In an article that appeared in Business Recorder's columns on 15th February 2015 titled "Challenging Received Wisdom", your scribe had argued that if we wish to launch the country on a high economic growth trajectory like that of China and India, we will need a fundamental change in our national economic policies even if these upset our lenders of last resort, i.e. The World Bank and IMF. It was argued that we need to focus on the strengths of our national endowments of water, soil, and abundant sunshine to become an advanced agricultural powerhouse. Our model of growth should be New Zealand, the largest dairy products exporter in the world rather than Japan or South Korea which, lacking natural resources, chose the route of industrial technologies to generate large trade surpluses. Their disciplined and educated labour force enabled them to compete with the West in industries like automotives, electronics, and shipbuilding. The likes of Toyota, Honda, Samsung, and Hyundai are the outcome of years of methodical acquisition of technology and result-oriented R&D. We have neither the technically educated workforce nor world-class institutes of science to emulate their model of industrialization for export-led economic growth. We do, however, have plenty of "grunt-labour" which forms the backbone of our inward remittances, putting bread on the table for millions of households. Using this same grunt-labor we can break into the ranks of advanced dairy exporters. When managed as an organized industry, dairying will not only generate large exportable surpluses, but more crucially, it will absorb hundreds of thousands of our illiterate but physically able rural labour force feeding, washing and caring for high-yielding milking cows.
First, some background data to lend perspective to this discussion. As per FAOstat, the monetary "farm-gate" value of global cow and buffalo milk production of 680 billion liters for 2012 was worth USD 238 billion.
Ranking 4th behind India, USA, and China in terms of volume (but third in value because buffalo milk has a higher percentage of total solids), Pakistan's 37 billion liters of milk per annum was worth USD 12.9 billion, i.e. over 40% of all annual agri-produce and 9% of GDP . In terms of value addition, it exceeds that of our entire textiles sector. And yet, we do not have a single federal agency or ministry focused on this critical bedrock of our economy. Even at the provincial level, Punjab that accounts for 74% of all milk production, has no all powerful Provincial Dairy Ministry. It has sporadically flirted with setting up underfunded and irrelevant agencies such as the present Punjab Dairy Development Board that has to date achieved precious little. Its annual budget is smaller than what the Punjab Government plans to splurge on a controversial 7 kilometer signal free roadway in Lahore! So much for our economic development priorities. But, you must have guessed the reason for Governmental apathy. Milk animals are critical to livelihood of poorest sections of rural society. Their existential plight is a low priority and can be safely ignored by politicians.
Industry Issues
Because the issue is not deemed of overriding importance, misgivings about accurate data on all aspects of Dairy Industry in Pakistan abound. There are big question marks on the real numbers of milking animals, their composition (buffalos, cows, goats, camels, and sheep), per animal milk yield, percentage of output processed, sold, and the extent of transit losses due to spoilage. The relevant data in Pakistan Economic Survey is based on projections from an animal head-count reportedly conducted as far back as 1996. Even that dubious census was a guesstimate based on incomplete survey of selected districts. So, when we report to FAO that we have 37 million lactating cows and buffalos (as against 7.5 million animals in USA and half as many in New Zealand for instance), we derive annual milk output by multiplying a fictitious head-count of producing animals with an approximate average yield of 1000 litres of milk (or roughly 3 liters per day) per lactating animal per annum. i.e.
37,000,000 X 1,000 = 37,000,000,000 liters of milk per annum. Presto!
A farcical corroboration of the foregoing figure from the perspective of consumption is frequently trotted out. This concerns the assumed average 2 litres daily milk consumption per family. There being roughly 40 million families in our 200 million strong nation (both dubious assumptions), and with an assumed 25% loss due to calf-feeding and spoilage (again unsubstantiated assumptions), the experts at Federal Bureau of statistics ostensibly derive the country's annual milk consumption as follows:
40,000,000 x 2 X 1.25 X 365 = 36,500,000,000 liters of milk per annum. Superb confirmation of the earlier output figure, don't you think?
But jokes aside, it does anecdotally point to an often overlooked aspect of our vaunted position as the 4th largest milk producing nation, i.e., we do not have enough surplus milk for industrial processing into value added products! The data from other nations is much more reliable. We know that annual milk output in USA in 2012 (again as per FAOstats) was 91 billion liters and that of New Zealand 20 billion liters. Dividing these by precisely documented populations of their milking animals, we can confirm that an average American cow produces over 12,000 liters of milk per 305 days' lactation cycle while the New Zealand animal's output is roughly half as much (the difference being accounted for by the simple fact that most New Zealand animals are range-grazed and not fed processed rich diets as are most stall-fed cows of the dairies in USA).
The wrong animal
Our dairy sector is afflicted by some basic whammies. First, and foremost, is that historically our predominant milk animal has been the buffalo. When healthy, the best of these half ton beasts can consume upto 50 kilos of fodder to barely yield 5 liters of milk per day. Compare this to American Holstein cows that average 35 liters of milk for the same volume of feed (though consisting of silage and high protein additives). I.e. they are 7 times more efficient than our buffaloes in converting feed into milk. This feed to milk ratio is even better for the famous AFS (Australian-Friesian-Sahiwal) breed currently being imported by scores of progressive farmers for a paltry PKR 350,000 per animal. These compact animals that have been genetically improved over the past 50 years for milk yield, resistance to disease, and for ability to withstand extreme temperatures weigh half as much as our monstrous buffaloes; consume half the amount of feed, and yield 4 times as much milk as our best black behemoths maintained as standard milk animals by poor small-holding farmers and landless peasants.
And yet, despite success of several private farms using AFS and other cross-bred animals to multiply milk yield, there has been no Government designed or supported initiative to progressively replace our buffalo population with high-yielding cows mentioned above. Even if 15% of the country's 25 million buffaloes can be replaced by imported AFS cows; and if these can be housed and stall-fed in small well managed farms, they can easily add as much milk to the country's total output as all of New Zealand's production...taking Pakistan's total production to 60 billion liters, overtaking China in third place. There is no reason why this goal cannot be achieved in under 10 years with a well understood plan of action implemented by trained professionals.
More importantly, were we to do so, a bulk of the incremental high quality milk can all be processed into value added products like cheese, creams, yogurt drinks, and baby foods for local consumption as well as for export. New Zealand's Fonterra, the largest milk processor in the world accounts for nearly all of New Zealand's dairy exports of over USD 6 billion per annum! There is no reason why Pakistan, blessed as it is with abundant water, soil, sunshine, and cheap labor, cannot develop into a similar dairy processing powerhouse. In fact, once the capital infrastructure of modern dairying is in place, with its low labor costs, Pakistan can easily out-compete the likes of New Zealand and Australia.
The foregoing brings to mind a historical anecdote from 1997 when your scribe, in his capacity as Chairman of Pakistan Dairy Association, took a delegation to India upon the invitation of the late Dr Kurien, the colossus of India's milk miracle. He informed our delegation that before partition, what is now India, was so short of milk that milk trains used to run all the way from Lahore to Delhi and Bombay! In fact, when I informed him that our milk processing plants found it difficult to procure enough milk throughout the year, he jokingly offered to send milk trains from India to Pakistan! What a case study of thoughtful planning in India Vs. mindless neglect in Pakistan.
Looming Supply Deficit
Let us look at our current milk collection and processing infrastructure. First, we do not have many scientifically designed dairies to house thousands of high-yielding animals, staffed by knowledgeable dairy experts, with access to high quality "Silage" feed (mulched unripe maize dehydrated to a state of 35% dry matter) and additives, on site veterinarians, and automatic milking parlors with instant chilling facilities. In all of Punjab today, less than 150,000 liters of milk a day is procured by milking plants from such modern dairies. Of course, 10 years ago, even these did not exist. The result is that 90% of the milk collected by the handful of operative processing plants (Nestle, Engro, Haleeb, Shakarganj, etc) comes from milk collection centers set up by them in what is known as the "Milk Shed"...irrigated agricultural land between Indus and Chenab ranging from Gujrat in the North to Sadiqabad in the south. Small farmers and "Dodhis" (milkmen) bring their surplus milk to these collection centers where it is chilled before being transported to processing plants. Unfortunately, the transit time between milking and final reception at processing plants is often more than 12 hours. By that time, milk quality has already deteriorated significantly. Globally, raw milk is deemed fit for processing when its "bacterial load" denoted by TPC (total plate count) is under 100,000 per CC (cubic centimeter). From personal experience of running Haleeb Foods as its MD for several years, I can vouch that the average quality of milk received by processing plants has a bacterial count in excess of five million per CC. Such milk is unfit for conversion into quality products like yogurt, cheese, and baby foods. The processing plants, therefore, have limited choice. They either convert it into powder or long-life (UHT) milk for urban consumers. Availability of milk in general is also erratic. During cooler months (November thru April), the so-called "Flush Season", with abundant green fodder, animals yield twice the volume of milk as they do in the rest of the year. This whammy of "Feast" and "Famine" in milk availability needs to be ironed out so that dairy processors can run plants efficiently 365 days a year. If not, they will remain hostage to seasonal processing like our sugar industry that only runs for an average 120 days in a year.
Twenty years ago, when global farmgate milk price was 25 US Cents per liter, the equivalent price in Pakistan was PKR 9 or roughly 20 US Cents. I.e., milk was cheaper in Pakistan than elsewhere. Today, the global average price is 45 US Cents per liter. Against this, the farmgate price in Pakistan is PKR 55, or US Cents 55 per liter. In other words, for the first time in history, Pakistan's fresh milk is over 20% more expensive than its average global price. In fact, progressive farmers possessing large herds of high yielding imported animals are being offered as much as PKR 60-65 per liter of milk by desperate processing plants like Nestle and Engro Foods. UHT long life milk that retailed for PKR 16 per liter twenty years ago, now sells for PKR 110 per liter, a compound annual growth of over 10% for past 20 years! Though we have not yet realized it, the country is looking at a widening fresh milk supply deficit...the result of decades of neglect of this vital sector where demand growth as reflected in steep price increases has swamped the meager 3% per annum growth in milk output...largely accounted for by growing animal herds rather than milk yield per animal. A glaring evidence of this is the phenomenal growth in demand for dairy whiteners in preference to milk. People can no longer afford fresh milk for tea. Whiteners like "Tarang", "Tea Max", and "Every Day" are much more economical. And why is that? Simply because the recipes of these whiteners contain nothing but 90 grams of cheap imported SMP (Skimmed Milk Powder) and 20 grams of sugar per liter of resulting concoction that sells for PKR 70 per liter! All the dairy processing plants in the country are busy manufacturing this white chemical liquid for use in tea! Thus, with abysmally low 30% import tariff on subsidized SMP, our Government is actively destroying its own dairy sector.
Structured Subsidization
Although annual global fresh milk production of cows and buffaloes in 2012 was worth USD 238 billion, less than 60% of it was processed into non-liquid products for sale, primarily butter, cheese, and milk powders as shown below. More significantly, only a third, USD 45 billion worth, of this production is exported. And who are these exporters? They are a tightly knit oligopoly of four...ECC countries (60%), New Zealand (13%), USA (6%), and Australia (4%). Surprisingly, other than USA, none of the top 6 milk producing countries of the world noted above figure anywhere in this list of exporters. As we shall note below, there are good reasons for this lopsided global trade in dairy products.
We observe that USA and ECC taken together account for 2/3rd of global dairy product exports. Their ability to do so is based on heavy subsidization of their dairy industries. A measure of this often quoted in WTO forums is that these exporters, on average, spend USD 2 per animal per day in terms of cash and farmgate product price supports to their dairy farmers. And, whereas, New Zealand and Australia have ceased subsidizing their dairy sectors (New Zealand in 1984 and Australia in 1990), for the previous half a century, they too had injected billions of dollars to develop what are today the most capital intensive and efficient dairy countries in the world. Ironically, both of them are now held up as examples by Washington based lending agencies and WTO mandarins to deter developing countries from subsidizing their ill-equipped sectors. It is the same "Free Trade" argument that the airline manufacturing duopoly of Boeing and Airbus now espouse to prevent other countries from subsidizing their manufacturers of aircraft. History demonstrates that both Boeing and Airbus were patronized and heavily subsidized by their governments over several decades to reach their present state of lowest cost capital intensive manufacturing. However, emerging giants of the dairy industry, namely India and China, are not buying such arguments. They are aggressively developing their dairy sectors with tariff protections and direct subsidies.
I'll hazard a guess. Twenty years down the road, not only will India and China be the largest milk producers in the world, their dairy processing industries will have swamped the four current leaders noted above. Unfortunately, Pakistan's government is oblivious to the need for such dire initiatives, even though it can easily beat both India and China handily because of superior natural resources.
Action Plan:
As of this writing, international price of SMP is USD 2,200 per ton. Its landed cost with 30% duty is a meager USD 2,860 per ton. With sales tax and inland transport included, its maximum cost to our friendly Jauria Bazaar trader is no more than USD 3,000 or PKR 300,000 per ton. Based on 130 grams of solids per liter of milk, this equates to PKR 39 per liter for imported milk! Obviously, the in-country milk powder plant operators like Nestle and Engro Foods cannot compete because fresh milk, which is their raw material, costs them PKR 55-60 per liter. Hence, even if they could procure enough milk for processing, their powder towers stand idle. They have no choice but to use cheap imported SMP for their largest segment of "dairy whiteners" while using high priced local fresh milk to produce limited quantities of UHT and Pasteurized milk for their upscale urban customers who happily pay PKR 110-120 per liter.
The dismal state of our dairy sector described above calls for immediate remedial action. Some suggestions, with appropriate timeframes are enumerated below:
Immediate
Anti-dumping: To address the issue of milk powder dumping by above-mentioned exporters club needs urgent revision of import tariffs. Landed price of these powders must exceed an equivalent local fresh milk price of PKR 60 per liter...the price dairy milk processors pay for the best quality milk from organized dairy farms. In view of calculations noted above, an increase of the basic duty slab from 30% to 75% is critical for survival of our dairy processing industry.
Processing Incentive: To encourage the processing industry its cost of milk needs to be brought down without hurting poor farmers who bring their surplus milk to the collection centers of these dairy processors. In fact, they need to be encouraged to sell milk to these collection centers rather than to "Dodhis" who transport the raw milk, often diluted and adulterated, to households in urban centers. Keeping in mind that dairy subsidies in the largest dairy exporting market, the EEC, are roughly equivalent to PKR 20 per liter of milk, it is suggested that the measure of this subsidy be used as benchmark for state subsidy for each liter of high quality milk (defined as milk of TPC count under 300,000) received by processing plants. Since milk reception at processing plants is automated and electronically recorded, the disbursement of subsidy should be relatively easy and free of fraudulent manipulation. Given that barely 150-200 thousand liters a day of such milk is currently being processed, the initial processing subsidy will not exceed PKR 3-4 million a day, or PKR 1.2-1.5 billion per annum. The sole purpose of this "quality premium" for milk supplied to processors is to gradually expand value addition in the range of dairy products. It will encourage progressive farmers to increase their herds of high-yielding cows thereby lifting the overall high quality milk availability to over 5 million liters per day within 2-3 years...inducing processors to expand capacities in tandem, and in a repeating loop encourage farmers to further expand their herds of high yielding AFS and cross-bred cows.
Lowering feed costs: The preponderant structure of dairying in Pakistan is based on surplus milk sold by the poorest farmers and landless peasants for whom their often sickly and underfed animals provide supplementary cash income. Farms with herds larger than 20 animals do not account for more than 10% of fresh milk brought to market. Our archetypical village widow with 2 buffaloes and a scrawny cow cannot afford sufficient fodder and oilseed cake for her animals to achieve yields better than 2-3 liters per animal. More often than not, she lets her animals graze in fallow fields and along the edges of water courses during the day and throws them a few kilos of wheat straw and a handful of green fodder bought from landed farmers in the evenings. This model needs urgent modification. The worldwide norm in serious dairying countries is for animals to be stall-fed with a protein rich "silage" equivalent to 10% of body weight. This can easily double milk output per animal. However, since these peasants cannot afford silage that costs PKR 6-7 per kilo, it needs to be subsidized to an extent of 50% at least. In India, village cooperatives directly perform this task for its members who daily trade surplus milk for high quality silage, vitamins, minerals and concentrates, taking the rest in cash. There is no reason such schemes cannot be implemented in Pakistan through the "collection centers" set up and managed by several dairy processors. This function can be tied into the above mentioned "quality premium" subsidy provided to farmers through the dairies. I.e., the two activities can be clubbed for participating dairy processors.
Medium Term:
Improving Herd Composition: Reliance on buffaloes as our primary milk animals, as mentioned above, is the weakest link in our dairy chain. It is imperative that we take proactive steps to change this picture. Of course, we cannot overnight replace all 25 million odd animals into high yielding cows. But, a beginning must be made. Business Recorder scribe suggests that the Punjab Dairy and Development Board and its counterpart in Sindh be tasked with replacing low-yielding buffaloes (those with average milk yield under 5 liters per day) with imported AFS cows from Australia. The medium term goal should be to replace at least half a million animals per annum for the next 5 years. Both governments should import these cows and swap them for buffaloes, slaughtering the latter for meat. I'm sure the recipient poor farmers and landless peasants would be only too happy to make the switch. And to make sure the imported animals are well cared for, these farmers should be trained and taught to care for their new animals and to feed them high quality subsidized silage as noted above. Efficient management of this programme can ensure an annual increase of 1.5 billion liters of high quality fresh milk...over 7.5 billion liters in 5 years. The annual herd replacement subsidy will amount to PKR 175 billion. However, it is not a steep price to pay as it will add PKR 90 billion worth of fresh milk to the economy, an investment payback of under two years for each year's investment in cows. It would be a steal for the overall economy in general and dairying in particular. By the way, this calculation does not account for the huge savings in feed costs as an AFS cow has an efficiency of feed to milk conversion that is 8 times greater than a buffalo.
Long Term:
Developing the Dairy Processing Industry: The mandarins at our Federal Bureau of Statistics would have us believe that the Federal Government provides nearly PKR 100 billion (0.43% of GDP) per annum in various subsidies (electricity, diesel, water, and fertilizers) to our agricultural sector that contributes 21% to our GDP and accounts for 44% of employment. In China, agriculture accounts for only 10% of GDP and 35% of employment. However, its agriculture subsidies total 3.8 trillion Yuan (1% of GDP)...nearly two and a half times the comparative level in Pakistan. What is more, The Central Bank of China mandates 22% of bank lending for agriculture. In Pakistan, last year SBP was hard put to marshal our reluctant lenders to extend PKR 230 billion for agriculture... a shade over 6% of total banking industry credit, or nearly a quarter the level of China's support for its agriculture. China has invested heavily in imported cow herds and large scale dairy processing plants that convert the bulk of the country's 40 billion liters of milk per annum into value added products like yogurts, cheeses, and baby foods. Several of these products are now being imported into Pakistan. In India, subsidization of agriculture is of similar magnitude and runs to IR 3 trillion per annum (PKR 5 trillion). Since the Indian economy is 10 times in size as compared to Pakistan's, our matching state subsidy to this sector should be at least PKR 450-500 billion...i.e., four times the current level. Failing that, I fear that in a couple of decades our vaunted dairy prowess and potential will only be a footnote in history.
For the long haul, therefore, we need to target subsidization in an intelligent and focused manner. Other than the immediate and medium term initiatives identified above, we need a 10-year plan for progressively building up a capital intensive dairy infrastructure. Its first rung on the ladder is an expanding cluster of scientifically designed dairies each housing over 300 lactating high yield imported or cross-bred cows around milk collection centers of large dairy processors. Having financed one such PKR 100 million operation south of Lahore in his capacity as Wholesale Banking Head for Silkbank, newspaper's scribe can vouch for the visceral reluctance of bankers to credit extension for dairying. This is despite the fact that gross margins in dairying (the business of rearing and milking cows) is close to 50%. Compare that number to our vaunted textile sector where gross margins in excess of 20% are rare. For starters, then, SBP needs to develop targets for commercial banks for dairy financing equivalent to, say 2% of total balance sheet lending with usual penalties for non-compliance. To this, at the dairy level, provincial governments need to subsidize animal insurance. Perhaps a 50-50 sharing of premiums with farmers will be sufficient to protect the dairies' most valuable assets, their cows. Finally, sowing of maize for silage needs to be addressed if we are to move away from feeding scraps and indigestible straw and occasional green fodder to our milk animals. The surest way to achieve this goal is to give "Silage Manufacturing" an industry status with specific subsidies for targeted cropping...perhaps cash grants of PKR 5000 per acre for sowing maize for silage.
The next stage is that of milk processing. Today our total number of state of the art dairy processing plants can be counted on the fingers of one hand. If the strategy to raise milk supply described above bears fruit, we shall need at least 50 times as many by 2025. But, whereas setting up a modern dairy operation as the one described above requires PKR 100-200 million (mostly for imported cows and automatic milking parlors and chilling facilities), a plant capable of processing a million liters of milk a day can easily cost 30 times as much.
Again, SBP can goad commercial banks to meet annual disbursement targets for dairy processing plants along lines suggested above. And to ensure both types of programs remain viable, concessionary finance tools that SBP is familiar with can be employed. For instance, these dairy industry loans can have 5-10 years tenors and be priced at KIBOR less 2.5% p.a. (the rate at which SBP should offer refinance to banks), while letting banks charge KIBOR to these targeted borrowers.
Conclusion:
The largest and most viable economic activity in Pakistan is the business of dairy farming and processing its produce into high value added products. With our largely illiterate population adding over 5 million souls each year to its burgeoning mass, there is no better outlet for large-scale job creation. Unfortunately, to date we have done precious little. The consequences of neglect have already arrived in the shape of skyrocketing fresh milk prices as demand outstrips supply and consumers are forced to rely on chemically concocted recipes for "tea whiteners". And, this is happening at a time when we proudly proclaim beating China to become the third largest milk producer in the world after India and the USA. Whatever the merit of this claim, it is a glaring reality that our dairy processors can't find sufficient fresh milk for processing. Urgent and well thought out plans for improving the quality of our milk animals, their housing, hygiene, and feed quality need to be addressed. Beyond that, Government and SBP directed initiatives need to be launched not only to enhance the volume of surplus high quality milk, but to ensure that many more state of the art processing plants are set up over the next 10 years. The obvious goal should be to reach the prominence of New Zealand as a major exporter of processed dairy foods.