Where could we stop the cycle? The supply chain gap is evident in a situation where the milk volume in a cluster is not enough to justify a milk collection centre being setup by an organised player and it is higher than the demand of milk agents resulting in suboptimal price for milk to farmers.
So, in order to make a milk buyer setup a collection centre in a village, the milk produced in that village should be so much that even after selling some milk to the milk agent the village is left with milk to be sold to the collection centre which is enough to justify setting up of a collection centre.
Once again, back to the same solution: Finance milch cattle.Problem is, the financiers are banks which do not penetrate deep into the remote rural locations where the dairy farmers reside. The banks can not lend and collect repayments from them because the farmers are in such far off places!
Enter the Dairy Processing units which are in need of more milk to run their operations and they have milk collection centres in the deep pockets where farmers reside. They offer to issue cattle loans to farmers on behalf of the bank and repay directly to the bank from the milk payments. This way they would collect more milk because the people who have taken loans from them will be “indebted” to supply milk to them.
That is how the model of a tripartite agreement between the dairy processor (milk buyer), a bank (financier for cattle loan) and dairy farmer was innovated and the cash flow trapping mechanism utilised.
This expectation of farmers becoming indebted to the dairy processor because the dairy processor is giving loan to buy cattle comes from the practice of milk agents giving loans to farmers to purchase cattle. Under such circumstances the farmers are virtually bound to give milk to the agents!They give the milk to the milk agents at whatever price he pays! The dairy unit thought that a similar thing would happen.
However, one key difference between a dairy processor and the milk agent is the social pressure that the milk agent can wield to make the farmers stick to him even by paying him/her a lower price. Dairy processors do not have that power. The tripartite agreements began to fail because the farmers went about pouring their milk with other who paid a better price. Loyalty that was expected from the farmers because of financing, veterinary and other forms of support did not quite show up.
What this situation reveals that a partnership between the dairy processor and banks which seemed to leverage each other’s strengths could not really do well because of the basic inability of either party in keeping the farmer within their “loop”.In fact,practically, this is NOT possible.
I am told that one of the largest banks in the country has in fact stopped cattle financing altogether because of the failure!