Figure 3.1 Smallholder crop-livestock farmers produce milk primarily for home
consumption but sales are also common. In traditional production systems in the
country, a u-shaped pattern of market participation among producers is observed. Poor
people sell milk to generate cash to meet family needs including purchase of staple food
grains. As farm size and level of grain self sufficiency increase, sales of milk decline
and home consumption to improve nutritional status increase, and sales of milk increase
again to earn cash income once grain self sufficiency has been achieved (Jabbar and
Ali, 1988). A similar pattern was observed among rural households in Ethiopia
(Getaneh, 2005).
Milk is traditionally consumed in the country in liquid form (boiled to avoid spoilage
and infection from micro organisms) and in the form of sweets and curd; a small
portion is converted to ghee (clarified butter). Taking the country as a whole, most of
the milk is marketed through informal channels by small scale producers and traders to
local consumers and processors (for making sweets, curd and ghee) in both rural and
urban areas. Dhaka city is the largest single urban consumption centre and Chittagong
and Khulna cities are also large consumption centres. These cities used to be served by
informal milk and milk products traders but increasingly, they are being served by milk
processors which produce pasteurized milk, butter and ice cream. A recent study based
on secondary data highlighted the elements of the formal marketing channels but gave
a cursory treatment to the informal channels (Anon., 2004). Haque (2007) gave an
inventory of milk processing enterprises in the country along with their processing
capacities and approximate number of farmers supplying milk. Some of the smaller
dairies serve only local markets or a tiny share of the large city markets and some like
Rangpur and Akij dairies are not yet regularly and fully operational. Milk Vita, BRAC
Dairy, Pran Dairy and Akij Dairy are the most important dairy processors (Table 3.1).
The chilling centres of Milk Vita and BRAC are shown in Figure 3.2. Processors other
than Milk Vita, BRAC and Pran, collect only small quantities of milk from certain
areas as they do not have elaborate network and infrastructure for collection of milk
from producers. While larger processors may mix powdered milk to produce
pasteurized milk in the lean season due to scarcity of milk, smaller processors may do
so on a regular basis as they do not collect much fresh milk anyway.
About 15% of cow and buffalo milk produced in the country is marketed through the
formal or industrial processing channels of the above enterprises (see right hand side in
Figure 3.1). But there is paucity of national level information on the volume of
smallholder milk production consumed at home by producers and marketed through the
various traditional informal channels. Some location specific case studies in different
districts provide information on informal channels for those locations. For example, a
survey of 40 farms by Kar (2003) in Sadar and Trishal Upazilas of Mymensingh district
showed that average production of milk per indigenous cow and cross bred cow was 1.2
litres and 7.1 litres respectively. About 80 percent of total production of milk was sold
and the producer families consumed 20 percent. Four market channels used by the
sample smallholder dairy farmers were:

11
Figure 3.1. Marketing chains for milk and dairy products in Bangladesh

Home Dairy producers

consumption

Trader/Agent of
Milk processing plants
traders
Collection points
of processing
plants
Local Local hotels,
market restaurants, Chilling plants of
tea stalls, processing plants
sweet shops

Local milk
assemblers
/wholesalers
Urban milk
Wholesalers
Processing
plants

Urban hotels,
Local milk restaurants, Urban retailers
retailers tea stalls, of milk and/or
sweet shops milk products

Local consumers Urban consumers

12
Figure 3.2 Distribution of chilling centres of Milk Vita and BRAC

13
Table 3.1 Inventory of milk processing plants and their processing capacity

Sl no Name of dairy enterprise Current processing Approx. no. of producers

and year of establishment capacity, litres/day supplying milk
1 Milk Vita (1973) 200,000 150,000
2 Aarong- BRAC dairy (1998) 80,000 70,000
3 Pran Dairy (2001) 40,000 30,000
4 Amomilk (1996) 10,000 5,000
5 Bikrampur Dairy (1998) 10,000 6,000
6 Ultra-Shilaidah Dairy (1998) 10,000 4,000
7 Aftab Dairy (1998) 8,000 4,000
8 Tulip Dairy (1998) 3,000 2,000
9 Grameen/CLDDP (1999) 7,000 6,000
10 Grameen-Danone (2007) 1000 CLDDP members
11 Rangpor Dairy (2007) 8,000 7,000
12 Akij Dairy (2007) 4,000 500
13 Savar Dairy (1974) 3,000 Government farm
Source: Haque (2007)

Dairy farmer- Small milk trader Consumers [home delivery]

Dairy farmer-Small milk trader Sweet-meat shop
Dairy farmer- Small milk trader Tea stall and
Dairy farmer-Small milk trader Milk market Consumers

Volume of milk passing through each channel was not reported. A survey in Rangpur
and Bogra districts showed the following marketing channels for milk (Amin, 2000):

Rangpur :
Farmer Milk trader (Doodhwala)Sweetmeat shop (35%)
Farmer Milk trader(Doodhwala)Urban consumers(65%)
Bogra:
Farmer Milk trader(Ghosh)Sweetmeat shop (27%)
Farmer Milk trader(Ghosh)Urban consumers(59%)
Farmer Milk trader(Ghosh)Tea- stalls (14%).

Miah (2002) found that 78% of the smallholder dairy producers in his sample from
three districts sold their produce to consumers, 19% sold to Goala (ghosh or
doodhwala) and 3% to tea stalls (Table 3.2). Higher proportion of rural producers sold
milk to Goala, compared to peri-urban and urban producers while direct sale to
consumer was higher among peri-urban and urban producers. So it is clear that the
smallholder producers in rural and peri-urban areas have less direct access to the urban
market, because their small amount of milk does not justify additional transport costs
for travelling to urban markets.

14
These case studies show that traditional market channels that connect rural areas with
small or district towns to serve local consumers are relatively short. The traders in these
channels are known by different names in different districts. They are called ghosh in
Bogra, Doodwala in Rangpur and Goala in Sylhet. In Mymensingh the consumers call
them Doodwala but milk producers and traders call them Paiker or Bepari or Goala
(Kar, 2003). Sometimes the milk traders themselves have to milk cows at farmers
house, then collect it.

Table 3.2 Percentage of producers in different locations selling milk to different outlets
Customers Rural Peri-urban Urban All areas
Goala 38 14 3 19
Tea stall - 5 3 3
General public 62 81 94 78
Home delivery 26 50 64 46
Sale at farmgate 14 6 27 15
Sale at market 22 25 3 17
Total responses 100 100 100 100
Source: Miah, 2002
An attempt was made to classify various contract arrangements and other institutional
arrangements in dairy production and marketing by the actors in the various market
channels described above into types having similar characteristics with specific
reference to (i) scope, products or services covered by contract, (ii) formation,
enforcement and monitoring mechanism of contract agreement, (iii) sharing of benefits,
risks, responsibilities and liabilities in the contract arrangements and (iv) scope of
sustained participation of smallholders in the contract arrangements. Considering these,
four types of contract arrangements in milk production and marketing is observed as
follows:
(a) informal output marketing contract between producers and milk traders,
(b) formal production-marketing contract of Milk Vita with producers
(c) formal output marketing contract of BRAC dairy with milk traders and indirectly
with producers
(d) formal production-marketing contract of Grameen/Community Livestock and Dairy
Development Project (CLDDP) with producers
These are discussed in detail below. Concentrate feeds, drugs and AI services are major
inputs for the dairy sector. These are marketed by both public and private or NGO
sectors. No formal or informal contractual arrangements as observed in milk production
and marketing was observed in the input marketing practices. So, trading practices and
performance of input traders are discussed in a separate section later.

3.2 Informal output marketing contract between producers and milk traders

Traditional milk traders are involved in contracts for purchase of milk from dairy
farmers and the agreement is basically verbal or in a form that may not be considered
acceptable in a formal court for any dispute settlement. In rural areas, the most common
practice is for independent small scale producers to sell milk in cash to traders or

15
consumers in village milk market and in some cases at farm gate. Sometimes, milk
producers are involved in some sort of prior arrangement or contract in selling milk to
different types of buyers such as consumers, processors and traders. The terms of
contract vary from person to person within a specific area and also from area to area.
Sometimes milk producers supply milk to ultimate consumers on a daily basis at
predetermined price either taking payment in advance or at regular intervals or in arrear
weekly, fortnightly or monthly. Secondly, they may take some lump-sum amount in
advance from the milk traders before the calving of a cow, on condition that they
would supply milk to that trader throughout the lactation period at the price prevailing
at the time of taking the advance. In that case the traders collect milk from the farmers
residence. Negotiated price is influenced by many factors such as amount of money
advanced, time gap between start of lactation and advancement of money, mode of
collection of milk.

3.3 Formal production-marketing contract of Milk Vita with producers

The Bangladesh Milk Producers Cooperative Union Ltd (MPCUL), commonly known
as Milk Vita, and its members are the principal actors in this arrangement. Milk Vita
procures milk from its members and in recent years have also embarked on programmes
to supply inputs and services, mainly concentrate feed and AI, to improve output
productivity of its members, and share risks and benefits. The agreement is documented
in writing and signed by the parties. Milk Vita also has contract arrangements with
Rickshaw Van Cooperative in Dhaka city and distributors in different districts for
delivery and distribution of processed products (pasteurized milk, butter, ghee, ice
cream) to retailers. A brief discussion of the genesis and history of Milk Vita is
presented below to understand its evolution and current practices.

In 1946, before the partition of India, an organisation named National Nutrients Co. Ltd
planned to set up a dairy plant with a capacity to process 2000 litres of milk per day at
Lahirimohanpur, then in Pabna district, presently in Sirajganj district. But the plan was
not fully executed due to partition of India in 1947. In 1952, an entrepreneur from
Kolkata, Mr. Mokhlesur Rahman, exchanged his property with this dairy plant. Within a
few years the plant was established under the name Eastern Milk Products Ltd and
adopted the brand name Milk Vita for its products such as milk, butter and ghee.
Through government patronisation, cooperative system was introduced in the
management and operation of the plant and the first Milk Producers Cooperative
Society was formed in 1965 with Eastern Milk Producers Co- operative Union Ltd as
the apex organization. In 1967 the plant was handed over to the Cooperative Marketing
Society by the management of the Apex Milk Union. Another dairy named ASTO dairy
at Tejgaon was also handed over to the Cooperative Marketing Society (Saha, 2002).

In 1972, the Government of Bangladesh initiated two major studies for the
rehabilitation of the above two existing dairy plants, i.e. the Lahirimohanpur Dairy at
Pabna and the ASTO Dairy at Dhaka (Kastrup 1972; Nielsen 1973). Based on the
recommendations of the studies, the government started a new development project, the
Co-operative Dairy Complex, based on the Indian AMUL dairy pattern (Latif, 1973).
New project areas were identified and the earlier two dairies, along with their assets and
liabilities, were incorporated into the project. The organizational name of the project,
the Eastern Milk Producers' Co-operative Union Ltd., was maintained until 1977.
Subsequently, it was changed to the Bangladesh Milk Producers' Co-operative Union

16
Ltd (BMPCUL) though the brand name Milk Vita was retained. Initially BMPCUL or
Milk Vita was the organization of mostly commercial dairy farmers. However,
following the philosophy of the Indian AMUL dairy, it was envisaged that dairy
farmers, especially poor, marginal and landless milk producing farmers would be
organised into primary milk producers' co-operative societies, and milk would be
purchased from individual producers through the primary societies at a fair price, twice
a day - in the morning and evening- to improve income and livelihood of such farmers.
This would also serve as a vehicle for smallholder based dairy development in the
country. Hence, the objectives of Milk Vita were stated as follows:
to raise subsidiary income of poor, landless and marginal farmers living in
relatively remote rural areas of the country by way of purchasing their produced
milk at a reasonable price through a guaranteed market under the co-operative
fold, and
to ensure the regular supply of safe, hygienic and nutritious milk and milk
products to city dwellers at a fair price.

Over time, in addition to the above objectives, Milk Vita also included the provision of
following services to member farmers in order to improve productivity of cows:
free of charge medicare (preventive and curative) for all cattle belonging to co-
operative society members, with emergency services for 24 hours daily
free of charge vaccination and AI services for upgrading local breeds
fodder extension advisory services to improve yields of raw milk
arrangement with the government to access government owned bathan land
(pasture grazing land) for grazing cattle belonging to milk co-operative farmers
distribution of primarily processed balanced concentrated cattle feed (crude
form) at break even price or on a no profit no loss basis to the member
farmers.
training on better animal husbandry practices for the farmers
imparting knowledge and information through routine display of audio-visual
shows regarding improved cattle keeping practices and co-operative
management
arrangement of training/study tours for the member farmers in order to get them
acquainted with up-to-date knowledge on dairy farming.

Based on these principles and objectives, the rural milk-producing farmers are
organized into samities or associations of a size ranging from 16 to 246 members. The
agreement between Milk Vita and a contract member farmer is very simple. Any farmer
located in Milk Vitas operating area is eligible to join an existing society or take
initiative to organize a new society under the umbrella of Milk Vita. To continue the
societys membership, a member should supply at least 100 litres of milk in 100 days in
a year. The samity is managed by a committee formed by its members. For each group
there is a common centre or location for milk collection where individual members
bring their milk. A salaried person employed by the primary cooperative society
collects milk and records the daily amount delivered in the passbook of the individual
farmer-member. At this point there is no arrangement for recording quality of milk. All

17
the collected milk is then sent to the nearest cooling plant of Milk Vita, where the
volume of milk of each samity is recorded along with the quality standard on the basis
of fat content. Thus quality is recorded for the bulked amount supplied by each samity,
and any quality difference between individual members of a samity is ignored. Price is
fixed by the central office of Milk Vita on the basis of fat percent of milk, and payment
for milk is made to the samity weekly in arrear. The samity in turn distributes the
proceeds on the basis of volume of milk supplied by the individual members.
Concentrate feeds and veterinary services are provided on credit, if requested, and the
dues are deducted from the sale value of milk.
Initially, between 1975 and 1977, a central processing facility in Dhaka and four
chilling plants at Tangail, Baghabari Ghat, Takerhat and Manikgonj were established
with an investment of Tk. 129.7 million which included foreign currency of Tk. 44.90
million (US$1= Tk 15.05 in 1984, Bangladesh Bank, 1984). Nine more chilling plants
were also established later with Milk Vitas own resources (Table 3.3). The enterprise
has also established retail sales centres at the factory gate in Dhaka city to supply milk
and dairy products to consumers. Over time, Milk Vita has developed into a vertically
integrated enterprise2 (Figure 3.2). In addition to collection, processing and distribution
of processed products to retailers, it has adopted programmes on concentrate feed
production, vet services, AI services and credit disbursement. Its feed production
programme was established primarily to provide balanced feed for the society members
in Bhagabari. It has later expanded the programme to cover all other areas served by its
chilling plants throughout the country.
Theoretically, the main feature of Milk Vita is that it is owned by its members but
managed professionally by trained staff in accordance with bylaws made and approved
by its members according to laws on cooperatives. There is a Managing Committee
comprising of nine members of which six including the Chairman and the Vice-Chairman
are elected out of the office bearers of the primary milk producers' co-operative societies
and the remaining three are nominated by the government. The managing committee is an
honorary body which implements its decision through the organizational set up headed by
the General Manager (Chief Executive). So in a legal and theoretical sense its
organizational or business entity serves as the contractor and the ordinary members as
contractees. The contract farmer provides land, housing, equipment and labour and Milk
Vita supplies some of the inputs at cost e.g. feed or free e.g. AI service, technical
knowledge and supervision that reduces yield uncertainty, and assured market for
products at pre-agreed prices or a pricing mechanism that reduces price uncertainty, all
likely to contribute to a remunerative business. In conventional vertically integrated
enterprises, contractees usually do not play any role in the management of the enterprise.

Between 1990 and 2000, number of primary societies and membership increased from
258 and 30,000 to 518 and 60,000 respectively (Table 3.4). A good number of new

2
Vertical integration refers to the extent to which successive stages involved in the production of a
particular product or service are performed by different firms, or the converse, the extent to which a firm
performs different successive stages in the production of a particular product. Vertical integration is also
used to describe the action of a firm in acquiring or constructing facilities for carrying out productive
stages, which formerly either preceded or succeeded its original productive activities (Needham, 1973).
So a firm or enterprise is vertically integrated when it integrates both the input supply and output
marketing sectors.

18
farmers join every year who receive interest-free credit for cattle purchase. In 2006,
Milk Vita had 1053 village milk producers co- operative societies with over 125,000
farmer-members. Between 1990 and 2006, the volume of milk collection increased 12
times and nominal price of milk increased by 76% (Table 3.5). The co-operative
members receive a reasonable price, based on quality of the milk and have a guaranteed
market for their milk. The traditional middlemen, ghoses or goalas, who had exploited
farmers by paying low prices and cheating when weighing milk, are replaced by the
farmer groups. The co-operative farmers are also given compensatory prices against the
volume of their milk supplies. Compensatory price is paid out of profit of the enterprise,
which results from many factors but low milk price paid to members may be an important
one, so ploughing back profit is a way to provide incentive to members to continue as
members.

Table 3.3 Plants of the Bangladesh Milk Producers Cooperative Union Ltd

Location Distance Nature of plant Capacity/day Date of

from Dhaka (Litre) installation
(Km)
Mirpur 10 Milk & milk products 110,00 May 1976
processing 0
Tangail 100 Milk Chilling 10,000 June 1975
Manikgonj 90 Milk Chilling 10,000 Sept 1975
Takerhat 190 Milk Pasteurization 25,000 Dece 1977
Baghabari 125 Milk Processing 162,00 Nov 1977
0
Srinagar 30 Milk Processing 5,000 May 1994
Rangpur 300 Milk Chilling 10,000 Decr 1995
Bhangura 155 Milk Chilling 5,000 October 1999
Lahirimohanpur 155 Milk Chilling 10,000 Nov 2000
Bhairab 75 Milk Chilling 5,000 April 2001
Raipur 208 Milk Chilling 10,000 Feb 2002
Natore 265 Milk Chilling 5,000 January 2003
Islampur 170 Milk Chilling 5,000 May 2003
Gabtaly 220 Milk Chilling 5,000 January 2004
Domer 370 Milk Chilling 5.000 July 2004
Satkhira 330 Milk Chilling 5,000 July2005
Noagaon 300 Milk Chilling 5,000 July 2005
Ramganj 200 Milk Chilling 5,000 Nov 2005
Shibpur 75 Milk Pasteurization 50,000 April 2006
Lalpur 250 Milk Chilling 5,000 May 2006
Moulovibaz 250 Milk Chilling 5,000 May2006
ar
Khulna 350 Milk Chilling 5,000 June 2006
Subarnachar 250 Milk Chilling 5,000 January 2008
Sunagazi 180 Milk Chilling 5,000 January 2008
Chirir 367 Milk Chilling 5,000 Sept 2006
Bandar

Source: BMPCUL 2006

19
 Consumer
Milk/milk products

Grocers/
Retailer Milkshaw
Van Society
Distributor/ Agent

Sales Central processing plant

centre

Inputs :
Vet services Chilling plant
AI services
Feed
Credit

Milk collection point

Farmer

Figure 3.2: Components of the vertically integrated operations of Milk Vita

20
Table 3.4. Growth of cooperative societies and services provided to the co-operative
members

No. of No. of No. of vet. No. of No. of artificial

primary members treatments vaccinations inseminations
societies (000) (000) (000) (000)
Year
1991-92 258 30.50 31.26 16.04 14.89
1992-93 268 34.82 32.66 19.87 21.62
1993-94 298 36.30 48.56 26.01 23.25
1994-95 322 42.50 60.68 28.65 16.25
1995-96 314 45.61 71.16 38.50 15.48
1996-97 358 47.99 92.57 35.61 22.52
1997-98 358 48.33 101.77 42.84 23.58
1998-99 390 49.36 98.03 60.27 28.58
1999-00 450 59.62 68.75 60.03 37.42
2000-01 518 60.00 81.34 36.28 44.47
2001-02 590 65.00 100.30 68.23 60.77
2002-03 748 65.50 103.28 124.31 58.07
2003-04 904 66.00 158.84 143.44 58.94
2004-05 1053 101.00 230.61 214.89 59.62
2005-06 1323 125.00 253.95 152.05 63.34
2006-07 1581 137.64 178.18 174.85 57.10

Source: Unpublished data, BMPCUL, 2007

Table 3.5 Milk collection and price paid to the farmers

Milk collected Average Fat Average Price

Year (Million litres) Index content (% ) Taka /litre Index
1990-91 6.22 100 4.4 10.77 100
1991-92 6.48 104 4.6 11.68 108
1992-93 10.24 165 5.0 11.57 107
1993-94 12.05 194 5.1 11.77 109
1994-95 17.45 281 4.4 13.49 125
1995-96 18.33 295 5.2 14.33 133
1996-97 19.46 313 5.0 15.67 145
1997-98 26.52 426 4.7 15.87 147
1998-99 29.47 474 4.4 15.85 147
1999-00 33.99 546 4.7 16.10 149
2000-01 41.32 664 4.6 16.50 153
2001-02 53.81 865 4.5 16.16 150
2002-03 56.84 914 4.4 19.91 185
2003-04 62.79 1009 4.3 16.88 157
2004-05 66.80 1074 4.2 17.38 161
2005-06 73.65 1845 4.1 19.42 180
2006-07 67.99 1184 4.00 20.26 188
Source : BMPCUL 2003 and 2006

21
Milk Vita has also created job opportunities for 5,500 people in the rural areas in
various aspects of milk marketing and input supply related activities and 1200 people
in the various processing plants. More than 500 rickshaw pullers' co-operative members
are engaged in the distribution process in the Dhaka city. A novel aspect of the Milk
Vita operation is its urban distributor co-operatives. Members of these cooperatives use
locally fabricated vans called Milkshaws - an insulated box mounted on a traditional
three-wheeler cycle rickshaw chassis - to deliver small quantities of pasteurised milk
and dairy products to urban retail shops and consumers. In addition to creating more
than 500 jobs the system has actually improved milk quality by cutting delivery times as
well as reducing costs. Imported distribution trucks are expensive to run and maintain,
and Dhaka citys narrow, highly congested streets make for laborious, time-consuming
deliveries. Milkshaws are highly manoeuvrable and non-polluting.

Risk reduction is an important cited reason for joining the cooperative society. Risk is
an important feature of dairy farming. Most of the farmers in Bangladesh are generally
risk averse, i.e., they normally choose the less revenue-risky business. There are two
types of risks: price risk and production risk. Price risk is an important contributor to
revenue variability. The biological nature of production and its perishability is one of
the important causes of price instability. Lack of access to distant urban markets also
gives less remunerative price. Dairy has the potential to provide regular cash income
even under variable price, hence can be considered as a good vehicle for income and
food security, but it is also a risky enterprise for poor farmers due to a relatively large
capital investment in the animal, poor access to veterinary services leading to risk of
diseases and mortality. Another risk arises from the fact that there are inadequate
numbers of bulls in the villages so many farmers are not able to service their cows in
time when they are in heat, hence conception rates are low. Also upgrading local breeds
with the insemination of some exotic germplasm is considered a suitable way to raise
milk productivity. Market and price risk arises because dairy farms in Bangladesh are
located far away from major urban markets, so they face several problems in marketing
including inability to sell milk at desired times due to lack of buyers, inadequate
transport facilities to carry milk to markets, uncertain prices and low bargaining power.
Overcoming production, health and marketing problems is a major motivation for
joining contract system. By entering into contractual agreement (either with the
cooperative society or with an agent), farmers have access to health and AI services and
assured market outlet for output. Farmers not being able to deal with distant urban
markets individually, Milk Vita initially tried to reduce price risk through a forward
contract and purchase arrangement. In order to reduce production risk, a scheme of feed
supply and provision of veterinary services was undertaken. There is no insurance
system for dairy animals in Bangladesh but assured vet services helps to reduce
mortality and diseases. Since 1998, AI service is provided to members in the 14
upazilas where chilling plants are located and the insemination is done at the samitys
premises free of cost for the first service as well as any required repeat service(s).
Semen of Friesian and Jersey breeds is imported and some amount is also produced at
Milk Vitas semen production centre. Number of vaccinations, vet treatments and AI
services provided over the years are summarized in Table 3.4.
Access to technical knowledge and management skills is another advantage of joining a
cooperative society. Though raising cattle including indigenous cattle breeds is an age
old practice of the smallholder mixed farmers in the country, most dairy farmers start
commercial dairy farming using improved breed and technology without acquiring

22
proper technical knowledge and management skills. As there is no organized system of
training on dairy farming, Milk Vita provides its member-farmers initial training in the
management of dairy animals, fodder production, health care, advanced technology and
also provides extension advice on a regular basis.

Until 1990, Milk Vita did not perform very well and its processing capacity remained
underutilised. However, since 1990, Milk Vita has expanded its network of milk
collection points in several milk sheds and has increased its collection and processing
greatly with a soft loan from the Government, which made its operation profitable for
some years, then apparently it has been undergoing losses again due to undue
interventions from labour union and overstaffing of its plants. During the past year, it
has earned profit once again. Milk vita has also contributed to a small increase in milk
productivity in its operational areas through the supply of AI services, and concentrate
feeds and credit, but the extent of productivity increase is unclear.
Although in theory members own Milk Vita and manage it through the Executive
Committee, in practice it has been observed that they exert little real power in the day to
day management of the organisation at local and national levels, and in major policy
decisions like price determination, investment in new facilities, sourcing funding for
investment, strategy for marketing etc that determine the competitiveness and
profitability of the enterprise. For example, several chilling plants are operating at much
below capacity because they have been established at locations having poor milk supply
hinterland and transport connection, and these decisions were made administratively
without proper assessment and involvement of members, perhaps because of political or
administrative pressure.

3.4 Formal output marketing contract of BRAC Dairy with milk traders

The Bangladesh Rural Advancement Committee (BRAC) is the largest national NGO
operating in the country as well as abroad. The BRAC is committed to poverty
reduction and empowerment of the poor through providing credit, training and technical
assistance. The BRACs involvement in dairy and contract milk collection has evolved
over time. The BRAC is a not for profit organization serving the poor but, like several
of its other profit making enterprise, its dairy processing enterprise established in 1998
is an income generating activity registered under the company act. The enterprise
consists of a dairy processing plant, about 70 chilling plants and collection centres, AI
service facilities, feed manufacturing and selling facilities, all run on commercial
principles. The BRAC dairy collects milk from different parts of the country through its
collection points-cum-chilling plants located at various places in milk producing areas
(Figure 3.2 and Appendix 1). These plants are of smaller size compared to those of Milk
Vita, so each plant has a smaller supply hinterland or service area but they are more
widely distributed than Milk Vitas chilling plants.
The milk collection system involves a contract not directly with the farmers supplying
milk but with milk supply agents, most of whom are traditional milk traders or gowalas
but may also include some dairy farmers who are engaged in milk trade as an additional
income earning activity, for supplying milk. There is a written agreement or deed
between BRAC and the agent, which is signed by both the parties. The BRAC provides
milk cans to the agents for collecting and bulking milk and sometimes advances money
unofficially to ensure regular supply of milk. An agent contract a number of farmers

23
willing to sell milk, preferably regularly, to BRAC and collects milk from their
doorsteps, and supplies to a specific chilling plant of BRAC. It is unclear how and what
stage of the supply chain the quality of milk is tested.
The BRAC follows almost the same procedure as Milk Vita in setting buying price of
milk and making weekly payment. Price risk is shared by both contractor and contractee
because contract price depends on market price so it may vary over months and seasons.
The production risk is fully borne by the farmer. Recently BRAC has started to give
farmers a membership card, though the objective of this is unclear.
The BRAC provides AI and vet services and feeds to milk producers through input
retailers under different marketing arrangements unrelated to the contract for purchase
of raw milk. The BRAC sells feeds from its feed manufacturing plant through its
dealers and agents. AI service is also provided by BRAC trained AI workers at the
farmers door step at cost. BRAC trains such AI workers to encourage them to work in
their own locality to earn additional income. They operate in 410 upazilas in the country
including the upazilas where BRACs milk collection points are located. The fee for AI
is Tk. 100 per service- base or repeat. Out of this, Taka 70 is refunded to BRAC as
payment for the semen and Taka 30 is retained by the AI provider as his/her
remuneration. Semen is either imported or produced at BRACs own bull centres where
Friesian cross and Shahiwal cross bulls are maintained. Feeds and AI services are
provided on credit by the suppliers if requested by the farmers but BRAC does not take
any direct responsibility for loan disbursement and collection. BRAC and milk Vita are
relatively new entrants in the AI service market (see more on this later).

3.4 Grameen/Community Livestock and Dairy Development Project (CLDDP)

contract with producers

Grameen Motsho Foundation- a subsidiary of the Grameen Bank - started

experimenting with a crop-livestock-fish farming integrated project with landless and
marginal farmers with UNDP funding in 1998. The purpose was to provide micro credit
facility to groups of about five members to acquire livestock (goats, poultry, cattle) for
fattening or milk production as appropriate to increase income and household nutrition.
A group of members could also lease ponds for fish raising or lease land for vegetable
or other crop production. Livestock credit included a mandatory insurance policy to
cover risk of disease and mortality, and 2.5% of purchase value of the stock was
deducted from the approved credit as premium of insurance. The project provides the
members access to inputs (feeds, AI) and vet services at cost and imparts training to
improve knowledge on better management of livestock. The project also included
establishment of four dairy processing plants to be located in selected project sites and
owned jointly by village group members (75% share) and Grameen Motsho Foundation
(25% share). Members are obliged to sell milk to the dairy enterprises which process
into products that can be marketed locally. They can also sell surplus milk to other
bigger dairy enterprises like Milk Vita and Bikrampur Dairy accessible in the respective
areas. Profits are shared among members. Where members have adequate number of
cows to produce enough dung to run a biogas digester, they can access additional loan
to establish a digester to generate energy for cooking, lighting etc and use the slurry as
manure (Mitra and Hossain, 2002).

Although there is no independent evaluation of the performance of the initial years of

the project, The Grameen Bank, apparently based on positive results during the pilot

24
years, expanded scheme to include a milk processing plant to make micronutrient
fortified yoghurt for selling to poor people in the locality to improve nutrition. This
venture has been undertaken with a grant underwritten by Danone, a multinational, of
France. This is running at a pilot scale since late 2007 and has been dubbed as a social
business. Efforts are underway to raise capital through the stock market to multiply this
enterprise in wider geographical areas in the country (Haque, 2007).

Given Grameen Banks operational principles of collateral free micro credit for
undertaking income generating activities and the obligation of small group members to
sell their milk to the group owned processing plant makes this a special type of contract
arrangement which is theoretically a self regulated and self managed entity but in
practice a project guided and supervised by Grameen Bank. This is still a small venture
and if the principle can be internalised by the groups, then scaled up and a true self
governed and self managed cooperative organisation emerges that is vertically
integrated, then it may approach the structure of Milk Vita except that unlike Milk Vita
and BRAC, Grameen-Danone is not targeting Dhaka or other big cities as the market
outlet for products rather the declared objective is to make this product available in rural
areas specially among the nutrient deficient poor. Already it is observed that the venture
is not able to collect enough milk from its members or even from the locality to fully
utilize the processing capacity. Its location being in the supply hinterlands of Milk vita
and BRAC, it has to compete for milk collection. Some amount of its product is already
sporadically appearing in the urban market, which is contrary to its declared goal.
Whether this is due to inadequate local market or a strategy to create an alternative
outlet for surplus output to serve the middle class and the rich who may appreciate its
value more and also pay more is unclear at this point.

3.6 Summary
It appears that both Milk Vita and BRAC dairy involved in milk collection and
processing to meet high urban market demand are interested in maximising milk
collection from current production to utilise their processing facilities. Though both
Milk Vita and BRAC are expected to honour agreements with their contract farmers, a
survey shows that 29% of the Milk Vita contracted farmers experienced conflict with
their contractor on rare occasions, and 35% and 12% of BRAC related farmers
experienced conflict with their contractor rarely and often, respectively. Such conflict
arose mainly due to delayed payment of sales proceeds. About 10% of the respondents
did not answer and the remaining sample farmers did not experience any conflict with
the contractor. One of the complaints from farmers during field visits was that Milk
Vita sometimes refused to take delivery of milk, especially in the flush season, when
supply might exceed expectation, as the milk collectors might not have enough logistic
preparation to handle extra milk. On the other hand, Milk Vita field staff also mentioned
that some contract farmers failed to deliver agreed and expected volume of milk as they
sold milk in the local market to take advantage of better price. However, these types of
contract violations by both Milk Vita and the contract farmer were not mentioned
during formal survey, perhaps because both the parties were defaulters at one time or
another.

Although Milk Vita is owned by its members and is supposed to be managed on the
basis of their choices and opinion, in reality members exert little practical power in
taking management decisions. Administrative and political interventions often lead to
decisions that result in poor technical and economic performance of its milk collection
and processing operations.

25
Both Milk Vita and BRAC have input supply programme to improve productivity but
these are highly inadequate, uncoordinated, and in case of BRAC separate from the
milk collection programme, and without any clear objectives for long-term
development of the dairy sector to ensure sustained long-term supply. Assured market,
regular payment and access to veterinary services are the main motivations for farmers
to get into contract arrangements with these enterprises. A survey among farmers
involved in contract arrangements with Milk Vita and BRAC showed that more than
94% of the sample dairy farmers under Milk Vita as well as BRAC considered the
availability of assured market for milk as the main motivation behind their joining the
contact arrangement (Table 3.6). The second most important reason (69% of the sample
farmers gave this response) was timely payment for output delivered. Access to
veterinary service was also an important reason for getting into contract with Milk Vita
(28% of respondents) and BRAC (17% of respondents). This seems reasonable in view
of the poor veterinary services provided by the public sector. Other factors usually
associated with benefits of contract farming such as access to information, extension
advice, technology, credit and feeds did not feature in the minds of most of the those
who made contract agreements with Milk Vita or BRAC though both the organizations
provided these inputs and services directly or indirectly.

Thus, it appears that milk being a perishable product most dairy farmers are concerned
with problems of assured buyer of milk and timely payment for the product marketed.
The problem of market access is more pronounced among relatively larger dairy
producers as evidenced by a recent survey which revealed that a higher proportion of
large farms sold milk to Milk Vita and BRAC collection points than did smallholders
(Jabbar et al., 2005). Milk Vita and BRAC as milk collectors may also prefer larger
producers to economise on collection costs even though both the enterprises are
supposed to serve smallholders by virtue of their mandate to help alleviate poverty.
Smallholders outside the operational areas of these organisations remain largely
disconnected from the large urban markets. It is not clear if the current milk marketing
systems - both formal and informal- are functioning efficiently from the point of view
of smallholder producers, urban consumers and the society at large. Moreover, quality
of milk marketed through different supply chains- formal and informal- is a major
concern as regulations and enforcement of quality and safety standards in the country is
very poor. The plight of the consumers can be guessed from the way the melamine
contaminated milk trade has been handled in the country recently (see Box 3.1)

26
Table 3.6 Main motivations to join contract arrangement with Milk Vita and BRAC
Reason for getting into contract Milk Vita BRAC All
farmers farmers farmers
(n=86) (n=58) (n=144)

First reason (% sample respondents)

Assured buyer of output 94 93 94
Timely payment for output 6 5 6
Access to credit for inputs - 2 1
Second reason (% sample respondents)
Timely payment for output 69 69 69
Good price of output 2 12 6
Access to credit for inputs - 2 1
Access to veterinary services 28 - 17
Access to technical advice on dairy 1 - 1
Stable price of output - 3 1
Assured buyer of output - 3 1
Advance payment of milk - 3 1
Near to house - 2 1
Time saving for sale of milk - 5 2

Source: Field survey

27
 Box 3.1 Milk Quality and Safety:
Melamine contamination and artificial milk production

In October 2008, following the discovery of melamine contaminated milk in China,

there was serious public concern in Bangladesh about quality of imported powdered
milk. Laboratory tests found different levels of melamine in a number of brands
imported from different countries. But test results also varied between different
laboratories so lack of consensus about test results delayed policy action on the
suspected brands, which created public outrage and concern. Powdered milk traders
continued to sell suspected brands even after a High Court ruling, in response to a public
interest writ petition, ordered to stop trading of suspected brands. It took several more
days for law enforcing agencies to come out to enforce the court order which allowed
the traders to hide much of the stocks.

Liquid milk traders, especially traditional gowalas, took advantage of this uncertainty
and increased milk price. Moreover, they also increased milk supply by mixing
increased quantities of powdered milk with liquid milk, and selling those as fresh cow
milk. Since water and powder milk adulteration is a fairly common practice, consumers
concern increased as they suspected that the melamine contaminated powdered milk
would end up in the market through the traditional liquid milk sellers.

To make situation worse, The Daily Prothom Alo, a popular daily newspaper, reported
(on 1-2 November 2008) that on 31 October 2008, their investigation in Pabna and
Sirajgonj districts, the main milk shed for Dhaka city, revealed that traditional milk
traders have been producing artificial milk using chemicals and they reportedly have
been supplying that milk to BRAC, Pran, and Akij dairies for processing and selling as
pasteurized milk. A traders artificial milk production factory is shown in Box 3.2. This
practice has emerged in response to inadequate supply of fresh milk in relation to
demand of the processing plants. The process of making artificial milk apparently runs
like this: traders separate cream and solid (sana) from milk purchased from producers,
then in the remaining milk-water (normally called ghoal) they mix iron cutting oil at
the rate of two drops per litre, which makes the colour of milk-water fully white like full
milk. Then they add cream, powdered milk, sugar, salt, sodium carbonate and milk
essence in appropriate proportion to prepare artificial milk. Further, peroxide and
formalin are added to extend shelf life for delivery to milk collection points of
processors,

After the above news paper report, public health and law enforcing authorities have
reportedly identified and captured several staff/agents of BRAC, Pran, Aftab and
Akij dairies and several milk traders with artificially prepared milk and/or materials
and equipment for preparation of such milk, and imposed financial penalty at
varying rates. While this quick response was commendable, it was disappointing to
see that the higher authorities of the relevant dairies did not take responsibility for
failing to maintain food safety norms and to protect the health of ordinary
consumers. The artificial milk issue subsided for a while but another newspaper, The
Daily Star, reported on 25 February 2009 arrest of a milk trader in Jhenidah district
with fake milk manufacturing equipment and raw materials which he has been using
to regularly supply fake milk to the local BRAC purchase centre. The BRAC
purchase centre staff reported to the law enforcers that they were unaware about the
practice and could not detect the adulteration with their normal testing procedure. So
quality control of milk along the supply chains remains a major concern.

28
Box 3.2 An artificial milk production factory in Pabna district

Source: The Daily Prothom Alo, 31 October, 2008

29
4. Determinant of Participation in Commercial Dairy and in
Contract Arrangements for Production and Marketing
4.1 Choice of models to explain market participation
In the present study, the main point of interest was to assess the probability of rural
farm households participation in commercial dairy under any arrangement, and then in
any contract arrangement for production and/or marketing of dairy in particular. The
literature on market participation by farm households shows that there are early models
that focused on explaining participation vs non-participation, and later models focused
on two stage decision process in market participation (decision to participate followed
by a decision about the scale of participation), Methodological issues related to
estimation of the various model parameters have also received much attention
(Becker,1965; Barnum and Squire,1979; Singh et al.,1986; Goetz et al.,1988; von Braun
et al.,1989; de Janvry et al.,1991; Sadoulet and de Janvry,1995; Taylor and
Adelman,2002; King,1980; Lee,1982; Walton and Ragin,1990; Goetz,1992;
Roncek,1992; Key et al.,2000; Goet, 1995; Holloway and Ehui, 2002; Lapar et al.,
2002; Lapar et al., 2003. A comprehensive review of these models and studies is given
in Jabbar et al. 2007. For the purposes of this study, by definition, commercial dairy is a
cash crop or market oriented enterprise though a small portion of the output might be
consumed at home. In theory, commercialization of a particular farm may be a time
bound process in which the farm may increase the degree of its market orientation by
gradually increasing the share of output sold rather than consumed at home. Information
on when a farm might have transformed from non-commercial to commercial status
through which pathway, and which factor(s) might have played any role in this
transition was not collected in this study. Rather data was collected from a sample of
commercial and non-commercial dairy farms as defined earlier a point in time (i.e. at
time of the survey), and the objective here is to compare their profiles and draw
inference on the likely characteristics of commercial and non-commercial dairy farms.
Therefore, it was assumed that a rural household was either a commercial dairy farm or
was not, and if it was a commercial dairy farm, a decision on the scale of the dairy
enterprise also had to be taken. So, the decision of a household to participate in
commercial dairy and the decision on the scale of the enterprise were joint and
simultaneous decisions. Once a decision to establish a commercial dairy enterprise was
made, the size or scale of the enterprise was also chosen instantaneously though in
reality the scale of operation might have evolved over time. The commercial dairy farm
could either operate independently or get into any contract arrangement with a third
party for production and/or marketing. Hence only factors influencing the probability of
participation in commercial dairy and in contract arrangement were analyzed in detail
using probit models as discussed below.

4.2 Hypotheses on factors having influence on decision to undertake

commercial dairy and in joining contract arrangement
Contract arrangement in production and/or marketing is sometimes considered as a
possible institutional mechanism to give smallholders access to higher priced markets,
and a scope to get out of poverty by benefiting from the expanding markets for high
value products. In Bangladesh, majority of the dairy farmers are smallholders and
landless so an interest of this study is to examine if such farmers are participating in
commercial dairy production activities as a means to improve their income and
livelihood. Since demand for dairy is rapidly growing, it is assumed that smallholder

30
participation in commercial dairy will help them to capture a fair share of this market
leading to an equitable distribution of benefits to different scales of farms from the
expanding dairy market. In order to explore this question, we examined the nature of
participation of rural households in commercial dairy and what factors determined the
nature of participation.
The following three broad types of farms were sampled in this study: non-commercial
dairy farms, independent commercial dairy farms and dairy farms engaged in some
contract arrangements. So in terms of participation, the following options or choices
could be considered and compared:
Among all dairy farms, non-commercial vs commercial farms.
Among commercial dairy farms, independent vs contract farms
Among contract dairy farms, contract with Milk Vita vs BRAC.

These are options in which two discrete choices are involved without any order of
preference or value. So in case of these binary choices, probit regression model was
used to identify factors that explained the choices.
Several sets of independent variables were tried in different combinations to identify the
best fit equation in each case based on a set of hypotheses about the effect of these
variables on the relevant choices. The factors hypothesized to influence participation or
non-participation in commercial dairy, and participation or non-participation in any
contract arrangement included the following:
Dairy herd size: Other things remaining the same, the size of the dairy herd largely
determines the volume of output produced and available for sale, therefore, it may be an
important determinant of whether a producer will participate in the market. The volume
of output available for sale may also influence the market outlet to be chosen as a
regular outlet with reasonably remunerative price is the one a producer may look for.
Such desire may induce a producer to get into some kind of contract arrangement.
Age of the household head: it was hypothesized that the probability of participation in
commercial dairy and in contract arrangement might be lower for older farmers as they
might be unfamiliar with improved dairy production technologies and management, and
might also have difficulties to learn quickly.
Education of the household head: it was hypothesized that the probability of
participation in commercial dairy and in contract arrangement might be higher for better
educated farmers as this would allow them to acquire knowledge and skills about
improved commercial dairy production technologies quickly, and their willingness to
learn might also be higher.
Family labour supply: it was hypothesized that dairy being a labour intensive enterprise
requiring intensive supervision throughout a production cycle, the probability of
participation in commercial dairy and in contract arrangement might be higher among
households with larger family labour supply.
Farm size (land holding): it was hypothesized that the probability of participation in
commercial dairy and in contract arrangement might be higher among households with
larger land holding as it would allow production of larger quantities of crop residues
and/or allow allocation of some land for feed production for dairy production, and

31
larger land holding might also allow diversification of production into dairy to increase
income.
Land available for use as pasture: Most farms are crop-livestock mixed farms in which
crop residues and milling by-products are principal sources of animal feeds. Such farms
usually give priority to draft animals for feeding as these are required for crop
production, which also is generally the primary focus. Local breed cows are low milk
yielders so special feeding for such cows is not always commercially attractive.
Because of these adequate land ownership that allows allocation of a certain portion for
pasture may be an important determinant of whether commercial dairy with more local
and/or crossbred cows will be adopted.
Non-agricultural income: includes income from business, service and remittance.
Having non-agricultural income might influence participation either positively by
providing investment and operating capital and scope for further diversification of
income, or negatively as labour might be already committed, so supply might be limited
for commercial dairy operations.
Borrowing : credit can ease capital constraint to acquire dairy cows and build cowshed,
and also meet regular operational expenses for inputs and services. Borrowing status
was included in the models as a dummy where appropriate to explain if a particular type
of farm had higher or lower probability of borrowing.

General characteristics of the sample dairy households are summarised in Table 4.1.
The farms related to BRAC have slightly smaller land holding and fewer have non-farm
income compared to farms related to Milk Vita. Non-commercial dairy farms have
smaller land holding but a higher proportion of them have non-farm income compared
to commercial dairy farms related to BRAC and Milk Vita. Independent farms have
smaller cattle and dairy herd sizes, and significantly smaller proportion of crossbred
dairy cattle compare to the MILK Vita and BRAC related farms. For the same reason,
independent farms have about one half the volume of milk output of BRAC and MILK
Vita associated farms.

Table 4.1 General characteristics of dairy households by farm type

Characteristics Milk BRAC Independent All Non-

Vita commercial commercial
dairy dairy
Age of 45.7 41.6 44.3 44.1 45.0
household head (1.4) (1.4) (1.2) (0.8) (1.8)
(yrs)
Yrs of schooling 5.2 5.2 6.2 5.6 5.4
of household (0.5) (0.5) (0.4) (0.3) (0.6)
head
Land holdings 3.00 2.35 2.39 2.59 2.24
(acre) (0.41) (0.26) (0.24) (0.19) (0.10)
% farms having 38 35 28 33 9
own land for use
as pasture
% Farms having 58 32 71 57 74
non-farm
income

32
 Total no. of 7 6 4 6 6
cattle/household (0.6) (0.4) (0.3) (0.3) (0.3)
Total no. of 3 3 2 3 2
dairy cattle (0.2) (0..2) (0.1) (0.1) (0.2)
/household
- of which 92 95 66 83 -
% crossbreeds
Total milk output 6380 6679 3341 5190 136
(litre/hh/year) (507) (648) (329) (288) (37.6)
Total milk consumed 140 269 145 174 136
(litre/hh/year) (18) (37) (16) (13) (37.6)
% consumed 2.2 4.0 4.3 3.4 100.0

Note: Figures in the parentheses indicate the standard error of mean. More specific parameter for the
dairy enterprise are shown in a separate table in the section on performance measurement as they are
more relevant there.
Source: Field survey

Average household gross income for commercial dairy farms was about twice that of
the non-commercial dairy farms, and among commercial dairy farms, Milk Vita related
farms had about twice the income of BRAC related and independent dairy farms (Table
4.2). Livestock as a source of income was far more important for commercial dairy than
non-commercial dairy farms, and among commercial dairy farms, livestock was more
important for BRAC related and independent dairy farms than Milk Vita related dairy
farms. This also indirectly shows that livestock share of income are higher among
smaller farms, who are more related to BRAC than Milk Vita. In case of Milk Vita and
BRAC related farms, 62% of livestock income came from dairy while in case of
independent farms, dairy share of livestock income was only 13% indicating that BRAC
and Milk Vita associated farms are specializing in dairy while independent farms derive
most of livestock income from non-dairy sources perhaps cattle, goats and poultry
though no details are available.
Within each type of farm, there is also variation in level and sources of income between
the three districts. For example, among commercial dairy farms, average income was
the lowest in Faridpur where livestock as a source of income was the least important
among the three districts. In case of independent commercial dairy farms level of
income and share of income from livestock are both highest in Pabna.

Table 4.2 Annual income of dairy households by sources

Milk Vita BRAC Independe All Non-

Income sources nt commercial commercial
dairy dairy
Annual 331000 171361 182248 231396
income (88006) (12791) (21954) (32296)
(Tk/household 112044
) (6682)
Per capita income 58751 30723 34838 42165 18105
(Tk/year) (14818) (2660) (3280) (5406) (1670)
% share of income
Crops 43.2 34.7 25.9 36.1 52.4
Livestock 37.3 53.2 45.4 42.7 11.1

33
 (of which 23.4 33.6 5.8 17.5
dairy) 0.5
Business 10.2 9.0 14.3 11.3 14.4
Service/wages
, remittances 9.3 3.1 14.4 9.90 21.9
US 1$ = Tk. 65.31 (December 2006).
Figures in the parentheses indicate standard error of mean.
Source: Field survey

Table 4.3 Proportion of farms borrowing and average amount borrowed per borrower
by farm type

Farm type and Milk Vita BRAC Independent All Non-

source of credit farms Farms farms commercial commercial
dairy dairy
Commercial 2 - - 1 2
bank (70000) (70000) (20000)
Agricultural 2 - 4 3 6
bank (32000) (73000) (59333) (10667)
Other farmers - 3 1 -
(6000) (6000)
Friends & - - 1 1 2
relatives (10000) (10000) (8000)
NGOs 5 38 5 13 6
(29750) (17783) (17000) (19156) (6833)

Others 11 13 5 8 6
(66667) (13250) (10600) (39222) (119000)

All sources 20 55 15 26 19
(54294) (16714) (29333) (30517) (12250)

Others: Informal money lenders, traders.

Figures in the parentheses indicate amount borrowed per borrower
Source: Field survey

About 26% of commercial dairy farms and 20% of non-commercial dairy farms had
outstanding loan at the time of the survey and they had borrowed varying amounts of
money from a variety of sources (Table 4.3). Over 50% of BRAC related farms
borrowed mainly from NGOs, primarily BRAC, compared to only 20% of Milk Vita
related farms and 15% of independent dairy farms who borrowed. The institutional
sources of loan, i.e., from banks and NGOs, were not very important in any farm type
other than BRAC, which indicate that access to formal credit is limited for rural
commercial and non-commercial dairy farmers.

4.3 Factors influencing participation in commercial dairy

The coefficients of the probit regression equation and related statistics explaining
probability of participation or non-participation in commercial dairy are shown in Table

34
4.4. The log likelihood function and the proportion of samples correctly predicted for
their likely status in terms of participation indicate a good fit of the equation. In
general, other things remaining the same, probability of participation in commercial
dairy was significantly higher among households with larger dairy hard size, which
gave larger volume of output, hence an inducement to sell. Other things being equal,
farms with larger labour supply had a significantly lower probability of participation in
the market. This seems plausible as, from a given output, larger labour supply or a
larger family size may mean more milk is required for home consumption rather than
for sale. No other factor had any significant influence on the probability of engaging in
commercial dairy. Breed was not included as a variable in this equation as all non-
commercial farms had only local breed while all commercial ones had either only
crossbreed(s) or a combination of local and crossbreed(s), so difference in breed was a
pre-existing condition for commercial and non-commercial dairy farms. Higher milk
yield and total output of crossbreeds make such farms market oriented while farms with
only local breeds produce mainly for home consumption and occasional sales if there is
a surplus.

Table 4.4 Estimated coefficients and related statistics of probit regression on

participation of farms in dairy production (non-commercial dairy = 0, commercial
dairy=1)

Variable (St. error)

Dairy herd size (No.) 0.791*** (0.114)
Age (year) 0.003 (0.007)
Education (year of schooling) 0.001 (0.024)
Family labour >18 years -0.113* (0.062)
Farm size (acre) 0.028 (0.04)
Own land for use as pasture (Yes=1, Otherwise=0) 0.312 (0.303)
Non-farm income dummy (Business and
remittance=1, Otherwise=0) 0.084 (0.221)
This Credit dummy (Borrower=1, Otherwise=0) -0.051 (0.258)
District dummy1 (Pabna=1, Otherwise=0) -0.333 (0.255)
District dummy 2 (Rangpur=1, Otherwise=0) -0.214 (0.301)
Maximum likelihood estimates
Number of observations 300

Log likelihood function -96.16

Restricted log likelihood -139.89
Chi-squared 87.45
Significance level 0.000
Corrected prediction 90%

***, * indicate significant at less than 1 and 10% respectively

***, * indicate significant at less than 1 and 10% respectively

The insignificant influence of credit on the decision to participate in commercial dairy

or in the choice of the form of commercial dairy farming to be pursued, can be
explained by the following reasons: (a) some respondents had outstanding credit at the
time of the survey from formal or informal sources but it was unclear if that was for
initial investment and/or for operational expenses, also question on whether a farmer

35
needed credit, asked for it and was refused could not be ascertained, (b) some informal
contract farmers borrowed from milk traders under forward sale contract and this was
exclusively or mostly to cover operational costs of already established dairy enterprise
or for family expenses rather than for new investments in dairy, so could not be
considered for explaining decision to engage in commercial dairy production., (c) a few
non-commercial dairy farms also borrowed for agricultural purposes, so credit probably
had a neutral effect in explaining the status of the sample farms at the time of the
survey.

4.4 Factors influencing participation in contract arrangement

Among the commercial dairy producers, specific factors may influence decision to get
involved in any contract arrangement or remain independent. The coefficients of the
probit regression equation and related statistics explaining probability of participation or
non-participation in any contract arrangement for production and/or marketing of dairy
are shown in Table 4.5. The log likelihood function and the proportions of samples
correctly predicted for their likely status in terms of participation in dairy contract
arrangement indicates a good fit of the equation.

Table 4.5 Estimated coefficients and related statistics of probit regression on

participation of farms in dairy contract arrangement (independent=0, contract=1)

Variable (St. error)

Dairy herd size (No.) 0.280*** (0.067)
Age of owner (years) 0.013** (0.007)
Education of owner (year of schooling) -0.055*** (0.023)
Family labour >18 years 0.187*** (0.063)
Farm size (acre) -0.064 (0.041)
Own land used for pasture (Yes=1, otherwise=0) -0.328 (0.229)
Non-farm income Dummy (Business and
remittance=1, Otherwise=0) -0.445** (0.204)
Credit dummy (Borrower=1, Otherwise=0) 0.585** (0.235)
District dummy1 (Pabna=1,Otherwise=0) -0.907*** (0.305)
District dummy2 (Rangpur=1, Otherwise=0) -0.732** (0.354)
Breed dummy (Only Local=0, Otherwise=1) 1.387*** (0.269)

Maximum likelihood estimates

Number of observations 246

Log likelihood function -123.34
Restricted log likelihood -166.56
Chi-squared 86.42
Significance level 0.00
Corrected prediction 99%
***, ** and * indicate significant at less than 1, 5 and 10% respectively.

Other things being equal, the probability of participation in any contractual arrangement
was significantly higher among households with larger dairy herd size, older household
head, larger labour supply, having access to credit and owning only crossbred or a
combination of local and crossbred cows rather than only local cows. The probability of

36
engaging in any contract arrangement was significantly lower among better educated
household heads, with larger non-farm income and farms located in Pabna and Rangpur
districts relative to Faridpur district. Larger labour supply allows taking care of more
animals to produce larger quantities of milk, crossbred cows also allow larger volume of
production. Access to credit from any source may facilitate larger dairy operation by
easing cash constraint and that may be a motivation to get into contract for selling
output. It may be noted that not all farms who established contract with Milk Vita or
BRAC borrowed from these organizations but got involved in contract with them for
selling output which indicate that those who entered into contract with BRAC or Milk
Vita did not do so hoping to obtain credit. On the other hand, some farms who borrowed
from other sources entered into contract with Milk Vita or BRAC to sell the expanded
output.
Pabna and Rangpur distract have a longer history of market oriented dairy production
where a good marketing network has developed over the years at the initiative of Milk
Vita so the need or motivation for getting into contract may be less there compared to
other places where remunerative market access may be a problem, hence motivation for
getting into contract to overcome that problem may be higher.

Among the commercial dairy farms that entered into contractual arrangement, there was
a choice between Milk Vita and BRAC. The coefficients of the probit regression
equation and related statistics explaining probability of getting involved in contract
arrangements with Milk Vita or BRAC are shown in Table 4.6. The log likelihood
function and the proportions of samples correctly predicted for their likely status in
terms of contractual arrangements indicate a good fit of the equation. Other things being
equal, the probability of getting involved in formal dairy contract business with Milk
Vita rather than indirect contract with BRAC through milk traders was significantly
higher among farms with larger dairy herds, older household heads, higher
business/remittance income, and significantly lower among farms with access to credit.
The age effect can be explained by the fact that Milk Vita has been in the field for a
much longer period than BRAC and older farmers might have developed a better
rapport or understanding about Milk Vita than the more recent operations of BRAC.
Higher non-farm income from business/remittance may allow to enlarge the size of the
dairy enterprise and output for which Milk Vita may be considered a better outlet. It has
been found that more solvent farmers with larger output are preferred by Milk Vita for
delivery of milk to reduce transaction costs (Jabbar et al., 2005) while BRAC
apparently has a pro-poor policy which should make it more accessible to smaller
producers. The negative effect of credit for contract with Milk Vita may be explained
by the fact that access to informal credit from traditional milk traders or other sources
such as BRAC limit a farms option to make contract with Milk Vita. This may also
imply that Milk Vita may be more attractive to those farms facing limited access to
credit elsewhere. The probability of getting into contract with Milk Vita is significantly
lower in Pabna district compare to Rangpur and Faridpur. Although Pabna district is
one of the earliest operational areas for Milk Vita, entry of BRAC in the same areas has
created a competitive environment, and the less formal contract arrangement of BRAC
may be more attractive to producers than the more formal procedure of Milk Vita, so
farmers are probably moving away from Milk Vita or at least new entrants in the
contract market are joining BRAC rather than Milk Vita.

37
Table 4.6 Estimated coefficients and related statistics of probit regression on
participation of contract farms in different contractual arrangement (BRAC=0, Milk
Vita=1)

Variable (St. error)

Dairy herd size (No.) 0.279*** (0.095)
Age of owner (years) 0.038*** (0.012)
Education of owner (year of schooling) -0.045 (0.038)
Family labour >18 years 0.008 (0.089)
Farm size (acre) 0.020 (0.074)
Own land used for pasture (Yes=1, Otherwise=0) -0.123 (0.329)
Non-farm income dummy (Business and
remittance=1, Otherwise=0) 0.895*** (0.319)
Credit dummy (Credit=1, Otherwise=0) -0.929*** (0.334)
District dummy1 (Pabna=1,Otherwise=0) -2.852*** (0.642)
District dummy 2 (Rangpur=1, Otherwise=0) 5.07 (152266.900)
Breed dummy2 (Local=1, Otherwise=0) 0.313 (0.658)

Maximum likelihood estimates

Number of observations 145

Log likelihood function -49.65
Restricted log likelihood -97.97
Chi-squared 96.65
Significance level 0.000
Corrected prediction 98%
*** and ** indicate significant at less than 1 and 5% respectively

38
5. Performance of Commercial Dairy Enterprises and Dairy Input
Traders
5.1 Performance in dairy enterprises
Efficiency in farm production depends on the nature of use of on-farm resources, farmer
characteristics as well as the nature and extent of participation by producers in input and
output markets. Primary production decisions by farm households involve not only
questions on what product(s) to produce, how much to produce, what inputs and
resources to use at what level but also where to buy and sell inputs, services and
products. Although these last set of questions relate to market, they may have profound
influence on choices of products to be produced, inputs and services to be used and
outlets to be used for disposal of products and on the overall efficiency in farm
production (Bishop and Toussaint, 1966; Mosher, 1966). Access to better quality inputs,
services and information is a major constraint or barrier for smallholders in the
developing countries to produce better quality products to enter expanding higher priced
product markets on a competitive basis with larger scale producers (Delgado et al.,
1999; Holloway and Ehui, 2002; Lapar et al., 2002; Lapar et al., 2003; Delgado et al.,
2003; Boughton et al., 2007). Therefore, analysis of production efficiency need to
consider both on-farm and off-farm, especially market access, factors (Jabbar and
Akter, 2008).
In this study, both enterprise budgeting (average costs and returns) and stochastic
frontier production function approaches have been used to measure performance in
dairy production of three groups of farms- independent, contract with Milk Vita and
BRAC. These three groups roughly stand as proxies for the types of input and output
market access that may influence their performance,. Milk Vita and BRAC supply
improved feed blocks at reasonable price to its members and some farmers also buy
protein feed ingredients that they mix themselves. Independent farms usually do not
have access to feeds supplied by BRAC and Milk Vita, rather they buy protein feed
ingredients from the market that they mix themselves. Milk Vita provides AI service
free at its village AI station and veterinary services at reasonable cost. BRAC does not
provide these services directly to farmers as farmers are not BRACs direct contractees;
these services are offered by other operators at cost supported by BRAC as discussed
earlier. BRAC supported AI service providers offer the service at the doorstep of the
farmers and charge Tk 100 per service compared to DLS which charges TK 30 per
service but offers the service at its AI station, which could be miles away from the
village. Independent farms do not have access to the services provided by Milk Vita and
BRAC rather they depend on services provided by the government veterinary
department. It is alleged that services provided by the DLS are not always timely,
regular and of high quality and sometimes farmers have to pay for the service providers,
which partly explains the significantly higher per unit cost of these items (more on these
later). These differences in access to inputs and services and their costs are expected to
be reflected in the technical and economic performance of the three groups of farms.

5.1.1 Costs and returns in milk production

Characteristics of the sample households and their dairy enterprises in the three districts
are shown in Table 5.1. Contract farms under both Milk Vita and BRAC have
significantly larger cattle and dairy herd sizes compared to independent dairy farms.
Duration of milking days in a year and average milk yield per cow was also
significantly higher for Milk Vita and BRAC farmers compared to independent farmers.

39
This was partly because Milk Vita and BRAC farmers dairy herds had respectively 92
and 95% of their dairy cows as crossbreeds compared to 66% for independent farms.3 It
should be noted that the crossbred dairy cows were of different parity with different
proportion of exotic blood, they were also of different sizes and body weight, all of
which contributed to yield difference between individual animals but the actual
contribution of these factors could not be quantified as individual animal level data was
not collected in detail.

Table 5.1 Some characteristics of the in commercial dairy farms by farm type

Milk BRAC Independent All

Vita types
Total no. of cattle per farm 7 6 4 6
(0.6) (0.4) (0.3) (0.3)
Total no of dairy cows per 3 3 2 3
farm (0.2) (0.2) (0.1) (0.1)
- of which % crossbreeds 92 95 66 83
Average milking days in a 339 329 295 318
year (6) (7) (8) (4)
Milk yield per cow per 2126 2474 1670 1730
year, litre (116) (114) (113) (72)
Milk Yield (litre/cow/day) 9.0 10 6.6 8.1
(0.4) (0.3) (0.4) (0.2)
Total milk (litre/hh/year) 6380 6679 3341 5190
(507) (648) (329) (288)
Milk consumed 140 269 145 174
(litre/hh/year) (18) (37) (16) (13)
Price received (Tk/Litre) 17.00 16.90 17.70 17.30
(0.12) (0.14) (0.29) (0.15)
Figures in the parentheses indicate standard error of mean.
Source: Field survey

Among the three districts, the cattle and dairy herd sizes in Rangpur and Pabna were
about twice the size in Faridpur. Farmers in Rangpur and Pabna also had longer
duration of milking during the year and higher milk yield than in Faridpur. A reason for
this is that there are more crossbred animals in the former districts than in Faridpur.
Prices received for marketed milk per litre did not differ significantly between the
different farm types, so profitability per unit of output differed between farm types due
to differences in yield and cost structure. Average overall costs on major items and
returns per 100 lites of milk are shown in Table 5.2. Independent, BRAC and Milk Vita
farms respectively earned net return (return over all fixed and variable costs except
unpaid family labour) per 100 litres of milk in the ratio of 1: 2.7: 3.9 . Net return per
person day of family labour employed in dairy averaged Tk 267 overall and Tk 191,
267 and 407 respectively for independent, BRAC and Milk Vita farms, giving a ratio of
1: 1.4 : 3.1.

3
The milk yield of the sample non-commercial dairy farms, who have an average of two local cows, was not
collected in this survey but another recent survey in similar areas showed average daily milk yield of 4.30.2
litres for local breeds and 8.00.4 litres for all crossbreeds combined. (see, Jabbar et al., 2005).

40
Table 5.2 Average cost and return per 100 litres of milk by farm type

Milk Vita BRAC Independent

farms farms farms All farms
Feed cost 545.80 568.50 845.20 676.00
(37.60) (39.10) (69.70) (34.20)
Veterinary services and drugs 52.70 11.10 47.70 40.20
(11.70) (1.70) (5.20) (4.60)
Family and hired casual labour 351.80 408.20 1031.30 648.40
(38.50) (44.70) (135.40) (62.70)
Interest on operating capital 63.10 71.40 147.00 99.90
(6.80) (7.40) (18.00) (8.60)
Total variable cost 1010.80 1079.80 2147.90 1500.80
(74.87) (70.50) (183.62) (88.05)
Fixed cost (tools, equipment and annual 63.70 72.60 133.50 94.90
hired labour) (11.10) (26.00) (22.10) (13.60)
Total cost 1074.50 1152.40 2281.40 1595.80
(78.16) (84.56) (196.58) (94.56)
Total return 2290.50 2013.80 2596.40 2349.20
(54.3) (62.10) (77.10) (42.60)
Gross margin 1279.70 934.10 448.40 848.30
(77.79) (68.51) (138.53) (68.30)
Net return 1216.10 861.40 314.90 753.40
(79.48) (79.42) (150.05) (73.89)
Return to family 407 267 191 267
labour (Per person day) (60) (37) (32) (27)

Figures in the parentheses are standard error of mean

Source: Field survey
The best performance of Milk Vita farms in terms of return per unit of milk produced
and per day of family labour employed can be explained primarily by the differences in
their level and structure of cost and level of return. Average return comprising value of
milk and prorated value of dung and changes in the value of herd inventory of
independent farms was 13% and 29% higher than milk Vita and BRAC farms
respectively but total cost of independent farms was about twice the cost of Milk Vita
and BRAC farms (Table 5.2). Higher total returns of independent farms resulted from a
proportionately higher share of returns from dung and inventory change. Feed cost of
independent farms was about 50% higher and labour cost about three times higher than
the other two groups. Lower milk yield per cow of independent farms meant that the
costs were spread over a smaller level of output compared to the other two groups of
farms. Milk Vita farms incurred a significantly higher proportion of their costs on feeds
and veterinary drugs and services, which made more direct contribution to milk yield
and output. Milk Vita and BRAC farms also spent a higher proportion of their feed
costs on protein feeds and other nutrient rich feeds compared to independent farms
(Table 5.3). An important nutritious feed available in the country is molasses from the
sugar mills but the figures in the table show that very little of this is used by dairy
farmers linked with different milk collection enterprises. As mentioned earlier, Milk
Vita and BRAC supplies improved feed blocks at reasonable price to its members and
some farmers also buy feed ingredients that they mix themselves. Independent farms

41
usually do not have access to feeds supplied by BRAC and MILK Vita, rather they buy
feed ingredients from the market and mix themselves. Consequently independent
farmers spent more per unit output on paddy straw, green grass and feed ingredients
compared to Milk Vita and BRAC farms.

Table 5.3 Average feed cost per 100 litres of milk by farm type

Feed costs Milk Vita Independent

farms BRAC farms farms All farms
Value Value Value Value
(Tk) % (Tk) % (Tk) % (Tk) %
Paddy straw 134.9 152.2 211.3 171.0
(13.5) 24.7 (10.2) 26.8 (19.2) 25.0 (9.8) 25.3
Green grass 87.8 110.3 224.3 150.2
(11.7) 16.1 (15.5) 19.4 (29.0) 26.5 (13.8) 22.2
Protein feed* 283.5 294.6 385.8 328.6
(31.0) 51.9 (22.4) 51.8 (35.4) 45.6 (19.0) 48.6
Molasses 3.4 1.7 4.6 3.5
(0.8) 0.6 (0.4) 0.3 (1.0) 0.5 (0.5) 0.5
Vitamin + salt 10.5 7.1 17.3 12.4
(1.7) 1.9 (1.2) 1.2 (1.7) 2.0 (1.0) 1.8
Other feed** 25.68 2.56 2.02 10.33
(4.7) 4.7 (0.5) 0.5 (0.2) 0.2 (1.5) 1.5
Total 676.0
545.8 568.5 845.2 (34.2)
(37.6) 100 (39.1) 100 (69.7) 100 100
Note: * Wheat bran, pulse bran and oilcake; ** Rice gruel, boiled rice, broken rice etc.
Figures in the parentheses indicate standard error of mean.

Milk Vita farms spent the highest average amount on veterinary drugs and services,
independent farms spent slightly less but BRAC farms, who also had a nearly as much
crossbred cows in the herds as Milk Vita farms spent about 4.5 times less than the other
two groups (Table 5.4). Moreover, Milk Vita farms spent a larger proportion of the
costs on drugs compared to the other farm types, independent farms spent larger amount
on vaccination and vet services than the other two types, and BRAC farmers had a more
equitable distribution of cost among drugs, artificial insemination and vaccination
(Table 5.4). These differences arose due to the differences in the access to these services
and their unit costs. Milk Vita provides AI service free at its village AI station and
veterinary services at reasonable cost. BRAC supported AI service providers offer the
service at the doorstep of the farmers and charge Tk 100 per service compared to DLS
which charges TK 30 per service but offers the service at its AI station, which could be
miles away from the village. Independent farms do not have access to the services
provided by Milk Vita and BRAC rather they depend on services provided by the
government veterinary department. It is alleged that services provided by the DLS are
not always timely, regular and of high quality and sometimes farmers have to pay for
the service providers, which partly explains the significantly higher per unit cost of
these items (more on these later).

42
Table 5.4 Average cost of veterinary drugs and services per 100 litres of milk by farm
type

Milk Vita Independent

farms BRAC farms farms All farms
Value, Value, Value, Value,
Health and services Tk % Tk % Tk % Tk %
Drugs 38.8 5.0 28.2 25.9
(10.7) (1.3) (3.3) (4.0)
73.6 45.4 58.6 64.2
Artificial insemination 4.1 3.3 4.1 3.9
(0.8) (0.4) (0.6) (0.4)
7.8 29.6 8.4 9.6
Vaccination, clinical 9.8 2.8 15.9 10.6
examination, vet services
(1.1) (0.6) (2.3) (1.1)
18.6 24.9 33.0 26.2
Total
52.7 11.1 48.2 40.2
(11.7) 100.0 (1.7) 100.0 (5.2) 100.0 (4.6) 100.0

Figures in the parentheses are standard error of means

Source: Field survey

Labour is an important input in dairy production but accurate measurement of labour

input for an enterprise like dairy in mixed farming systems is a difficult exercise,
especially through single visit survey, because of the diversity of tasks performed by a
variety of family members and hired labour, who also perform many other tasks so
there is a problem of apportionment. Both under and over estimation may be possible in
such circumstances. The results of this study show that independent farms used three
and 2.5 times more labour per unit of output compared to Milk Vita and BRAC farms
respectively (Table 5.5). It may be recalled that Milk Vita and BRAC farms have a
higher proportion of crossbred cows in their dairy herds, so it seems that management
of herds with predominantly crossbred cows may require less labour than herds with
predominantly local cows because most crossbred cows are stall fed with significant
proportion of concentrate feeds while local cows are managed in a variety of ways
including grazing, tethering along boundaries of crop fields which require careful
supervision, collection of weeds grasses from crop fields, which also require substantial
labour. Moreover predominantly roughage based feeding, as shown earlier, also
required more labour in case of independent farms.4 Over 90% of the labour in all three

4
Per 100 litres of milk production, Miah (2002), Sen (2008), and Ashrafuzzaman (1993) respectively found
7.9, 7.5 and 8.4 persons days for crossbred cows; Miah (2002), Sen (2008) and Mian (2007) respectively found

43
cases came from family sources. The relative contribution of female labour was 46, 34
and 43% respectively for Milk Vita, BRAC and independent farms.

Table 5.5 Average labour cost per 100 litres of milk by farm type

Independent
Milk Vita farms BRAC farms farms All farms

Value Person Value Person Value Person Value Person

Types of labour (Tk) days (Tk) days (Tk) days (Tk) days
Family male
176.2 243.0 572.5 357.6
(20.2) 3.0 (26.9) 4.1 (86.4) 9.6 (38.9) 6.0
Family female
174.8 158.9 451.2 285.8
(22.7) 2.9 (15.1) 2.6 (54.2) 7.5 (25.7) 4.7
Family total
351.0 401.9 1023.7 643.4
(37.8) 5.9 (39.3) 6.7 (127.8) 17.1 (59.1) 10.7
Hired male
annual
13.6 40.9 18.4
(4.9) 0.2 (19.5) 0.7 9.0 (4.7) 0.1 (5.5) 0.3
Hired male
casual
0.0 6.0 4.6
(0.0) 0.0 (5.1) 0.1 7.6 (7.6) 0.1 (3.3) 0.1
Hired female
0.8 0.3 0.0 0.4
(0.7) 0.0 (0.3) 0.0 (0.0) 0.0 (0.2) 0.0
Total labour
365.7 449.9 1040.6 667.3
(37.2) 6.1 (50.1) 7.5 (128.4) 17.3 (59.7) 11.1
Figures in the parentheses indicate standard error of mean.
Source: Field survey

Thus it appears that contract arrangements that provide access to better quality inputs like
feeds, breeds through AI, and veterinary services are likely to make more positive
contribution to productivity improvement and overall increase in income even when such
farms do not get any better price compared to other producers in the market. But
provision of these inputs by the three processing enterprises is not well integrated with
their output purchase contacts as usually found in classical contract farming
arrangements.

5.1.2 Stochastic frontier production function

13.4, 25.2 and 11.4 person days for local cows, while Rahman (1993) found 12.5 person days for mixed
crossbred and local cows. So the labour input figures for the present study seem to be reasonable.

44
Theoretical and empirical literature on this approach is quite extensive. In short, the
stochastic frontier approach incorporates a composed error structure with a one-sided
inefficiency component and a two-sided symmetric random component. The inefficiency
component is used to obtain firm specific or average efficiency and the random
component picks up the effect of uncontrolled random shocks, such as weather,
measurement error, disease and other statistical noise. There are many variants in model
specification and distribution of the unknown variance of the inefficiency component
(Aigner et al. 1977; Meeusen and Van Den Broeck 1977; Jondrow et al. 1982; Battese
and Coelli 1988). In this study, a modified Cobb-Douglas specification was assumed and
the following frontier production and inefficiency models that are variants of Coelli and
Battese (1996) were specified:

ln (Yi)= 0 + j ln (Xij) + j Dj + vi ui (1)

i = 0 + k Zik (2)

where the subscripts i, j, k and p refer to the i-th farmer, the jth and the kth parameter or
variable respectively (i = 1.n, j = 1J, k = 1.K); ln represents the natural logarithm;
Y, X and Z are variables to be defined below.

The 0, j, j, 0 and k are unknown parameters to be estimated; the vis are assumed to be
independently and identically distributed random errors with distribution N(0, v2); the uis
are non-negative technical inefficiency effects independently distributed and arise by
truncation at zero of the normal distribution N(i, u2), where the unknown variance u2 is
defined by

2 = u2 + v2 (3)

= u2/ 2 (4)

and the mean i is defined by equation (5) below5. The value of the parameter lies
between zero and one. When the frontier production function is defined for the logarithm
of production, then the suggested measure of technical efficiency for the ith farm is

TE = exp (- ui) (5)

Thus, given the specification of the stochastic frontier model (1) and (2), the technical
efficiency of the ith farm can be obtained by using equation (5) (Battese and Coelli,
1993).

In addition to measuring the level of efficiency, differences in efficiency levels and their
causes are also explained. Empirical studies to explain differences in efficiency of farms
used either a two-stage or a single-stage approach. In the two-stage approach, the first
stage involves the estimation of a stochastic frontier function and the prediction of farm
specific technical inefficiency or efficiency effects. The second stage estimates the effects
of the factors explaining technical efficiency using ordinary least squares regression. This
approach is criticised on the ground that the assumption of independent and identical
distribution of the inefficiency effects is violated in the second stage when they are made

5
Coelli and Battese (1996) used this formulation for a time variant model. Here we use cross-section data and
therefore specify the formulation as required.

45
to be a function of the farm specific factors (Kumbhakar et al. 1991; Reifschneider and
Stevenson 1991; Kumbhakar and Lovell, 2000). The single-stage approach specifies
stochastic frontiers and models for the technical inefficiency effects and simultaneously
estimates all the parameters involved. We apply this one-stage approach because it leads
to more efficient inference with respect to the parameters involved (Coelli and Battese,
1996). Frontier version 4.1 software was used to analyse the data (Coelli, 1994).
Estimated coefficients of the production and inefficiency factors of the best fit model
are shown in Table 5.6. The values of the 2, , log likelihood function and test statistic
and their significance level indicate that inefficiency effects of a stochastic nature exist
among the sample farms. The predicted mean efficiency for the sample is 35%, which is
quite low. Distribution of the efficiency levels show that 9% of the sample farms
achieved efficiency level below 25%, 39% between 25-50%, 32% between 51-75% and
20% over 75%. Given the heterogeneity of the farms and the dairy enterprise in terms of
breed composition, parity, size and body weight of the cows, feeding systems, feeding
levels and quality, level and quality of other inputs including veterinary drugs and labour,
the low overall level technical efficiency and its wide variation may be reasonably
expected.

As for the parameters of the individual production factors, all except the one for feed cost
and labour are less than one and positive as expected. The sign of the feed cost variable is
negative, which is contrary to expectation. However, the coefficient of the variable share
of protein feed in feed cost is positive and significant, implying that better quality feed
has a positive effect on output. The coefficient of labour input is also negative but
statistically not significant the value is essentially zero implying that marginal
productivity of labour is zero. It has been shown earlier that generally high levels of
labour input have been used, especially by independent farms even though upward bias
in estimation of the labour input could not b e ruled out. The labour input coefficient
shows that, given the system of management, production and feeding, scope for further
productive use of labour with current technology is rather limited or nonexistent rather
other yield increasing technology need to be applied to expand production. Among the
three districts, production level in Rangpur is significantly lower compared to the other
two districts.

Among the inefficiency factors, dummies for Milk Vita and BRAC are proxies for
differential access to inputs and service, especially feeds, vet services and AI, compares
to independent farms, which are expected to have significant impact on output. The
coefficient of the dummy for BRAC shows that contract with BRAC reduced
inefficiency. The coefficient of the dummy for MILK Vita is also negative, i.e. contract
with Milk Vita reduced inefficiency, though the coefficient is not statistically significant.
By implication, inefficiency increase if the farm remained independent, which was used
as the base category. Among the 19 least efficient farms ( efficiency level below 25%),
79% are independent farms; of the other 86 with lower middle efficiency (25-50%
efficiency) 51% are independent. On the other hand, 46% of most efficient farms are
contracted with BRAC (Table 5.7). Location also affected efficiency level. Ninety per
cent of the farms in Faridpur and Madaripur achieved below 50% average efficiency
while 65% of the farms in Pabna achieved over 50% efficiency. Farms in Rangpur had a
more balanced distribution across the efficiency scale.

Longer milking duration reduced inefficiency, which is to be expected. Having local

breed increase inefficiency which is also theoretically plausible as the same input and
effort given to a crossbred cow will yield larger output. Having land for pasture increases

46
inefficiency. Normally access to pasture should ease feed constraint and add to technical
efficiency but in this case the contrary result might have arisen perhaps because pasture is
to be grazed or harvested and carried home for feeding, requiring extra labour, which is
apparently already being over used as shown earlier. Age education and access to credit
did not make any significant difference in efficiency level. It may be recalled that few
farms actually borrowed and some borrowed from a diversity of sources unrelated to the
input and output market contract, so neutral effect of credit seems plausible.

Table 5.6 Maximum likelihood estimates of parameters of the stochastic frontier and
inefficiency models for milk production in selected areas of Bangladesh (dependent
variable = value of milk in Tk/household/year)

Coefficient (SE)
Production factors
Constant 8.709*** (0.508)
Ln Value of dairy cows (Tk/hh) 0.207*** (0.059)
Ln Human labour (Tk/hh) -0.032 (0.045)
Ln Feed cost (Tk/hh) -0.092*** (0.040)
Ln % of protein feed 0.185*** (0.070)
Ln Health and services 0.093*** (0.020)
Region1(Pabna=1, Otherwise=0) 0.108 (0.141)
Region2(Rangpur=1, Otherwise=0) -0.198* (0.134)
Inefficiency factors
Constant 0.940*** (0.269)
Age of respondent (years) 0.004 (0.003)
Education of respondent (years of schooling) 0.002 (0.008)
Dummy for credit (yes=1, Otherwise=0) -0.064 (0.075)
Farm size (acre) 0.011 (0.011)
Dummy for pasture land (yes=1, otherwise=0) 0.171** (0.085)
Milk given (days/yr) -0.002*** (0.001)
Dummy for Breed (Local=1, Otherwise=0) 0.707*** (0.108)
Dummy for Institution1(Milk Vita=1, Otherwise=0) -0.128 (0.086)
Dummy for Institution2(BRAC=1, Otherwise=0) -0.183** (0.097)

2 , 0.142*** (0.021)
0.930*** (0.101)
log likelihood function -66.220
LR test of the one-sided error 85.626
Mean technical efficiency 35.43%
***, **, * indicate significant at 1, 5 and 10% respectively.

47
Table 5.7 Distribution of dairy farms by contractual status and level of efficiency

Level of technical efficiency

Contract status <25% 25-49% 50-74% 75% + Total
BRAC 1(5) 13 (15) 22(31) 20(46) 56(26)
Independent 15 (79) 44(51) 17(24) 12 (27) 88(40)
Milkvita 3 (16) 29(34) 31(44) 12(27) 75(34)
Grand Total 19 (100) 86 (100) 70 (100) 44 (100) 219 (100)

Figures in the parentheses are percentages

Source: Field survey

5.2. Performance of dairy input traders

The main inputs for dairy farming are dairy animals, breeding especially AI services,
concentrate feeds, and veterinary drugs. Equipments used for dairy farming and
marketing are still simple and rudimentary which are produced by domestic cottage or
small-scale industries, so this was not included in this study due to lack of information.
Since input supply was found to be poorly integrated with output purchase contracts of
different dairy processing enterprises, dairy producers usually depend on own
production or market for feeds. In order to asses how input markets serve producers, an
attempt was made to characterize the market structure and trading practices of AI
service providers, feed traders and drug traders as a prelude to measure their
performance. A well performing market is beneficial for both buyers and sellers.
Market structure can be identified by considering the number and size distribution of
buyers and sellers, the extent to which products are differentiated, how easy it is for
other firms to enter the market and the extent to which firms are integrated or
diversified (Bain, 1968; Ferguson, 1988). More specifically, market structure for a
commodity can be evaluated in terms of four dimensions: (a) the degree of seller
concentration, (b) the degree of buyer concentration, (c) the degree of product
differentiation and (d) the condition of entry to the market. Concentration has two
alternative meanings; (i) control of a large proportion of some aggregate of economic
resources or activity by a small proportion of the units which control the aggregate; or
(ii) control of a large proportion of such an aggregate by a small absolute number of
these units (Scarborough and Kydd, 1992; Abbott, 1993).
In a competitive industry, business firms are expected to earn normal profit as existence
of abnormal or super normal profit should invite new entrants in the market pushing
down profit rate to normal level. It is generally well known that in a competitive market
a trading firms temporal or spatial arbitrage performance depends on its financial,
physical and human capital assets as well as its ability to minimize costs. There are
physical marketing costs, e.g. transport and storage, and transaction costs that arise from
the coordination of the exchange among relevant market agents and include the costs of
obtaining and processing market information, negotiating contracts, monitoring agents
and enforcing contracts. Transaction costs are unique and specific to individual market
agent, so each agent in the market conducts transactions on the basis of his/her own
costs. When transaction costs are very high, market becomes thin or even fails (North,
1989; Hoff and Stiglitz, 1990; Williamson, 1985; Gabre-Madhin, 2001). Gabre-Madhin
and Negassa (2005) have argued that trading practices also influence trading
performance. They define trading practices or the way exchanges are conducted as
observable market behavioural outcomes of underlying market institutions. Market

48
institutions encompass rules of the game rules and laws, informal norms, formal and
informal organizations and associations. These institutions may determine trading
practices with respect to, among others, mode of purchase and payment, inspection of
goods, negotiation and enforcement of contracts, contract violations and means of
settlement. Some examples of trading practices include use of regular suppliers and
customers, and brokers/agents for purchase and sale, volume of purchase and sale
through regulars and agents, cash or credit purchase and sales etc. Trading practices
may also be determined by type and composition of assets as firms operating under the
same set of underlying market institutions often do not follow similar trading practices.
On the other hand, trading practices may impact on traders performance through its
influence on transaction costs. However, most trading practices are observable and
measurable in some form but most transaction costs may not be observable and
measurable so trading practices may serve as proxies for transaction costs.
In this study, some industry level information is provided for artificial insemination
services, feeds and feed ingredients, and some local market level analysis was also
done for these inputs. Drugs for cattle are partly manufactured in-country and partly
imported and a full picture of the drug market could not be gathered for industry level
analysis. However, trader practices and performance was analyzed for veterinary drugs.
High density of dairy farming is observed in Shahjadpur Thana in Pabna district where
large number of feeds and feed ingredients and drugs suppliers also operate. So, to get a
typical picture of these input markets in a dairy market shed, Shahjadpur market was
selected as a case study for analysis of trader behaviour.

5.2.1 Trading practices and performance of AI service providers

Artificial Insemination (AI) is the most important technique devised for rapid genetic
improvement, economization of breeding programme and control of reproductive
diseases of domestic animals. This is possible because a few highly selected males
produce enough spermatozoa to inseminate thousands of females per year (Hafez,
1993). The basic aim of cattle breeding programme in Bangladesh is to improve the
genetic potentiality of local cattle through infusion of exotic blood (Ahmed and Islam,
1987). Bull : cow ratio in the country has been declining due to increased population
pressure on land, which adversely affects fertility rate of the national herd due to
inadequate number of bulls available for natural service at the appropriate times and
frquencies, consequently need and demand for AI as a breeding technique has also
increased.

The Department of Livestock Services (DLS), Milk Vita, Bangladesh Rural

Advancement Committee (BRAC), Quazi and Quazi Ltd. and other NGOs have been
providing AI services in the country with frozen semen (Nasrin, 2006). Characteristics
of AI service provided by four principal providers- DLS, Milk Vita, BRAC and BAU -
are presented in Table 5.8. Together they currently provide 1.8 million dozes of
inseminations per year throughout the country though the distribution is not uniform as
some areas with concentration of commercial dairy are served by more than one service
provider while some other areas may be served by a single service provider or none at
all.

The Department of Livestock Services (DLS) has been providing AI service since 1969
with semen produced at its Cattle Breeding Station in Savar, where various exotic
European breeds as well as improved breeds from Pakistan and India have been

49
Table 5.8 Characteristics of AI services provided by different organisations in
Bangladesh
Particulars Service providers
DLS Milk BRAC BAU
Vita
Year of starting 1969 1988 2000 1958
Area of operation 451 14 (where 410 6 in
(No. of Upazila) at Milk vita Mymensingh
present chilling district
plants are
located)
No. of AI 1600 48.5 200 10.4
done/year(000)
Breed used for Shahiwal Friesian Friesia Friesian
semen production and and n Cross
Friesian Jersey Cross Shahiwa
Shahi l-Sindhi
wal Cross ,
Cross Pabna,
Red Red Chittagong
Type of semen used Frozen- Frozen Frozen Frozen
60%
Liquid-
40%
Place of service Centre Samitys At farmers BAU AI
based place doorstep centre &
Sub-
centre
Charge (Tk.) for 30 Free 100 45
first service
Charge for any 30 Free 100 30
repeat service
Conception rate (%) 46.5 47.4 61.5 60.0
No. of semen
production centre:
Frozen 29 1 1 1
Liquid 61 0 0 0

Service provider Field FAAI AI worker AI

Assistant (Field technician
(FA)/AI Assistant &
volunteer Artificial
Inseminator)
Source: Field survey 2006.

maintained for research on breed choices for Bangladesh conditions. In the absence of a
national policy on breeding strategy for breed choices, experimentation at the station
had no long term goal and associated strategy to maintain record and accumulate

50
knowledge for longer term breed development in the country. Breeding experiments
were designed following short term project objectives so changed very frequently as
new projects were implemented with mostly donor funds. Consequently, many breed
lines were some times maintained without any clear idea on breed attributes or criteria,
other then milk yield, for comparison of breed lines and help make final choices and
how those lines would be multiplied and disseminated if found suitable on the basis of
the chosen criteria or attributes (Jabbar and Green, 1983; Jabbar and Ali, 1988).

The DLS currently operates in 451 upazilas in the country and perform 1.7 million
inseminations yearly with semen of Friesian and Shahiwal breeds at a cost of Taka 30
per service. Since 2005 seven pure Red Chittagong bulls are also being used to support
conservation and development of the Red Chittagong cattle. Table 5.9 presents
production of semen and AI activities by DLS. Some of the recent projects being
implemented by the DLS include the artificial insemination activities, extension and
embryo transfer technology project launched in 2002 for strengthening the ongoing AI
activities throughout the country. The objectives are: (i) production of high productive
animals, (ii) to increase the number of quality breeding bulls as well as quantity of
semen, (iii) to familiarize and encourage AI activities at grass root level and to the
private entrepreneurs, (iv) to practice embryo transfer technology in the nucleus herd at
CCBS and (v) to establish a nucleus herd at CCBS with animals of high genetic merit.
Under this project, about 1000 inseminators have been trained at the CCBS, Savar.

Table 5.9 Production of semen and AI activities by DLS

Year Liquid Frozen Target of Achievement Birth of Birth

semen semen AI (Million, (Million, rate
(Million (Million (Million, no.) no.) (%)
c.c) doze) no.)
2001-02 0.657 0.700 1.20 1.18 0.397 34
(98.12)
2002-03 0.685 0.772 1.26 1.23 0.436 36
(97.83)
2003-04 0.704 0.886 1.30 1.32 0.455 34
(101.48)
2004-05 0.773 1.075 1.49 1.43 0.476 33
(96.47)
2005-06 0.812 1.303 1.60 1.61 0.519 32
(100.57)
2006-07 0.823 1.223 1.70 1.78 0.564 32
(104.88)
Source: DLS Office, 2008
Note: Figures within parentheses indicate percentages of target numbers.

Another on-going project undertaken by the DLS through the CCBS in 22 districts is the
Breed up-gradation through progeny test" for improvement of cattle genetic resources of
Bangladesh. In this programme emphasis is given to maintain Pure Native line, Pure
Sahiwal line and Native Exotic cross line through bull dam identification and testing of
potential young bulls followed by growth trial for final selection. Major objectives of the
project are (i) production of superior proven bulls, (ii) identification of high yielding

51
cows and heifers, (iii) year-wise genetic gain and productivity improvement of cattle
through planned mating, (iv) conservation and improvement of Native (Deshi) cattle
genetic resources, (v) production and identification of superior animals suitable for
Embryo Transfer (ET) and (vi) increasing milk and meat production.

Another organization which has a localized but long standing AI programme is the
Bangladesh Agricultural University, Mymensingh, which established a research dairy
farm in 1958 and acquired stocks of several exotic breeds for experimental purposes.
However, the universitys breeding research has a rather poor history as there was no
long term goal of the breeding research programme, and nearly all breeding stocks have
been lost one way or another and no historical records on breeds research have been
preserved in a manner to build accumulated evidence on breed performance. The AI
centre has been providing AI service through its AI station to the farmers in the villages
and upazilas around the university campus. Moreover, it had four sub-centres in the
early 1980s in four upazilas in Mymensingh district where the university had on-farm
research projects but those were discontinued after the project life expired (Jabbar and
Green, 1983; Jabbar and Ali, 1988). Currently it has Friesian Cross, Shahiwal-Red
Sindhi Cross, Pabna, and Red Chittagong breeds for experimental purposes, and
provides AI services with semen from these breeds in six upazilas around the university
and performs about 10,000 inseminations in a year charging Tk 45 per service and Tk
30 for any repeat service.

While experimentation with various exotic breeds for purposes of crossbreeding to

upgrade local nondescript breeds has been in place for a long period, even if without a
clear strategy for the long term breed development in the country, inclusion of Red
Chittagong in the experiments by both the CCBS of DLS and BAU, as stated above, are
more recent events. The primary purpose of inclusion of Red Chittagong in the herds of
CCBS and BAU was to characterize its genetic make up and develop strategy for
conservation because of observation in the field about its good performance in its original
habitat in the highlands of Chittagong area. But dissemination of its semen to upgrade
other local breeds in various parts of the country may be a questionable activity because
it contradicts the basic principle of in situ conservation. If genetic make up and
conservation are goals, then it may be argued that this should be done in its original
habitat in Chittagong rather than in other environments in other parts of the country.
Moreover, further dissemination in other environments should wait until its suitability in
various environments has been empirically established and it has been included in a long
term breed development strategy in the country.

Milk Vita and BRAC are relatively new entrants in AI service delivery. BRAC used to
provide AI service in collaboration with DLS up to 1996 to help improve cattle but
discontinued the joint work for several reasons including lack of control over DLSs AI
assistants at the field level and also because it started a new programme to disseminate
AI through its own trained AI service providers who are self-employed. This service is
now available almost throughout the country. Milk Vita also depended on AI service
provided by DLS until they started their own bull station and AI service delivery. Milk
Vita has introduced AI programme in 1987 to meet its members requirement. Prior to
this, a training programme was conducted with the assistance of the UNDP/FAO
project, Cooperative Dairy Extension programme. It uses mainly two breeds i.e.
Friesian and Jersey.

52
A few studies have provided information about the performance of AI services. Alam
(1986) conducted a survey in five neighbouring villages of Savar dairy farm and found
that crossbred cattle constituted only 9% of total cattle population. After a repeat
survey a year later, the proportion of cross-bed cattle was found to be 22% with
variation from 14% to 37% between villages. The study revealed that the factors
conducive to success of the AI programme were proximity of AI sub-centre, service of
Veterinary doctor and improved breeds.

Alam et al. (1992) conducted a study to evaluate the socio-economic aspects of AI

programme using proportion of cross-bred cattle population in the AI served areas,
conception rate, cost of semen, economic benefit of AI to farmers and the attitude
towards AI programme as criteria. The study revealed that the proportion of cross-bred
cattle was 11.7% in the country, and it varied from 9.7% in rural areas to 10.6% in peri-
uraban areas and 20.6% in urban areas. The causes of the variation were identified as
population pressure, literacy rate, communication and marketing facilities and activities
of NGOs. The adoption of AI programme was highest in Milk Vita served areas (82.2%)
followed by Rotary Club (39.1), BRAC (30.3%) and DLS served areas (27.6%).
However, it is may noted that these rated are higher then the results of this study but this
area is located close to the central cattle breeding station so has benefited from better
exposure and supervision as well as demonstration effect and while the surveys
conducted for this study are far away from the CCBS. The conception rates under the
various AI programmes over the years are shown in Table 5.10.

Table 5.10 Conception rates of AI serviced cows, selected years

Year Non-return Conception rate Service per conception

rate (%) First Up to last
insemination insemination
1984-85 84.1 52.2 64.7 1.9
1985-86 79.9 53.0 69.2 1.9
1986-87 82.4 53.2 67.0 1.9
1987-88 78.3 53.2 70.7 1.9
1988-89 83.2 54.6 68.8 1.9
1989-90 78.4(68.9) 54.2 73.2(70.5) 1.9
Total 80.7 53.6 69.6 1.9
Note: Figures within parentheses are related to deep frozen semen.
Source Alam et al (1992)

About 30% of the cattle did not conceive. Conception rate, non-return rate and service
per conception were used as indicators to evaluate the performance of the AI
programmes. The cost of semen was estimated at Tk. 16.17 per doze, Tk. 26.65 per
insemination, Tk. 50.64 per conception, and Tk.56.27 per progeny. Cost of deep frozen
and liquid semen per doze was estimated at Tk. 31.25 and Tk. 16.17 respectively in
1989-90 by DLS. The fee of AI paid by the farmers was Tk. 14 per service on average -
Tk.22.10 and Tk. 13.30 respectively for service provided at home and at station. The
government fixed the rate at Tk. 5 of which Tk. 2 is received by the government and Tk.
3 is kept by the Field Assistant of the AI programme.

53
Barua (2006) conducted a study in selected areas to compare the AI activities of BRAC
and DLS. Some of the findings are shown in Table 5.11. BRAC is pursuing a policy of
delivering service at or near the door step of the farmer while farmers need to reach
DLSs service centres to obtain a service. This also justifies the higher fee charged by
BRACs service providers. Given that BRACs service area per service provider is much
smaller than DLSs, BRACs programme has the potential to reach many more farmers
when they need the service than DLS, thus contribute to improve fertility rate of the
national herd.

It should be noted that reported conception rates under the different AI service providers
vary and they need to be interpreted with caution as it is unclear if repeat inseminations
have been properly adjusted in all cases in calculating conception rates. Moreover,
conception rates might also vary depending on the breed of the cow (local vs crossbreed
and with different level of exotic blood), the level of nutrition, which again is likely to
vary depending on breed and output produced ( milk vs milk and draft power for
example), and management.

Table 5.11 Comparison between BRAC and DLS AI programme

Variables BRAC DLS

Launched AI programme 2000 1969
No. of production centre (frozen) 1 29
No. of production centre (liquid) 0 61
AI coverage area (%) 75 25
Service approach Doorstep Doorstep, Centre based
Working area 8 km radius of the Mostly district and
centre upazila sadar
Service implementer AI volunteers Field Assistant (FA),
AI volunteers
Financial incentives Commission Salary (FA),
commission
Volunteers purchase semen at 70 15-30
price (Tk./dose)
Volunteers sell semen to 100 80-100
beneficiaries at price (Tk./dose)
Volunteers purchase semen for 60 Free of cost
repeat case at price (Tk./dose)
Volunteers sell semen for repeat 90 40-50
case at price (Tk./dose)
Form of goat semen used Frozen Black Bengal Uses natural method
Conception rate (%) 61.5 (DLS approved) 46.5 (IAEA report)
Service provided (approx.) 200,000/year 1,600,000/year
Form of semen used 100% deep frozen 60% deep frozen
40% liquid semen

Source: Barua, 2006

54
It appears that the AI programme in the country is not a coordinated programme of
different organizations. Each service provider has the short term goal of providing
insemination service to maintain fertility and milk production so that there is adequate
supply of milk for collection to run their processing industries. There is no agreed and
adopted breeding policy in the country for long term genetic improvement through
delivery of appropriate genetic material. Other than conception rate, there are hardly
any other objective criteria for judging their relative performance in improving the
genetic quality of the national herd. Since no progeny record is maintained by any of the
service provider, long term improvement in genetic make up and productivity of the
individual and national herd cant be assessed or even guessed yet without such records
and their continuous monitoring and evaluation, long term breed development and
genetic improvement cant be achieved. And without such achievement, improvement
of dairy industry will also be impossible.

5.2.3 Structure and performance of feed markets

Feed is any edible material which is capable of being digested and utilized by livestock
(Somani, 1989). Feed can be categorized into concentrate and roughage. Concentrate
feeds include corn, barley, wheat, soybean, bran, molasses etc. On the other hand
roughage feed is bulky, fibrous and relatively low in energy, for example, straw, silage
and forage. In a traditional system cattle mainly live on straw but in commercial farms it
is essential to add sufficient amount of concentrate to feed ration for maintaining
desired level of growth of the animal and to harvest its potential. Roughage feeds
cereal straws, and grasses- are marketed to some extent but in this study only
concentrate feeds were covered due to limitations of time and resources.
There are 52 registered feed mills in the country but 40 are currently in operation. These
mills are mainly involved in manufacturing poultry feed. Some of them are also
producing fish feed but locally processed balanced feed for cattle is not available in the
market although eight of the above mills claim to produce cattle feed (Table 5.12). In
the market, concentrate feeds for livestock are available only in the form of rice bran,
wheat barn, oil cake, molasses from sugar mills etc. These by-products are supplied by
grain processing mills i.e., rice mills, pulse mills and oil mills, that are located in both
rural and peri-urban areas throughout the country. Distribution of 353 major rice
processing mills and 16 sugar mills are shown in Table 5.13. Significant quantities of
these ingredients are also produced by small rice processing mills located in remote
rural areas but no aggregate and accurate information on these are available. Farm
household level production of rice and pulse bran using traditional technology has
declined and may now constitute a tiny share of total output. In the absence of
production of industrial balanced feed, the grain processing mills are playing an
important role in the economy as they process farm products and make the by-products
available for the livestock sector. In the 1980s, most of these by-products used to be
exported to Thailand, Singapore as local market was thin and there was demand abroad.

55
Table 5.12 Distribution of mills that produce branded concentrate feed for cattle

Name of Mills Location Brand

ACI Limited. Khamarkhand Crumbro
Sirajgonj feed
Aftab Bahukukhi Farms Ltd. Rupshi, Narayanganj Aftab
BRAC Joyna Bazar, Gazipur Surma feed
Harvest Rich Multiple feed Rupganj, Narayanganj Rich feed
Mills Ltd
Mondal Agrovet Ltd Joypurhat Padma feed
Hiraso Cattle and Goat Feed Maona, Gazipur -
Ltd
Afil Agro Ltd Jikhorgachha, Jessore -
Kazi Farms Limited Thakurgaon Kazi feed
Source: Poultry Business Directory, 2006

Table 5.13 Major Rice mills and Sugar Mills by Location in Bangladesh

District (undivided) No. of major rice mills* No. of sugar mills

Barisal 5 -
Bogra 13 -
Chittagong 52 -
Comilla 6 -
Dhaka 69 1
Dinajpur 44 3
Faridpur 5 1
Jamalpur 3 -
Jessore - 1
Khulna 47 -
Kushtia 2
Mymensingh 10 2
Noakhali 28 -
Pabna 3 1
Patuakhali 2 -
Rajshahi 4 3
Rangpur 6 2
Sylhet 29 -
Total 353 16
Source: * BBS 2002,p.152

56
Figure 5.1 Marketing chains used for distribution of feeds

Grain processing mills

By-product

Importer
Wholesaler

Retailer

Dairy farmer

About 8 feed mills reportedly produce cattle feeds in the country along with poultry
and/or fish feeds. These processing mills distribute the feeds in different ways, e.g.
some feed manufacturers distribute feeds through agents; some use independent traders
(wholesalers and retailers). However, none of the feed traders in Shahajadpur market,
one of the most active livestock feed market in the country, was found to stock any feed
from those mills. Also the farmers in that area were not found to use processed balanced
feed for their animals. Rather they used feed ingredients and mixed them at home
themselves. Typical marketing chains of concentrate feed are shown in Figure 5.1.

In order to assess how the feed wholesale and retail markets operate and perform, 10
feed wholesalers and 10 feed retailers handling cattle feed ingredients were selected
from Sahajadpur market of Sirajganj district.
The wholesalers purchased concentrate feed ingredients from different mills located in
different areas. The distance of supply source varies from 15 to 300 km from the
wholesalers stores. Sixty percent of the wholesalers purchased feeds from the longest
distance of up to 300 km , followed by 10% traders each who covered up to 250 km
and up to 200 km, and the rest 20% of the traders covered up to 100 km in buying feeds.
At the time of selling, 60% of traders sold feeds to buyers coming from a distance of 4
5 km while 40% sold to buyers coming from a distance up to 12 km.
Sixty percent of retailers collected feed from a distance of 2 km, and another 40% of
retailers purchased feed from 1 km distance, i.e. mainly from local mills or wholesalers.
Thirty percent of retailers sold feed within the area of 3 km radius; another 30% traders
within 10 km followed by 20% traders supplied feed to buyers up to a distance of 4 km
and the remaining 20% sold to buyers up to 20 km. These distances cover the service
area of the Shahajadpur market.

57
The sample wholesalers and retailers were found to handle four types of concentrate
feed ingredients used by the dairy farmers. These are: wheat bran, pulse bran, oil-cake
and anchor (one type of bean). Of the four types of concentrate feed, wheat bran
constituted about 73% of the total volume of business followed by pulse bran (14%),
oil- cake (8%) and anchor (6%). The wholesalers usually sell feeds both to the retailers
and dairy farmers. It was reported by the wholesalers that there were regular customers
among both the retailers and dairy farmers.
For retailers, of the total volume of concentrate feeds handled per month, wheat bran
accounted for 29% followed by pulse bran (29%), oil-cake (25%) and anchor (17%).
Two methods were followed in setting wholesalers buying price of feed. First, the
wholesalers buying prices were fixed through bargaining between feed processor and
the wholesale-buyers of feed. Secondly, both the parties checked the prevailing price in
different areas of the country and finally accepted the market price. These two methods
were used simultaneously or interchangeably. The wholesalers sold feed both in cash
and on credit to retailers and farmers. Hundred per cent of wholesalers reported that in
2005, they sold to an average number of 28 buyers on credit. In setting selling price,
100% of wholesalers charged a fixed margin on the total cost composed of purchase
price of feed and marketing cost. The price of feed varied from type to type. Moreover,
90% of wholesalers discriminated feed prices between buyers on the basis of mode of
payment (cash vs credit) , volume of purchase (small vs large) and regularity of
purchase. There is no arrangement of cost and risk sharing in feed trading between
manufacturers and wholesalers.
The retailers buying price of feed is settled through bargaining. Retailers were very
loyal to their suppliers i.e. wholesalers. Ninety percent of retailers sold feed on credit.
On an average one retailer served 38 farmers in 2005. The retailers were free to set
selling price of concentrate feed. In setting selling price, 80% of retailers usually added
fixed amount of margin to purchase price and cost of marketing. Another 20% of
retailers add certain percent of total cost (purchase price plus marketing cost) as profit.
Ninety percent of retailers discriminated selling price on the basis of quantity of
purchase, mode of payment and customers loyalty to retailer.
Generally the wholesalers did not take any measure to promote sales. However, they
usually sold feeds on credit that might be treated as one of the methods of sales
promotion. Retailers did not take any formal measure for promotion of sales of feeds.
But they supplied feeds mostly on credit to their customers. So the dairy farm owners
became loyal to feed retailers.
The wholesalers handled 27.2 tonnes of feed per trader per month. Wholesalers, on
average, paid Taka 12640 per tonne for buying feeds and their average sale price was
Taka 13420. They incurred Taka 313 as costs related to buying operations and Taka 73
as costs related to selling operations (Table 5.14), giving them an operating margin of
Taka 395 per tonne and Taka 10750 per month. The actual rate of return per unit of
operating capital could not be accurately calculated to assess if this trade generated
returns comparable to other businesses or at least equivalent to the going bank rate.

58
Table 5.14 Marketing costs and margins of feed trade (Taka /month)

Wholesaler Retailer
Volume handled/month 27.2 11.9
in tonne
Amount % Amount %
(Tk.) (Tk.)
Purchase price 344,314 155,509

Traveling 680 6.5 81 1.6

Communication 380 3.6 429 8.3

Transportation 6000 57.2 2333 45.1

Loading & unloading 641 6.1 409 7.9

Wastage 1400 1.3 200 3.9
Shop rent 800 7.6 502 9.7
Labour 1628 15.5 1036 20.0
Electricity charge 220 2.1 175 3.4
License fee 8.3 0.1 8.3 .1

Total Marketing Cost 10,497 100 5,173 100

Sale price 365,561 162.400
Margin 10,750 1,717
Source: Field survey 2006

Table 5.15 shows that the highest gross margin of wholesaler was obtained from oil-
cake (Tk.0.90/kg) followed by pulse bran (Tk.0.86/kg), anchor (Tk.0. 82 /kg) and
wheat bran (Tk. 0.76/kg).The average marketing cost per kg of feed was Tk. 3.9.
Retailers gross marketing margins/kg of concentrates varies from Tk. 0.33 for wheat
bran to Tk. 0.75 for oil-cake while Tk.0.70 and Tk. 0.61 was earned from anchor and
pulse bran respectively (Table 5.16). On average the marketing cost per kg of feed was
Tk.0.44 as incurred by the retailer. In general retailers made smaller margin per kg for
all the feed types compared to wholesalers.

Table 5.15 Wholesalers marketing margins on concentrates

Feed Quantity Purchase Sales price Marketing
traded (tones) price (Tk. (Tk. / kg) margin(Tk./
per month /kg) kg)
Wheat 19.8 (72.7) 13.00 13.76 0.76
bran
Pulse 3.8 (13.8) 11.04 11.35 0.86
bran
Oil- 2.1 (8.0) 15.10 16.00 0.90
cake
Anchor 1.5 (5.5) 8.28 9.10 0.82
All 27.2 (100) 12.64 13.42 0.79
types
Note: Figures within parentheses indicate percentages to total
Source: Field survey 2006

59
Table 5.16 Retailers marketing margins on concentrates

Feed Quantity Purchase Sales Marketing

traded (tones) price (Tk. price margin(Tk./
per month /kg) (Tk. / kg)
kg)
Wheat 3.5 (29.3) 13.60 13.93 0.33
bran
Pulse 3.4 (28.5) 11.92 12.53 0.61
bran
Oil- 3.0 (25.1) 16.50 17.25 0.75
cake
Anchor 2.0 (17.1) 9. 17 9.87 0.70
All 11.9 (100.0) 13.09 13.67 0.58
types
Note: Figures within parentheses indicate percentages to total
Source: Field survey 2006

5.2.3 Trading practices and performance of veterinary drug traders

More than 100 pharmaceutical companies have been reportedly involved in veterinary
drugs business in the country. An estimated Tk.3500 million worth of health and
nutritional products are marketed annually in the country but the exact size of dairy
drugs business is not known.
In order to analyse the trading practices and performance of wholesale and retail traders
of veterinary drugs, five wholesalers and five retailers of livestock drugs were selected
from Shahjadpur of Sirajgonj district.
The marketing chain for drugs is simple which is composed of 3 actors: the
pharmaceutical companies, the wholesalers and the retailers. The pharmaceutical
companies distribute drugs both to wholesalers and retailers. The retailers also purchase
drugs from wholesalers and sell to livestock farmers. The sample wholesalers purchased
drugs from ten pharmaceutical companies. They are: Renata Ltd, ACI Limited, ACME
Laboratories Ltd, SKF, Techno Drugs, Square Pharmaceuticals Ltd, Opsonin Pharma
Limited, James Pharmaceuticals and Intervet. The sample drug traders started this
business during 1995-2001. One of the retailers started this business in 1995 and one
each in 1998, 2002 and the other two in 2001.
The pharmaceutical companies set the prices of drugs for both the wholesalers and
retailers. All the wholesalers and retailers reported that they often sold drugs on credit.
In 2005, a wholesaler on average sold to 30 buyers on credit while a retailer on average
sold to 15-20 dairy farmers on credit. Thus on an average drug wholesaler served larger
number of farmers but the retailer sold to smaller number of buyers on credit than an
average feed trader.
On an average the wholesaler purchased drugs of Tk. 77510 per month, which varied
from Tk. 37,500 to Tk.110,000 and earned about 4% profit on the purchase price. The
average size of the business per retailer per month was estimated at Tk. 36265 with a
range of Tk. 16300 to Tk. 94000. They also reported that they charged profit of 4% on
purchase price of drugs and vaccines. The selling price of wholesalers and retailers was
set in two different ways such as adding a certain percent of total cost as profit with cost

60
per unit of drugs plus purchasing price of drugs and adding fixed margin to cost and
purchase price.
Each of the sample wholesalers reported handling 4% to 5% of vaccine and 10% to
12% of medicine of the market in their area of operation, which indicates that the
market is quite competitive. Different wholesalers sold drugs at different prices
depending on the brand and reputation of the manufacturing company. Transportation
cost of medicine/drugs from the factory to wholesalers store and cost of damage etc.
were usually borne by the company. Each of the sample retailer reported handling 2%
to 4% of vaccine while 3% to 6% of medicine market which indicates the retail market
is more competitive than the wholesale market in Shahjadpur.
Both the wholesaler and retailers tried to promote sales using various methods,
especially through credit sale and advertisement. All the wholesalers and retailers in
drugs market did price discrimination. Mode of payment, volume of purchase and
regular purchase was considered as bases for price discrimination by all the drugs
traders in Shahjadpur market.

61
6. Summary and Conclusions

6.1 Summary
Smallholder producers having 1-2 local cows giving 1-2 litters milk per day supply 70-
80% of milk output in the country. There are some milk sheds where crossbred cows
are reared for commercial milk production. The formal milk processing sector
comprising Milk Vita, BRAC dairy and a few other smaller dairy processing
enterprises handle about 15% of the national production of cow milk, collected mainly
from selected milk sheds, and the rest is handled by the informal sector. Because of
domestic supply shortage, import of mainly powdered milk constitute about 30% of
consumption. To overcome the constraints of smallholder milk producers participation
in milk market a variety of contractual and institutional arrangements are practiced in
the country but not much is known about how these arrangements work and with what
impacts on smallholder milk producers. This study was undertaken to provide empirical
evidence on marketing systems with a focus on contractual arrangements in milk
production and marketing so that future efforts to improve institutional arrangements,
encompassing organisations and rules and procedures, to link smallholders to urban
markets may benefit from them. The main objectives were to
Document the range and extent of contract farming and other organizational or
contracting arrangements used in smallholder dairy production and marketing in
Bangladesh;
Identify the factors that influence participation or non-participation in contracting
arrangements in dairy production and marketing;
Compare the production and marketing costs and net income of dairy farming under
independent and the identified contracting arrangements for production and
marketing;
Compare income of participants and non-participants in identified contracting
arrangements;
Analyze determinants of cost per unit output and net income under independent and
identified forms of contracts;
Analyze the structure and conduct of the feeds, drugs and equipment markets
serving the dairy sector.

To identify the different forms of contract prevailing in milk production and marketing,
milk producers were classified as commercial dairy farmers, non- commercial dairy
farmers, independent dairy farmers and contractual dairy farmers. Given the
predominance of Milk Vita and BRAC dairies, field studies were conducted in areas
where they operate in order to compare contractual arrangements they practice with
dairy producers and traders. For analysis of input marketing arrangements, AI service
providers, feed retailers and wholesalers, and drug retailers and wholesalers were
surveyed in the same districts where producer samples were surveyed. Where large
numbers of actors were not available in a category, some case studies were conducted
to get an understanding of that enterprise or trader category.

62
6.1.1 Typology of contract arrangements for production and marketing of milk
In order to identify existing contract arrangements in production and marketing of milk,
a review of past studies showed that most of the milk is sold through informal channels
by small-scale producers and traders to local consumers and processors. The
smallholder producers in rural and peri-urban areas have less access to urban markets
due to their small volume of production and marketed surplus which does not justify
additional cost for travelling to urban markets. Traditional market channels that connect
rural areas with small or district towns to serve local consumers are relatively short.
Four types of contract arrangements were observed to be practiced by various formal
and informal milk marketing operators: (a) informal output marketing contract, (b)
formal production-marketing contract of Milk Vita with producers, (c) formal output
marketing contract of BRAC dairy with milk traders who subsequently contract with
milk producers, (d) formal production-marketing contract of Grameen/Community
Livestock and Dairy Development Project (CLDDP) with its member farmers. No
formal or informal contractual arrangement of the type usually found in contract
farming arrangements was found in input marketing.
Milk Vita is a milk producers cooperative which evolved over time out of two
different private milk processing enterprises and took its current shape following Indian
Amul dairy principles in the early 1970s. It is a vertically integrated enterprise having
milk collection, processing and distribution facilities. It procures milk from primary
milk producers societies and in recent years has also undertaken programmes to supply
concentrate feed, AI and veterinary services to improve output and productivity of its
members, and share risks and benefits. Any farmer willing and able to supply at least
100 litres of milk in 100 days in a given year may become a member of Milk Vita
cooperative society. The agreement is documented in writing and signed by the parties.
Milk Vita also has contract arrangements with Rickshaw Van Cooperative in Dhaka
city and distributors in different districts for delivery and distribution of processed
products (pasteurized milk, butter, ghee, ice cream) to retailers.

BRAC, the largest NGO in the country, established a dairy processing enterprise in
1998 under company law as a commercial entity. It is composed of a dairy processing
factory, about 70 small chilling centres, AI service facilities and feed manufacturing
mills. BRAC dairy collects milk through agents who are mostly traditional milk traders
from different parts of the country. A written deed is signed by both BRAC and the
agent for regular supply of milk, the volume may vary from one supplier to the other.
BRAC supplies milk cans to the agents for collection of milk and sometimes advances
money unofficially to assure regular supply of milk. An agent makes contract, often
informally, to collect milk from a number of farmers from their premises and supplies
to specific chilling centres of BRAC. Thus, there is no direct contract between the
BRAC and dairy farmers,. Feeds and AI services are provided by BRAC through input
retailers under different marketing arrangements which are not related to milk purchase
contract.
Grameen Motsho Foundation- a subsidiary of the Grameen Bank- started the project
financed by UNDP in 1998 with the purpose of providing micro-credit to groups of five
members to acquire livestock i.e. goat poultry, and cattle for fattening or milk
production as appropriate to increase income and family nutrition. Livestock credit
included a mandatory insurance policy to cover risk of disease and mortality and 2.5%
of the purchase value of stock was deducted from the approved credit as premium of

63
insurance. Training is imparted on better management of livestock, and access to feeds,
AI service and vet services are provided at cost. Based on apparently positive results of
the initial years of operation of the project, the scheme was expanded to include a
processing plant to make micronutrient fortified yoghurt for selling to poor people in
the locality to improve nutrition. This venture has been undertaken as a social business
with a grant underwritten by Danone, a multinational company, of France. This is
running at a pilot scale since late 2007 and has been dubbed as a social business. Efforts
are underway to raise capital through the stock market to multiply this enterprise in
wider geographical areas in the country though its financial prospect or viability is
unclear yet.

6.1.2 Factors influencing participation in commercial dairy and in contract

arrangement
Factors influencing the probability of participation in commercial dairy and in contract
arrangement were analyzed using probit models.
Most of the farmers in the country being small, they may have opportunities to increase
their income and alleviate poverty through market oriented dairy production. In the
study areas three broad types of farms were found: non-commercial dairy farms,
independent commercial dairy farms and dairy farms engaged in some contract
arrangements. The characteristics of different types of farms were compared and
analysed to identify factors that differentiated them.
In general, other things remaining the same, probability of participation in commercial
dairy was significantly higher among households with better education of the head of
the household and among households having extra land for use as pasture. Most
smallholder farmers are mixed crop-livestock farmers who give priority to draft animals
required for crop production and keep one or two local cows for milk production and
herd replacement. Crop residues and by-products used as feed and priority is given to
draft animals. So the probability of commercial dairy production using improved breed
may increase if the land holding is adequate to set aside some land for pasture.

Among the commercial producers, there was a choice between remaining independent
and purchasing inputs and selling output at will in the market, or joining an enterprise
under some form of contract for supply of inputs and/or for selling output. Other things
being equal the probability of participating in some contract arrangement for production
and/or marketing (as opposed to remaining independent) was significantly higher
among households with larger labour supply, having access to credit and owning only
crossbred or a combination of local and crossbred cows rather than only local cows.
The probability of engaging in any contract arrangement was significantly lower in
Pabna district relative to Rangpur and Faridpur district. Labour supply at optimum
level allows taking care of more animals to produce larger quantities of milk, crossbred
cows also allow larger volume of production. Access to credit from any source may
facilitate larger dairy operation by easing cash constraint and that may be a motivation
to get into contract for selling output. It may be noted that not all farms who established
contract with Milk Vita or BRAC borrowed from these organization but got involved in
contract with them for selling output which indicate that those who entered into
contract with BRAC or Milk Vita did not do so hoping to obtain credit. On the other
hand, some farms who borrowed from other sources entered into contract with Milk
Vita or BRAC to sell the expanded output.

64
Pabna district has a longer history of market oriented dairy production where a good
marketing network has developed over the years so the need or motivation for getting
into contract may be less there compared to other places where remunerative market
access may be a problem, hence motivation for getting into contract to overcome that
problem may be higher

Among the commercial dairy farms that entered into contractual agreement, there was a
choice between Milk Vita and BRAC. The other option, Grameen dairy, was not
available in the areas surveyed for this study. Other things being equal, the probability
of getting involved in formal dairy contract business with Milk Vita rather than indirect
contract with BRAC through milk traders was significantly higher among farms with
older household heads, higher business/remittance income, and larger number of non-
dairy stock of animals, and significantly lower among farms with access to credit. The
age effect can be explained by the fact that Milk Vita has been in the field for a much
longer period than BRAC and older farmers might have developed a better rapport or
understanding about Milk Vita than the more recent operations of BRAC. Higher non-
farm income from business/remittance may allow to enlarge the size of the dairy
enterprise and output for which Milk Vita may be considered a batter outlet. It has been
found that more solvent farmers with larger output are preferred by Milk Vita for
delivery of milk to reduce transaction costs while BRAC apparently has a pro-poor
policy which should make it more accessible to smaller producers. The negative effect
of credit for contract with Milk Vita may be explained by the fact that access to
informal credit from traditional milk traders or other sources such as BRAC limit a
farms option to make contract with Milk Vita. The probability of getting into contract
with Milk Vita is significantly lower in Pabna district compare to Rangpur and
Faridpur. Although Pabna district is one of the earliest operational areas for Milk Vita,
entry of BRAC in the same areas has created a competitive environment, and the less
formal contract arrangement of BRAC may be more attractive to producers than the
more formal procedure of Milk Vita, so farmers are probably moving away from Milk
Vita or at least new entrants in the contract market are joining BRAC rather than Milk
Vita.

6.1.3 Performance of commercial dairy enterprises and dairy input traders

Since average unit prices for milk received by different types of farms were not
significantly different, enterprise budgeting and stochastic frontier production function
approaches were used to compare performance of three farm types- independent, Milk
Vita and BRAC contracts. These three also represented differential access to key inputs
and services- feeds, veterinary services and AI at different prices, hence had the
potential to influence extent of use of these inputs and their impact on production
efficiency..

Independent, BRAC and Milk Vita farms respectively earned net return (return over all
fixed and variable costs except unpaid family labour) per 100 litres of milk in the ratio
of 1: 2.7: 3.9 . Net return per person day of family labour employed in dairy averaged
Tk 267 overall and Tk 191, 267 and 407 respectively for independent, BRAC and Milk
Vita farms, giving a ratio of 1: 1.4 : 3.1. These return rates are significantly higher than
prevailing wage rates for daily labour in the study areas, so it seems dairy is a
remunerative business. The best performance of Milk Vita farms in terms of return per

65
unit of milk and per day of family labour employed can be explained primarily by the
differences in their level and structure of cost and level of return. Average return
comprising value of milk and prorated value of dung and changes in the value of herd
inventory of independent farms was 13% and 29% higher than milk Vita and BRAC
farms respectively but total cost of independent farms was about twice the cost of Milk
Vita and BRAC farms. Feed cost of independent farms was about 50% higher and
labour cost about three times higher than the other two groups. Lower milk yield per
cow of independent farms meant that the costs were spread over a lower level of output
compared to the other two groups of farms. Milk Vita farms which reared cross-bred
cows incurred a significantly higher proportion of their costs on feeds, especially
protein feeds and veterinary drugs and services, which made more direct contribution to
milk yield and output, and enhanced economic returns.
Average technical production efficiency of the entire sample was 35% which was quite
low but seems plausible given the heterogeneity of the farms, their resources,
composition of the dairy enterprise and the level and quality of inputs used. Among
production factors, over use of roughage feeds apparently ha a negative effect on
productivity but higher proportion of protein feeds in the ration had significant positive
effect on productivity. Labour input use also seems to be at a level where marginal
productivity is almost zero implying that further scope for productive use of labour
with currently available and used technology is rather limited. There are significant
regional differences in production efficiency with Faridput-Madaripur district having
the lowest efficiency and Pabna district the highest.
Distribution of farms according to level of technical efficiency suggest that most low
efficient farms belong to the independent group while most efficient ones have contract
withy BRAC and also with Milk Vita to some extent. Differential access to feeds, vet
service and AI at differential prices by these three farm types explain these differences.
In traditional contract farming arrangements, input supply by contractors or integrators
is an essential element of the contract. The formal and informal contract arrangements
of milk collectors - Milk Vita, BRAC and Grameen, input supply is either unrelated to
the milk purchase contract or is loosely connected to milk purchase contract. Yet the
evidence shown above suggest that without regular access to better quality inputs
productivity improvement to supply quality milk to processing plants will remain
problematic. Overall productivity improvement in the country irrespective of market
channels used will also remain a constraint.
Structure and performance of input traders was analysed to see if they are serving the
dairy producers at reasonable price and cost. Manufactured commercial feed is rarely
available in the market. Milling by-products of various kinds rice bran, oil cakes,
pulse bran are used as animal feed and most commercial dairy farms combine these
ingredients according to their liking based on experience as there is no standard
recommendation ration based on combination of ingredients. Consequently quality and
optimal quantity of protein feed use is not always guaranteed. Structure, conduct and
performance of the markets for various feed ingredients also vary widely. These
markets are poorly organised and operated though there was no hard evidence of lack
of competition in these markets. Similar was the situation with veterinary drugs
markets.

AI service is provided by the DLS and BRAC nation wide and by Milk Vita to its
members in its milk collection areas. There are also other organizations providing AI
services in small specific areas. There are differences among the service providers in

66
the choice of breeds of animals used for AI, the mode of delivery of the service (e.g.
served at station by DLS and Milk Vita and at farmers premises by BRAC), and basic
and repeat service fees charged.

6.2 Conclusions and implication of the findings

Smallholders in Bangladesh produce about 80% of the milk output, relatively larger
farms produce the rest. Utilization of milk can be broadly divided into four segments:
home consumption by producers (raw and/or processed product), raw milk sales to
consumers directly or through various intermediaries, raw milk sales to traditional
processors (who make sweets and curd) directly or through intermediaries, and raw
milk sales to formal sector processors. But the formal processing sector handles only
15% of total output, traditional processing for sweets and curd handle a small share and
the remainder is marketed as raw milk or consumed by producers themselves. Also 30%
of total consumption is imported, a large part of which takes place in the urban areas.
Therefore, developing appropriate institutional arrangements including producer
groups, cooperatives, or other vertically integrated enterprises to link large number of
smallholders to the urban market has the potential to meet a larger share of domestic
demand from domestic production thereby reduce dependence on import, moderate
overall domestic consumer price yet give adequate incentive price to smallholders to
increase production and income and improve their livelihood. The analysis in this study
shows that the formal dairy processing sector comprising Milk Vita, BRAC and few
other dairies have developed some contractual and institutional arrangement with
producers and traditional milk traders to collect, process and distribute milk. But none
of the contract arrangement can be described as contract farming per se though they
provide assured market access, a reasonable price and direct or indirect access outside
output purchase contracts to some concentrate feed and AI services for improving
productivity. Dairy farms in Bangladesh are generally small, les than 5% of the farms
have more then 5 dairy cows, so there is limited choice among processors to
discriminate among sizes of farms for milk collection. Yet within this seemingly
egalitarian farm structure, opportunities for smaller producers to participate in contract
arrangements with processors is not equal or guaranteed by all contractor enterprises as
there is a tendency among some processors to give preference to slightly larger
producers where possible to minimize transaction costs of collection. This situation can
be improved provided small producers organize themselves into some kind of small
collective or group to aggregate input purchase and output sale and derive adequate
economies scale, which will also increase their competitiveness with larger producers.
Moreover, the collective or group action will also give them an opportunity to exercise
their real power to influence policy and practice of the processing enterprises private
or cooperative or public. Public policy should help increase awareness among small
producers about the possibilities of remunerative market access through collective or
group action and at the same time take regulatory measures to provide incentive and
encouragement to processing enterprises to ensure that they create an environment for
wider participation of small producers in their business activities.
The capacity and coverage of existing enterprises is fairly small in relation to the
number of potential milk producers in the country able to supply milk. They also
operate and compete in selected areas of the country where commercial dairy
production is more prevalent due to past government efforts as well as better
infrastructure. Only recently some enterprises have started extending market
infrastructure to more distant areas. However, the marketing and contract arrangements

67
of these enterprises are more oriented towards meeting short term goals of the
enterprises to maximize milk collection to meet current market demand and not
adequately oriented towards creating capacities for long term development of the dairy
industry. The small size and poor organisation of the formal sector dairy is also not
conducive for transmission of any benefit from international or domestic urban
consumer price increase to producers to give them incentive to make long term
investment in dairy. Price controls and other measures to benefit urban consumers will
also have long term negative consequences for the dairy sector growth, so the
processing industry has a role not to fall in the trap of offering low producer price to
earn short term profit rather play a more positive role in transmitting price incentives to
producers for longer term benefit of the industry as a whole.
Milk collection programmes need to be linked or coordinated with input supply
programmes more effectively in order to improve productivity for sustained increase in
milk supply. Theoretically Milk Vita is owned by its members but practically they have
very little say in its management as government bureaucracy routinely interferes in its
management and major policy decisions related to manpower recruitment, localtion of
new chilling plants and pricing policy. Unless Milk Vita is run as a business enterprise,
it will fail to achieve its goal of serving and benefiting smallholder producers and poor
urban consumers and also fail to exploit the potential of the dairy sector in the country.
Milk Vitas tendency to give preference to larger producers to minimise transaction
costs is also contrary to its original mission and goal. BRAC is still giving preference to
smaller producers in line with its poverty alleviation goal but absence of direct link
between BRAC and producers and use of traditional milk traders as buying agents may
ensure business efficiency but has the potential to keep producers vulnerable to the
exploitation of such agents once the purchase network is extended widely when close
supervision may be difficult.

Among the inputs and services provided AI has a long term consequence for
development of the dairy sector. However, the principal problem is lack of a breeding
policy for long term improvement of breeds, lack of coordination among the alternative
service providers to achieve a national breeding goal through proper recording and
cumulative improvement. All the service providers are engaged in short term goal of
providing breeding service to ensure fertility of cows and supply of milk for their
processing plants without any regard for the long term consequences of such
programmes on the genetic make up of the national herd. In this case, strong self
regulation by each service provider may be helpful under the current policy vacuum
provided the breed choices and dissemination strategies are based on scientific
evidence. But ultimately, such a major policy domain and an issue of long term
consequence has to be guided by appropriate public policy and regulations and cant be
left to the self regulation of the parties whose primary goal is short term profit
maximization.

Feed is a major constraint for dairy development. There is a need to study the reasons
for poor development of the feed markets and find ways to overcome this constraint. It
will also be necessary to understand producers behaviour regarding the use of feeding
ingredients of concentrate feeds rather than manufactured feed. If feed quality is to be
assured for milk quality and higher productivity, there is no alternative but to
standardize feed formulation of commercially produced feeds. Though much research
has been conducted on various feed technologies, not much of that has been packaged
in usable form for manufacturers and producers. The gap between science and

68
application needs to be filled urgently. Moreover, it is not clear if feed technology
research has taken into account the fact that land scarcity is a problem in the country.
Unless feed technologies suitable for land scarce situations are available, chances of
their adoption and use will remain bleak irrespective of the marketing arrangements
developed.

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Appendix 1: Chilling Centres of BRAC in Bangladesh

No. Distance Capacity/ day Year of

Location (Thana)
of from Gazipur (Litre) establishment
plant (Km)
Shahjadpur 1998
1 130 6000
Shanthia 2001
4 120 3000
Faridpur,Pabna 2000
1 150 10000
Bhangura 1998
2 140 8000
Chatmohur 2004
1 150 2000
Gurudaspur 2003
1 180 1500
Salanga 2006
1 210 1000
Raygonj 2007
1 200 2000
Bera 1999
2 150 2000
1998
1000
Sujanagr 1998
1 165 2000
Ataikola 1998
1 150 3000
Pabna sadar 2004
1 170 1500
Shaturia, 1998
1 80 2000
Kumarkhali 2004
2 250 3000
Daulatpur 2006
1 270 2000
Pangsha 2006
1 200 1000
Jessore sadar 2 270 1000 2007
Magura sadar 2005
1 177 1000
Sailkupa 2005
1 250 1000
Kaliganj 2005
1 285 2000
Mahespur, Jhinaidah 2005
1 350 2000
Alamdanga 2006
1 250 2000
Damurhua, 2006
1 250 2000
Kolaroa 2006
1 310 2000
Sharsha 2005
1 310 2000
Jikorgasa 2005
1 270 3000
Monirampur 2006
1 270 2000
Bagerhat Sadar 2006
1 300 2000
Thakurgaon sadar 2002
1 440 2000

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 Appendix 1: Chilling Centres of BRAC in Bangladesh (Continued)

No. Distance of Capacity/ day Year of

Location (Thana)
of chilling (Litre) establishment
plant centre from
Gajipur (Km)
Birganj 2001
1 420 2000
Bochaganj 2001
1 420 2000
Birampur 2001
1 350 2000
Goraghat 1 350 2000 2007
Shibgonj, Chapai 1 350 2000 2007
Nachol
1 300 2000 2007
Sadullapur 1 325 2000 2006
Sagata 1 300 2000 2006
Razarhat
1 290 1000 2005
Hatibandha 1 380 1000 2006
Dimla 1 420 1000 2005
Jaldhaka 1 450 1000 2005
Nilphamari sadar 1 320 2000 2005
Pirganj, Rangpur 1 380 1000 2000
Parbattipur 1 350 2000 2007
Chirirbandar 1 300 2000 2002
Ranisankil 1 280 2000 2005
Panchbibi 1 270 4000 2000
Kalai 1 240 2000 2000
Shibgonj,Bogra 1 350 2000 2000
Kahalu 1 350 2500 2004
Manda 1 300 2000 2006
Patnitala 1 350 3000 2004
Singra 1 150 2000 2006
Lalpur 1 300 3000 2004
Ulipur 1 470 1050 2005
Source: Information is collected over telephone from operator in charge of the plant.

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