Dairy markets and Dairy markets and access to higher value access to higher value

chains in Illangama chains in Illangama watershed, Ecuadorwatershed, Ecuador

Heather Weeks, Virginia TechHeather Weeks, Virginia TechWendy Slusher, Virginia TechWendy Slusher, Virginia Tech

Moasir Celleri, Universidad de BolivarMoasir Celleri, Universidad de BolivarVictor Barrera, INIAP, EcuadorVictor Barrera, INIAP, Ecuador

George W. Norton, Virginia TechGeorge W. Norton, Virginia Tech

BackgroundBackground

• Dairy production is an important source of income Dairy production is an important source of income for small-scale farmers in the Illangama sub-for small-scale farmers in the Illangama sub-watershed in Ecuadorwatershed in Ecuador

• Dairy, however, suffers from low productivity, Dairy, however, suffers from low productivity, persistent problems with quality, and associated persistent problems with quality, and associated low levels of income for participantslow levels of income for participants

• Nearby communities (most notably, Salinas) have Nearby communities (most notably, Salinas) have experienced successful development of a high-experienced successful development of a high-quality dairy industry with national and quality dairy industry with national and international recognition of their productinternational recognition of their product

• External stimulus created dairy industry in these locationsExternal stimulus created dairy industry in these locations• Finance, technical assistance and long-term commitment of Finance, technical assistance and long-term commitment of

NGONGO• Dairy production in these areas has grown with minimal Dairy production in these areas has grown with minimal

environmental degradationenvironmental degradation• What is the potential for expansion of and higher capture of What is the potential for expansion of and higher capture of

value added in Chimbo watershed?value added in Chimbo watershed?

Salinas, Ecuador: High-value cheese production

Objectives (SANREM)Objectives (SANREM)

• Identify and promote alternative Identify and promote alternative environmentally sustainable environmentally sustainable livelihood strategies that raise livelihood strategies that raise incomes and well-being incomes and well-being

• Promote participatory decision Promote participatory decision making in watersheds making in watersheds

Objectives (Dairy Objectives (Dairy research)research)

• Conduct an analysis of the dairy marketing Conduct an analysis of the dairy marketing (value) chain(value) chain– Analyze overall potential of dairy productionAnalyze overall potential of dairy production– Identify obstacles to attaining this potentialIdentify obstacles to attaining this potential

• Identify and describe actors along the chainIdentify and describe actors along the chain– Production (and input suppliers)Production (and input suppliers)– Marketing through retailMarketing through retail– Final consumersFinal consumers

• Identify and analyze bottlenecks to creation Identify and analyze bottlenecks to creation of a value (rather than product) chainof a value (rather than product) chain

Methodology for Productive Chain Analysis for Equitable Development, SANREM Ecuador 2007

INDIRECT ACTORS

Equipment Suppliers

Technical Assistance

Input suppliers

Energy suppliers

Finance

Research

Information

Training

Production Transformation Comercialization Consumption

DIRECT ACTORS

Production Chain Owners of product, assumers of risk

External factors/ contextNot owners of

product: provide inputs and services

Productive chain vs. value chainProductive chain vs. value chain

Productive chain embodies the relationship Productive chain embodies the relationship between individual actors we normally between individual actors we normally encounter in the marketencounter in the market

When this relationship evolves into a strategic collaboration between actors and organizations for the mutual benefit of each, a productive chain becomes a value chain

Differences between productive and value chains

FactorsFactors Productive Productive ChainChain Value ChainValue Chain

Information Information flowflow Relatively smallRelatively small ExtensiveExtensive

Principal Principal focusfocus Cost / benefitCost / benefit Value / qualityValue / quality

StrategyStrategy Basic production Basic production (commodity)(commodity)

Differentiated Differentiated product (value-product (value-

added)added)

OrientationOrientation Supply drivenSupply driven Demand drivenDemand driven

OrganizatioOrganizational nal structurestructure

Independent actorsIndependent actors Interdependent Interdependent actorsactors

PhilosophyPhilosophy Firm Firm competitivenesscompetitiveness

Chain Chain competitivenesscompetitiveness

8

MethodsMethods

• Review of literature; interviews with national Review of literature; interviews with national actors=> background on overall industry actors=> background on overall industry conditions and outlookconditions and outlook

• Qualitative methods:Qualitative methods:– Describe existing chain through interviews with key Describe existing chain through interviews with key

informants (producers, intermediaries, processors, informants (producers, intermediaries, processors, final consumers)final consumers)

– Identify problems and bottlenecksIdentify problems and bottlenecks

• Quantitative methods:Quantitative methods:

– Producer and intermediary surveysProducer and intermediary surveys– Characterize participants; identify production/cost Characterize participants; identify production/cost

structurestructure

General FindingsGeneral Findings• Ecuador has the highest per capita consumption of dairy Ecuador has the highest per capita consumption of dairy

products in South America.products in South America.

• The Ministry of Agriculture and Livestock states that the The Ministry of Agriculture and Livestock states that the current system faces a, “Lack of processing ability in the current system faces a, “Lack of processing ability in the form of raw material [raw milk] production in order to form of raw material [raw milk] production in order to increase the industrial production.” increase the industrial production.”

• More than 85% of the country’s dairy producers are small-More than 85% of the country’s dairy producers are small-scale producersscale producers

• 75% of milk supply is produced in the highlands75% of milk supply is produced in the highlands

• Small-scale producers receive an average of 0.07-0.11 Small-scale producers receive an average of 0.07-0.11 USD less per liter than larger-scale commercial producers USD less per liter than larger-scale commercial producers (no adjustment for quality differentials)(no adjustment for quality differentials)

• The system in the Guaranda area is very much a product The system in the Guaranda area is very much a product chain; SANREM objectives suggest efforts to create a chain; SANREM objectives suggest efforts to create a value chainvalue chain

Baseline survey Baseline survey information & information &

interviewsinterviewswith dairy producerswith dairy producers

Interviews with Interviews with producersproducers

• Average milk production per cow is low (7-10 liters/day):Average milk production per cow is low (7-10 liters/day):– Poor pasture and access to water likely explain this outcomePoor pasture and access to water likely explain this outcome– Milking conditions are unsanitary; all done in field or near Milking conditions are unsanitary; all done in field or near

house—no sheltered milking and access to water is rarehouse—no sheltered milking and access to water is rare– Distances from homes to milking areas are as much as 2 Distances from homes to milking areas are as much as 2

miles; distances to grazing areas are as much as 5 milesmiles; distances to grazing areas are as much as 5 miles– Production falls off to nearly 5 liters/cow/day during dry Production falls off to nearly 5 liters/cow/day during dry

seasonseason• Reported 20-40 percent of dairy production is consumed Reported 20-40 percent of dairy production is consumed

on farmon farm• Dairy income accounts for 40-60 percent of household cash Dairy income accounts for 40-60 percent of household cash

income for producersincome for producers• For those who market regularly, 80 percent of dairy sales For those who market regularly, 80 percent of dairy sales

are to intermediaries and 20 percent is directly marketed are to intermediaries and 20 percent is directly marketed (mostly to neighbors; but some to market in Guaranda)(mostly to neighbors; but some to market in Guaranda)– Prices received from intermediaries vary (mean=$.6/lb, Prices received from intermediaries vary (mean=$.6/lb,

cv=.25) and average 60% of (sales) price in Guaranda marketcv=.25) and average 60% of (sales) price in Guaranda market– Uneven information about price differentials paid for higher Uneven information about price differentials paid for higher

quality milk; no testing of quality (visual inspection)quality milk; no testing of quality (visual inspection)

Interviews with Interviews with producersproducers

• Weekly pick-up for most producersWeekly pick-up for most producers• Cheese is paid for in cash; some producers Cheese is paid for in cash; some producers

receive credit from intermediariesreceive credit from intermediaries• Marketing options are limited:Marketing options are limited:

– Most respondents reported only one intermediaryMost respondents reported only one intermediary– Direct marketing in Guaranda is hindered by lack Direct marketing in Guaranda is hindered by lack

of access to purchasers (and fear of retribution)of access to purchasers (and fear of retribution)– Women market majority of output (also Women market majority of output (also

responsible for bulk of dairy production)responsible for bulk of dairy production)

• Seasonal price variability reported to be Seasonal price variability reported to be severe, but generally not as concerning as severe, but generally not as concerning as low priceslow prices

Interviews with Interviews with intermediariesintermediaries

• Surveyed 46 intermediariesSurveyed 46 intermediaries• Intermediaries who operate in watershed come from Intermediaries who operate in watershed come from

two villages, but most come from Patocochatwo villages, but most come from Patococha– Technology limited: some transport cheese in pickup, Technology limited: some transport cheese in pickup,

some in public transportation; no refrigeration (storage in some in public transportation; no refrigeration (storage in salt baths) salt baths)

– Sales range from 120-2,000 lbs per weekSales range from 120-2,000 lbs per week– Transport infrastructure inhibits expanded areaTransport infrastructure inhibits expanded area– No reported demand for fluid milkNo reported demand for fluid milk

• Sell in Guaranda market to a limited number of re-Sell in Guaranda market to a limited number of re-vendors; do not have the ability to supply higher-vendors; do not have the ability to supply higher-value chains (fresh milk, supermarkets)value chains (fresh milk, supermarkets)

• Some sell directly to more distant markets Some sell directly to more distant markets • General socioeconomic conditions in intermediary General socioeconomic conditions in intermediary

village not different from rest of watershedvillage not different from rest of watershed

Intermediaries: prices paid, prices received, and gross margins

Other interviewsOther interviews

• Processors (cheese factories) expressed Processors (cheese factories) expressed concern about continued availability of concern about continued availability of quality milk supply. Problem with quality milk supply. Problem with quality deliveryquality delivery

• Local government concerned about Local government concerned about environmental consequences of dairy environmental consequences of dairy production and processingproduction and processing

• Local government sees little role for Local government sees little role for itself in the promotion of dairy industry itself in the promotion of dairy industry in Illangamain Illangama

Results: Analysis Results: Analysis of market chainsof market chains

On-farm Milk Production

On-farm Milk Production

Sell Fluid MilkSell Fluid Milk Sell Processed Cheese

Sell Processed Cheese

Home Consumption of Milk

and Process Cheese

Home Consumption of Milk

and Process Cheese

Guaranda MarketGuaranda Market

Quality DifferentialsQuality Differentials

Intermediary: Private versus Cheese Processor

Intermediary: Private versus Cheese Processor

Intermediary: Purchases

and Transports to Market

Intermediary: Purchases

and Transports to Market

Cheese Processor: Add Value Locally

Cheese Processor: Add Value Locally Fresh Milk MarketFresh Milk Market

Guaranda/ National Market

Guaranda/ National Market Guaranda MarketGuaranda Market

Dairy Market Structure in Upper Guanujo

Strengths and weaknesses: threats to the chainStagesStages WeaknessesWeaknesses

(Internal)(Internal)ThreatsThreats

(External)(External)

Primary Primary productionproduction

Poor quality of pasture; Poor quality of pasture; dairy genetics; low yieldsdairy genetics; low yields

Limited possibilities for Limited possibilities for higher quality pasture; higher quality pasture; lack of information about lack of information about herd improvementherd improvement

Sanitation—high bacteria Sanitation—high bacteria content of milkcontent of milkLack of knowledge about Lack of knowledge about quality controlquality controlNo producer organizationsNo producer organizations

Market does not reward Market does not reward quality; no price quality; no price differentialsdifferentialsHigh variability High variability (seasonality) in (seasonality) in output=> high price output=> high price variabilityvariability

IntermediariesIntermediaries Low technology: no ability Low technology: no ability to test milk quality, to test milk quality, refrigerate and store refrigerate and store products products Spatial spread of suppliersSpatial spread of suppliersPoor transportation Poor transportation infrastructureinfrastructure

Weak demand for high-Weak demand for high-quality productsquality productsLimited market powerLimited market power

Final Final consumersconsumers

Low incomes in target Low incomes in target market areamarket areaPreferences for certain Preferences for certain cheese typescheese types

External supplies of External supplies of high-quality cheeseshigh-quality cheeses

Transport technology

Production technology

QuestionQuestion For ExampleFor Example Answer for chainAnswer for chain What does the What does the client demand?client demand?

Who buys Who buys and what?and what?

Quantity, quality Quantity, quality measures, measures,

attributes of attributes of productproduct

Intermediaries buy, Intermediaries buy, quantities varyquantities vary

Low quality Low quality cheese, limited cheese, limited demand for hard demand for hard cheesecheese

Conditions Conditions of purchaseof purchase

Payment conditions, Payment conditions, linked transactionslinked transactions

Payment is in cash, price Payment is in cash, price determined by determined by intermediary; purchase intermediary; purchase point is farm gate, credit is point is farm gate, credit is often linked to marketingoften linked to marketing

Sellers require Sellers require immediate immediate paymentpayment

Market Market salessales

Point of final sale; Point of final sale; conditions in conditions in

marketsmarkets

All intermediaries sell to All intermediaries sell to Guaranda market; some Guaranda market; some cheese is further cheese is further transported to more distant transported to more distant markets; intermediaries markets; intermediaries receive delayed payment receive delayed payment for their deliveries for their deliveries

Quality control is Quality control is minimal; seller’s minimal; seller’s reputation is reputation is important; limited important; limited access for access for unknown suppliersunknown suppliers

Other Other marketsmarkets

Alternative market Alternative market outletsoutlets

Several processing plants Several processing plants exist in Guarandaexist in Guaranda

Cooled milk; Cooled milk; minimum sanitary minimum sanitary conditions; conditions; regular deliveriesregular deliveries

Final Final demanderdemander

Who participates in Who participates in final market?final market?

Low-income households in Low-income households in Guaranda; supermarkets Guaranda; supermarkets purchase from alternative purchase from alternative suppliers (higher prices)suppliers (higher prices)

Price is main Price is main concern; quality concern; quality differentials not differentials not widely recognizedwidely recognized

Map of product purchase

FindingsFindings• Common barriers to producers include access to information, credit Common barriers to producers include access to information, credit

and cooperation among producer households: weak production and cooperation among producer households: weak production chain=>challenge is to move to value chainchain=>challenge is to move to value chain

• Success of local processing plants (Salinas) is a result of outside aid Success of local processing plants (Salinas) is a result of outside aid and community organization. Processing offers potential for higher and community organization. Processing offers potential for higher product prices from value-added production, however supply and product prices from value-added production, however supply and demand challenges exist demand challenges exist – Supply challenges: low productivity; poor quality; low density of Supply challenges: low productivity; poor quality; low density of

productionproduction– Demand challenges: Structure of intermediary system inhibits smooth Demand challenges: Structure of intermediary system inhibits smooth

price transmission to primary producers; seasonal fluctuations in pricesprice transmission to primary producers; seasonal fluctuations in prices• Intermediary transport operations are traditionally family run and Intermediary transport operations are traditionally family run and

are clustered in specific indigenous communities; these are clustered in specific indigenous communities; these intermediaries specialize in transport of other agricultural goods in intermediaries specialize in transport of other agricultural goods in addition to dairy productsaddition to dairy products

• Producer prices vary depending on location; intermediary power is Producer prices vary depending on location; intermediary power is evident in a number of locations. evident in a number of locations. – More isolated communities suffer lower producer prices; some of these More isolated communities suffer lower producer prices; some of these

lower prices are explained by higher transport costs, but there is strong lower prices are explained by higher transport costs, but there is strong evidence that these producers suffer from few marketing optionsevidence that these producers suffer from few marketing options

– Market does not provide a consistent premium for product qualityMarket does not provide a consistent premium for product quality

Next stepsNext steps• Identify small-scale processing alternatives:Identify small-scale processing alternatives:

– Existing technologiesExisting technologies– Minimum quantities and sanitary qualitiesMinimum quantities and sanitary qualities– Optimal location of processing plantOptimal location of processing plant

• Explore possibilities for greater Explore possibilities for greater coordination among producers such as coordination among producers such as cooperatives or other producer cooperatives or other producer organizationsorganizations

• Continue research to improve productivityContinue research to improve productivity– Enhanced pastureEnhanced pasture– Better water managementBetter water management– Location relative to water sourcesLocation relative to water sources