Fixing the dairy value chain

Pakistan produces more than 59.7 billion tons of milk annually, implying an annual market size of more than US$ 34 billion, mostly in the informal segment. Packaged milk makes up only 9 percent of total milk consumption in the country. Loose milk is not only exposed to the risk of potential adulteration through mixture of various additives, but may also not have the requisite nutritional content, as one would expect from pure milk.

Despite being among the larger producers of milk in the world, Pakistan has a malnutrition crisis. This is not a production problem, this is a distribution problem. Absence of quality standards for more than 90 percent of the market, fragmented nature of industry, and high cost of doing business, it is not possible to ensure availability of affordable milk. Inadequate caloric intake has far more serious socioeconomic consequences, much greater than loss of any short-term tax revenues.

Wastage is also a perennial issue. It is estimated that roughly 20 percent of loose milk is simply wasted due to absence of refrigerated storage and distribution facilities. This is roughly 9.6 million tons of milk, which can provide nutrition to more than 38 million children on a daily basis, if not wasted. In absence of wastage, overall retail price also goes down. Just plugging the leakages can yield enormous socioeconomic benefits.

It is estimated that almost three-fourth of loose milk that is sold in the country is not fit for human consumption, signifying importance of having base-level quality parameters in place which can be done through a minimum pasteurization law. However, as the industry is fragmented with almost 70 percent of livestock owners having two to three animals, enabling pasteurization on scale would require establishment of cooperatives across the rural and urban landscape of the country. Through such cooperatives, it will be possible to invest in infrastructure to pasteurize on scale, which can be done through concessional financing schemes targeting the dairy segment. The impact of such an intervention would be net-positive, resulting in higher farmer incomes, and better nutrition

On the supply front, milk yield is per animal has significant room for improvement. Similarly, absence of scale further compounds problems increasing overall cost of production, thereby resulting in an eventual increase in retail price, making it unaffordable. A lopsided tax structure which heavily taxes formal packaged segment while turning a blind eye to the informal segment further discourages development of a more formal supply chain network for milk production and distribution.

The focus needs to be on increasing the size of the pie over the mid-to-long run rather than stunting growth of formal sector to meet short-term taxation targets. It is estimated that even a 1 percent increase in market share of packaged milk has a multiplier effect of more than PKR 40 billion to the rural economy, supporting creation of more than 2,500 direct jobs. Expansion of the pie generates more taxes in the long-run, far outweighing any short-term tax collections.

The calculus is simple. Expansion of market share of packaged milk will have a multi-pronged effect. It will formalize a largely informal segment of the economy, increase labour force participation, enhance financial inclusion, improve yields and incomes for the farmer, ensure quality and nutritional control, while also expanding tax base over the long run. At a time when rural incomes in real terms have declined, and unemployment is on the rise - catalysing growth of the packages milk segment is the economically efficient thing to do.

The livestock segment of the economy has lagged far behind, and there exists tremendous room for growth, and value addition. Encouraging growth of packaged, and pasteurized milk whether through zero-rating of industry, or through investment in infrastructure will all result in better social, and economic outcomes. Malnutrition is a national crisis, and so is anemic growth in the livestock and agricultural sector. It can only be through a fiscal stimulus, whether that is through direct investments in value added supply chain, or through incentivizing existing and new players to develop the dairy value chain through zero-rating of the sector – that it will be possible to extract high growth rates from the livestock segment. Just plugging the leakages and wastages can save enough milk to ensure availability of milk for millions of food insecure children in the country. Agriculture and livestock is the backbone of the economy, there can’t be no inclusive and sustainable growth without fixing the market structure of this critical sector of the economy

(The writer is a macroeconomist)

Copyright Business Recorder, 2021