Author: Avishek Gupta

There are different “states” through which a milk collection activity in a cluster move. Each state depends on factors like location of the cluster, volume of milk produced and competition amongst milk buyers.

At the very outset, we will make it clear that according to DNE, quality based payments for milk wherein each farmer gets paid exactly according to the quality of milk poured by him is the best situation that we can have and that is something that DNE hopes to achieve through its interventions.

Before we go further we would also like to clarify that by quality we mean the nature of chemical composition and extent of microbial content in milk. For a dairy processing unit which converts raw milk into various dairy products, what matters is the solids content in the milk. If we go deeper, the solids in milk consists of fat, proteins, lactose,minerals. Depending on the product manufactured in the dairy plant, the milk may be valued at a higher price if it has a higher content of one of these components. However,the most common method of quality based payment is on the basis of the total solids content in milk. This is the easiest to find out and it requires a simple lactometer dip.( Lactometers measure the specific gravity of milk and hence the solids content.)In slightly better cases, milk is paid on the basis of fat.

The different forms of payment that the farmers get are:

Volume Based:

This method is normally followed in case where the farmer sells milk to a milk vendor/agent or sells it to households directly. S/he may bargain for a better price just on the basis of the perceived “thickness” of the milk.
More volume you pour more money you get.
Why is this good: No hassles of measurement. No investment required to collect milk or keep track of the payments to be made.
Why is this bad:The farmer has no incentive to produce good quality milk. S/he adds water.Entire dairy supply chain suffers.

Entry of an “organised” player into an area for milk collection does NOT guarantee “right” price for milk. There are multiple systems under which the organised players collect milk.

They may let a milk agent collect milk for them.

Quality Based:

Normally followed by the organised sector or to some extent by milk agents in case of competition.

Why is this good: Farmers have incentive to pour better quality of milk, the rest of the supply chain gets benefitted immensely.

Why this is bad: Requires different level of complexity and investments to implement.

Different “versions” of quality based payments

• The milk buyer may collect milk from farmers and NOT measure the quality of individual sample separately and pay all the farmers in a cluster according to the quality of the bulk sample of all the milk poured in that cluster. The farmer gets paid as per the volume of milk poured and as per the quality of milk poured by the entire village.

• The milk may be collected from farmers and the TS content measured for each farmer separately. The farmers are then paid according to the TS content for each farmer. The equipment required at the village level is a simple lactometer and a measuring cylinder.Cost Rs.200 (approx).

• Milk may be collected from farmers and individual samples taken for milk poured by each farmer. The samples may then be taken to the nearest chilling unit/dairy plant to measure the fat and Solids Not Fat content of milk. The equipment required at the village level is a sample bottle tray, a lactometer and measuring cylinder. Cost Rs.1500 (approx)

• Each milk sample is not tested daily. It is randomly tested and each farmer gets payment based on the quality of the milk that gets tested once in a week/fortnight/month.

• Milk is collected and tested at the village level for fat and TS. the testing of milk may be done using a manual system where all samples will not be tested everyday. The equipment cost would be about Rs.5000-6000.The farmer gets paid according to the quality with the fat being tested once in a two days/week.

• The testing of milk may be done using an electronic equipment. The total setup would cost about Rs.30000-60000. This would enable payment as per fat and SNF for each sample of milk poured.Farmer gets paid for every sample of milk that s/he pours differently based on quality.

• There is an automated milk testing setup available which would enable creation of records of payment automatically through a computerised system. The setup costs Rs.80,000-1,20,000.

In other countries, the microbial load of milk is also judged for payment. In some cases (cheese plants), the protein content of the milk is considered for payments.

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!

Went to a few villages which no longer had co-operative milk collection centres. They had it in the past but because of disputes they shut down. The local milk agents/sweet shops gave more money per litre than the co-operative collection centre. They accepted even water added milk/adulterated milk. The price was paid within 2-3 days! People expected the same “benefits” from the co-operative society. Milk started flowing to the milk agents.

However, the milk agents have limited capacity. They can collect only up to a certain volume. The ability to collect milk fluctuates wildly with season. Slowly the number of HHs having cows/buffaloes have gone down.

Average Milk production was 2 litres in a day. The volume of milk was low enough to prevent problem of milk sales. It was mostly sold to them without a hassle.

There is no doubt in the minds of farmers that dairy farming is profitable BUT only if there is guaranteed buyer of ALL milk.Buying high value cattle would actually increase the pains if there is no guarantee of all milk being sold milk.

Our understanding: If at all the co-operative DOES reopen its collection centres in these villages,after a few months, the first lot of milk from each farmer might still go to the milk agents (because they get a higher price there), it will be the remaining milk that would reach the co-operative milk collection centre. However, there is a limit to the volume that the agent can collect.

Let us assume that cattle financing is done in a village where an organised milk collection centre (offering guaranteed milk purchase with quality based payment) is reopened/opened. As the volume of milk production goes up in a village, the price the milk agents pay for the milk will go down because it will be easier to get milk (good old demand- supply). The farmers will start to earn less per litre of milk sold. However, since there is a milk collection centre in the village, the milk agent will offer a price slightly higher than the milk collection centre rate ALWAYS. So, for most farmers, the first attempt would be to sell milk to the milk agent and then the remaining to the collection centre.So while the price received per litre will go down,the volume of milk sold is now higher (because of high yielding cattle purchased with cattle loans), the total earnings will be much higher than earlier.

IF the milk collection centre does NOT exist in the village where cattle financing is done, the price of milk will dip drastically and milk agents will rule. They farmers will have no alternate option to sell milk and will suffer and will slowly lead to farmers taking lesser care of cattle and finally leading to a situation where they keep low yielding cattle just because it is a tradition or because it meets domestic requirements of milk.

Sounds very logical and obvious.Solution for Co-ops: Finance cattle to collect milk. Problem is co-operatives did try to finance cattle.But most of the milk started flowing into the milk agents channel because they were paying higher.So, neither did the repayment of loans happen and neither did they get the milk. Finally the co-operative collection centres shut down. Obviously, the moment the collection centres shut down, the milk agents had the freedom to decide prices and volumes to be collected as per their requirements. The active veterinary support provided through co-operatives stopped. The Govt veterinary support was only partly functional. The farmers found it difficult to maintain good quality cattle and hence the present state where average milk production is 1-2 litres!