EVOLUTION OF MILK PRODUCTION SYSTEMS IN TROPICAL LATIN AMERICA AND ITS INTERRELATIONSHIP WITH MARKETS:  AN ANALYSIS OF THE COLOMBIAN CASE 1

F. Holmann, L. Rivas,  J. Carulla, L. Giraldo, S. Guzman, M. Martinez, B. Rivera, A. Medina, and A. Farrow.  International Center for Tropical Agriculture (CIAT) and International Livestock Research Center (ILRI).  P. O. Box #6713, Cali, Colombia

1 Funded by the Systemwide Livestock Program (SLP) convened by ILRI.

 

ABSTRACT

Objectives were: (1) to quantify the effect of technological change on productivity, profitability, and competitiveness in milk production systems and regions in Colombia; (2) to analyze the evolution of these systems; and (3) to discuss market concentration and its impact on milk price formation.  Data came from a survey to 545 farms during 2000 to calculate variable costs, income, and to characterize farms by productivity and management practices using multiple correspondence and general linear models.  As herd size increased, milk and beef production costs decreased,  net incomes per cow increased, and  return to capital investment improved.  Adoption of improved grasses, investment in pasture divisions, and milking twice a day generated higher productivity and income and reduced production costs.  Best economic response to feed supplementation in lowland regions was with low quantities of concentrates while in highland regions was with moderate amounts.   Fertilization and irrigation increased productivity but reduced net income and increased costs.     Farmer experience increased profits but not productivity.  Farms located near markets had higher productivity but were less profitable. Comparing farms during a 12-yr period,  production per hectare increased and unitary costs were reduced due to increases in stocking rates and investments in infrastructure and equipment.  However, net incomes droped  due to reductions in producer’s prices which were never translated in lower consumer prices, but remained in the hands of supermarkets and milk plants.  Collective action is required through cooperatives or associations, not only to buy or sell at better prices, but also to help small producers to adapt to new patterns with higher levels of competition.

 

KEYWORDS

Dairy, dual-purpose, technological change, profitability, competitiveness, markets.

 

INTRODUCTION

The livestock sector in tropical Latin America (LAC) has been one of the main economic activities within the agricultural sector due to a great extent to abundant areas under savannas appropriate for livestock production. Despite its vast forage resources, livestock production in tropical LAC faces acute problems due to low productivity levels and market changes.  In addition, internal discussion exists on the viability of these production systems to compete in a free trade economic environment, especially now that negotiations are under way to join the North American Free Trade Agreement (NAFTA).  The  aim of this document was to study the evolution of milk producing systems taking Colombia as a case study and to analyze their constraints and opportunities in the context of small producers, technological change, and competitiveness of the regional livestock sector.

 

MATERIALS AND METHODS

Data came from a survey to 545 farms in five ecosystems during 2000 to calculate variable costs, income, and to characterize farms by productivity and management practices using multiple correspondence and general linear models.  Costs and incomes were estimated based on the methodology described in Holmann et al., (1990). Competitiveness was defined as the permanence capacity in the dairy activity and was measured through the unitary cost of milk and/or beef production. Thus, the lower the production cost, the more competitive the farm is. Profitability was defined as annual net income divided by the number of adult cows. Technological change was measured through the concept of productivity, expressed as production of milk and beef per cow and per hectare per year.   Twelve technologies and/or management practices were evaluated to quantify their impact on productivity, profitability, and competitiveness, which were: (1) proportion of improved pastures established on the farm; (2) number of grazing paddocks used by milking cows; (3) amount of feed supplements offered to milking cows; (4) reproductive system used; (5) breed group used; (6) number of milkings per day; (7) use of fertilization; (8)  use of the irrigation; (9) proportion of mature herd in milk;  (10)  years of experience producing milk; (11) herd size; and (12) de-worming frequency against both external and internal parasites.   Data was analyzed by production system (i.e., specialized dairy vs. dual-purpose) and by region (i.e., two sites in lowland areas: Caribbean and Piedmont; and three sites in highland areas: Coffee-growing area; Antioquia, and Cundiboyacense altiplanicie).

 

RESULTS AND DISCUSSION

Effect of technological change.  Depending on the region where farms were located, farmers that adopted more than two thirds of the area allocated to livestock under improved grasses produced 126% to 309% more milk/ha, had 31% to 350% higher net income/cow/yr, and produced milk at 8% to 13% lower cost than farms with a low proportion of improved forages (i.e., less than one third of livestock area).   Farms that had more than 20 grazing paddocks for a more efficient rotation of the milking herd produced 12 to 140% more milk/ha, generated 54% to 133% higher net income/cow/yr, and produced milk at 19% to 27% lower cost compared to farms that had less than 10 grazing paddocks. The use of strategic feed supplementation to the basal diet of forage had mixed effects. The best economic response to this supplementation in lowland regions was with low quantities (i.e., < 0.5 kg DM/cow/day) of feed supplements while in highland regions was with moderate quantities (i.e., between 0.5 and 2 kg DM/cow/day).  The use of fertilization and irrigation increased productivity, but reduced net income and increased production costs in all regions and production systems, except in the Cundiboyacense altiplanicie, which suggested the need to allocate research resources to determine the best economic response to various levels of N2 and H2O to different improved grasses under various soil types and conditions.   Farms that practiced twice a day milking produced 83% to 520% more milk/ha, generated 25% to 148% higher net income/cow/yr, and produced milk at 15% to 27% lower costs compared to farms that milked once per day.   Farms that de-wormed the milking herd with low frequency (i.e., less than twice/yr) for internal parasites obtained 77% to 128% higher incomes and 8% to 35% lower production costs in comparison with farms that de-wormed with higher frequency (i.e., more than 3 times/yr) although there were not differences in productivity. The amount of years of experience from farmers at producing milk was a key factor to increase profits (38% to 120%), although not productivity.   The most competitive and profitable breed group in the dual-purpose system was the crossbred with low (i.e. 24% European - 76% Zebu genes) and medium levels of dairy genes (55% European - 45% Zebu genes) but had lower productivity than the purebred group (i.e. 98% European genes).  In the specialized dairy system, the purebred group was slightly more profitable, productive and competitive than the crossbred group with medium level of dairy genes, but this difference was not significant.  Independent of production system or region where farms were located, the increase in competitiveness was in direct relationship with herd size. Thus, as herd size increased, production costs per unit of milk and beef decreased and net incomes per cow increased. However, when this increase in competitiveness with associated with increases in productivity, this trend was not observed, which suggested that highly productive farms were not necessarily profitable.   The dual-purpose system was the most profitable one in the Piedmont, Caribbean, and Coffee growing regions while in Antioquia and in the Cundiboyacense altiplanicie the most profitable was the specialized dairy system.  Thus, Colombia should have different strategies for research and technology transfer in order to exploit more efficiently the comparative advantages of each region.

 

Evolution of milk production systems.  The Colombian dairy sector has become more productive and competitive, but less profitable. Comparing the evolution of dairy farms with studies 12 years ago (Aldana, 1990), milk production per hectare has increased by 44% in dual-purpose herds and by 14% in specialized dairies. This increase in productivity reduced the milk production cost  by 16% and 10% in dual-purpose and specialized dairies, respectively,  due to an increase in stocking rate by 15% and 17% in dual-purpose and specialized dairies as well as to an increase in investment in infrastructure and equipment by 258% and 37% in dual-purpose and specialized dairies, respectively.  However, net income per hectare during this period decreased by 27% and 69% in dual-purpose and specialized dairies  due to a reduction in the producer’s price of milk and beef of 22% and 20% in dual-purpose systems, and of 41% and 27% in specialized dairies.  Nevertheless, this reduction in price to the producer was never translated in lower prices to consumers, but remained in the hands of supermarkets and milk plants which expanded and modernized with long-life technology. Figure 1 shows the percentage of the price paid for one liter of milk by the consumer that is retained by producers. As observed, producers retained in 1989 about 70% of the final price. However, during the 90's this percentage was systematically reduced to only 37% in 2001.  This occurred because the adjustments in the price of milk to producers were always below inflation while the adjustments of milk price to consumers usually surpassed the level of inflation (Figure 2).  Development agencies must internalize the fact that policies oriented to  markets will be increasingly "oriented to supermarkets".   If one adds that in Colombia exists 3 or 4 supermarket chains that control the food retail market, the conclusion is that sectoral policies will need to learn how to deal with a handful of giant companies. This in a huge challenge, and demands an urgent review of ideas and strategies.

 

The Challenge.  The information presented in this case study illustrates the problems and opportunities of the dairy sector in Colombia.  However, these systems could represent similar situations in other countries of Latin America.  Given the phenomenon of globalization and higher degree of efficiency that these systems are being exposed to, the issues of productivity, technological change, competitiveness, and markets, are critical and of enormous relevance for the performance and survival of the livestock sector in the next decades.  In the coming years, producers cannot limit themselves to participate only in the primary phase of production, but to expand their scope of action to other phases of the market chain to have a higher participation in the formation of milk price and to capture a greater piece of the final price. To achieve this, collective action is required, either through cooperatives or associations, not only to buy or sell at a better price, but also to help small producers to adapt to new patterns with higher levels of competition.  Otherwise, the new rules of the game could induce a massive exodus of producers in the short term and in a relatively brief period of time.  Efficiency goes hand in hand with technology and this depends on research and technology transfer.  However, public funds allocated to agricultural and livestock research are being reduced (Holmann et al., 2003).  The challenge consists that producers in Colombia and Latin America take greater control of livestock research by building alliances with local, regional and international organizations leaders in forage and livestock research.  For this it is necessary that producers define and fund their own research agenda.

 

REFERENCES

HOLMANN, F., R. W. BLAKE, M. V. HAHN, R. BARKER, R. A. MILLIGAN, P. A. OLTENACU, and T. L. STANTON.  1990.  Comparative Profitability of Purebred and Crossbred Holstein Herds in Venezuela.  Journal of Dairy Science 73: 2190-2205.

 

HOLMANN, F., L. RIVAS, J. CARULLA, L. GIRALDO, S. GUZMAN, M. MARTINEZ, B. RIVERA, A. MEDINA, and A. FARROW.  2003.  Evolución de los sistemas de producción de leche en el trópico latinoamericano y su interrelación con los mercados:  Un análisis del caso Colombiano.  International Center for Tropical Agriculture (CIAT) and International Livestock Research Institute (ILRI). Working Document # 193.  Cali

 

ALDANA, C.  1990. Productividad y rentabilidad en sistemas de producción de leche en Colombia.  Coyuntura Agropecuaria Vol. 7, Número 2.  Bogotá.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1.  Proportion of the milk price paid by consumers that is retained by producers in Colombia during the period 1989 to 2001.

 

 

 

 

 


Figure 2.  Inflation rate and adjustments in the price of milk paid by consumers and received by producers

in Colombia during the period 1989 to 2001.