2. Challenges for Dairy Development in India - Dairy Development

The following are some of the major challenges for the dairy sector in India:

Issue of aggregation:

Dairy sector in India faces a major issue relating to aggregation of milk. A majority of producers have one or two milch animals and hence their production levels are quite low. Consequently, aggregation of produce from a large number of such small producers is not only difficult but also cost-intensive. Moreover, due to high collection cost only about 20 to 30% of milk produced by small-holders is believed to be marketed through organised channels, while the rest remains in the ambit of unorganised supply chains.

Small and scattered supply chains:

The other issue facing small producer is establishing the supply chain and its efficient management. In fact, a large number of small vendors/middlemen are engaged in collecting small quantities of milk from individual producers.

High cost of milk production:

The average yield of cattle in India is low as compared to other countries. It has impact on higher cost of milk production in India. Lack of breed improvement, proper feed, water management and housing are some factors that contribute towards reducing the productivity of Indian cattle.

High cost of milk handling and marketing:

In India, milk passes through several small aggregators until it reaches a pasteurisation facility. Consequently, the added margins of various players in the milk distribution chain, lead to increase in the cost of milk.

Low quality of milk:

Unhygienic condition of animal farms and dairies, poor and unhygienic milk handling have contributed to deterioration in the quality of milk. In 2012, FSSAI (Food Safety and Standards Authority of India) pointed out in a survey that 70% of urban and 31% of rural milk supplies do not meet standards.

Poor veterinary support:

Another major issue in India is the lack of adequate veterinary services. This often results in poor cattle health, leading to low chances of breed improvement for small rural farmers.

3. Project Idea -Dairy Development

This business idea aims to promote dairy through collectives of small-holder dairy farmers and support the farmers for improvement in livestock breeds, improved fodder and feed, improved bovine health ultimately leading towards enhanced milk production. The proposed model also seeks to provide financial services to dairy farmers in order to enable them to buy additional livestock.

Aggregation of milk produce of individual farmers and collective marketing of the same also forms an important component under this model. The purpose is to ensure better prices to the farmers in order to maximize their income levels.

This project idea promotes a cluster-based approach wherein a FPO will be formed at the cluster level that would support the dairy farmers. The FPO would support the farmers in livestock breed improvement, purchase of additional livestock, feed management, veterinary health and adoption of hygienic practices for milk handling. Subsequently, the FPO would facilitate the collection and marketing of milk while ensuring better milk prices for the farmers.

4. Impacts and Sustainability -Dairy Development

4.1 Impacts – Social, Economic and Environmental

Social impacts

1. Building social capital and social cohesion through organisation of farmers.
2. Building capacity of individual farmers and also farmer groups.
3. Generating additional employment for a number of persons through the FPO and other business activities.
4. Ensuring the development of sustainable community-based organisations at the village level (PGs) and at the cluster level (FPO).

Economic impacts

1. Enhancing incomes of small-farmers through dairy activities.
2. Vermicomposting developed as an alternate source of income for farmers.
3. Organic cultivation promoted through use of vermicompost.
4. Increase in farmers’ income.

Environmental impacts

1. Promotion of alternate fuel in the form of biogas.
2. Reduction of soil, water and air pollution because of promotion of organic manures.
3. Promotion of azola results in improved soil health, improved fertiliser use efficiency, nitrogen fixation and maintaining soil moisture.

4.2 Mainstreaming Options

This model has a potential to be widely replicated across the country as dairy activities are carried out widely by farmers. This model can be promoted through various schemes of state governments and NABARD. Financial support from other banks may be leveraged.

4.3 Sustainability

Milk has high demand and a ready market. It is expected that if backward and forward linkages are adequately established and proper marketing is done, this model would start generating profits from second year onwards and become self-sustaining within 2 to 3 years. In fact, small scale dairies have been successfully promoted by MSGD in Rajasthan and this model is based upon the work done in Rajasthan.

The major factors that are expected to contribute towards sustaining this model are:

1. Scope for provision of milk animals to the farmers through loan assistance.
2. Facilitating agency to provide support to farmers in dairy enterprise development, aggregation and marketing, livestock health, fodder development etc.
3. Capacity building of farmer groups and FPOs in governance, business planning and financial management.
4. Convergence with ongoing schemes.
5. The economics of this model indicate good returns from the farmers and the FPO from 2nd year onwards.
6. Adoption of biogas and vermicomposting by farmers, in addition to dairy enterprise, can enhance their income.

5. Financial Details - Dairy Development

5.1 Scope of financing and subsidy

It is assumed that in order to enhance milk production, the farmers would require financial assistance to purchase new livestock livestock along with technical support for scientific cattle management practices. For this purpose, the NGO/ FPO would link the farmers with financial institutions.

Efforts for convergence with existing government programmes would be attempted in order to get farmers the benefits of existing schemes.

The FPO itself would require loan for meeting capital costs as well as working capital requirement during the initial years. It is estimated that the FPO would require a loan of INR 54.40 lakhs for meeting capital costs and for meeting working capital requirements a loan of INR 148 lakhs. It is felt that working capital requirements can be sourced through loans from NABARD and other banks, while capital costs would be met through loans. However, in case any grant assistance from NABARD or other sources can be sourced by the FPO then it would be an added advantage.

Convergence with MGNREGS:

Financial assistance/subsidy to individual farmers for constructing cattle sheds can be availed through the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

NABARD:

NABARD provides financial grants of upto INR 10 lakhs per FPO to meet initial expenses. In addition to this, NABARD also provides loan to FPOs for upto INR 1 crore for meeting working capital requirements. These loans are provided directly by NABARD or routed through other banks.

In addition, NABARD has a number of schemes for promotion of small dairy units, rearing of calves, purchase of dairy equipment, milk marketing and cold chain establishment. The details are as follows:

Establishment of small dairy units upto 10 animals.

    Investment: Rs 5.00 lakh for 10 animal unit – minimum unit size is 2 animals with an upper limit of 10 animals

    Subsidy: 25% of the outlay (33 .33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 1.25 lakh for a unit of 10 animals

Rearing of heifer calves upto 20 calves.

    Investment: Rs 4.80 lakh for 20 calf unit – minimum unit size of 5 calves with an upper limit of 20 calves.

    Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 1.20 lakh for a unit of 20 calves

Purchase of milking machines /milk-testers/bulk milk cooling units

     Investment: Rs 18 lakh

     Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 4.50 lakh

Purchase of dairy processing equipment for manufacture of indigenous milk products.

    Investment: Rs 12 lakh

    Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 3.00 lakh ( Rs 4.00 lakh for SC/ST farmers)

Establishment of dairy product transportation facilities and cold chain.

    Investment: Rs 24 lakh

    Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 6.00 lakh ( Rs 8.00 lakh for SC/ST farmers)

Cold storage facilities for milk and milk products.

    Investment: Rs 30 lakh

    Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 7.50 lakh ( Rs 10.00 lakh for SC/ST farmers)

Dairy marketing outlet / Dairy parlour.

    Investment: Rs 56,000/-

    Subsidy: 25% of the outlay (33.33% for SC / ST farmers) as back ended capital subsidy subject to a ceiling of Rs 14,000/-( Rs 18600/- for SC/ST farmers)

Table 1: Cost-benefits for individual farmers engaged in dairy farming (2 buffaloes)

Assumptions

• Cost of constructing cattle shed may be sourced from MNREGP.
• For purchasing buffalo the FPO could arrange bank loan for the farmers.
• A lactation cycle of 9 months with daily milk yield of 10 litres is assumed for the above calculations.
• Inflation at the rate of 5% per annum has been factored in while calculating all costs as well as revenues.
• The labour costs are included while calculating the above costs but in-case farmers themselves engage in performing dairy operations then the cost of labour may be a saving for the farmers.
• This model is based on yield estimates from Alwar district of Rajasthan. In case of other regions, milk yields and costs may show slight variations.
• Farmers would be assisted in establishing household level biogas plants through convergence.
• Azola units at Producer Group level could be established for improved cattle feed.
• Manure would be utilized by the farmers in their own farm.
• While the market price of female calf is higher than that of a male calf an average price has been taken for the above calculations.

5.2 Cost Economics

The proposed business model provides estimates of cost-benefits at two levels i.e. at the level of individual farmer and at the level of the FPO for dairy enterprise.

5.2.1 Cost-benefit for farmers 

The above Table 1 provides the estimated cost of milk production as well as the expected net revenue for individual farmers engaged in dairy farming with one buffalo.

Assumptions

• Cost of constructing cattle shed may be sourced from MGNREGA.
• For purchasing buffalo the FPO could arrange bank loan for the farmers.
• A lactation cycle of 9 months with daily milk yield of 10 litres is assumed for the above calculations.
• Inflation at the rate of 5% per annum has been factored in while calculating all costs as well as revenues.
• The labour costs are included while calculating the above costs but in-case farmers themselves engage in performing dairy operations then the cost of labour may be a saving for the farmers.
• This model is based on yield estimates from Alwar district of Rajasthan. In case of other regions, milk yields and costs may show slight variations.
• Farmers would be assisted in establishing household level biogas plants through convergence.
• Azola units at Producer Group level could be established for improved cattle feed.
• Manure would be utilized by the farmers in their own farm.
• While the market price of female calf is higher than that of a male calf an average price has been taken for the above calculations.

Economic analysis

Under the proposed model, farmers are able to get a net return of around INR 3.12 lakhs (after deducting capital costs). While the net annual returns are around INR 0.68 lakhs (Year 2) to INR 1.17 lakhs (Year 5). The Benefit Cost ratio for an individual farmer is calculated to be 1.24 which is good.

Table 2: Economic analysis dairy with 2 buffaloes

IRR for a farmer rearing 2 buffaloes comes to 28% which indicates that the investment decision is sound and viable.

LOANS

It is envisaged that for this establishing a dairy unit an individual farmer would require a loan of INR 140000 for the purchase of 2 buffaloes. Repayment of loan would be initiated from the second year onwards and it would be repaid in six years.

Table 3: Loan taken by farmer for purchase of buffaloes

5.2.2 Cost-benefit for FPOs

Details of cost-benefit of FPO engaged in aggregation and marketing of milk are as follows:

Table 4: Cost-benefits for FPO engaged in aggregation and marketing of milk (250 producers with 2 buffaloes each)

Assumptions

In the above analysis the following assumptions have been made:

• The above analysis assumes that the FPO is aggregation milk from about 500 dairy farmers with each have one buffalo/ the milk sold by each farmer being 10 litres per day.
• The available subsidy, if any, from various sources has not been factored in this model which has been prepared on the basis of maximum cost in order to assess economic viability.
• The FPO would assist the farmers in promotion of feed, capacity building as paravets, organising animal health camps and providing technical trainings.
• The storage infrastructure will be made of low-cost materials.
• Loan will be obtained for INR 148 lakhs as working capital for six-month each year for first five years. This would be used for procurement of milk from farmers and meeting operational costs of FPO.
• A loan of INR 54.40 lakhs would be obtained for meeting capital costs.
• An increment of 5% each year for price escalation in the costs and revenues has been factored in the above analysis.

ECONOMIC ANALYSIS

The FPO is projected to obtain a surplus from Year 1 onwards (in case capital costs are not considered) and from Year 2 onwards a net profit of between INR 64 to 78 lakhs is projected. This analysis also takes into account the interest on working capital and capital loans that are expected to be taken by the FPO. The benefit cost ratio comes to 1.08.

Table 5: Economic analysis of operations of FPO

IRR for the business of federation is calculated at 25% for a five-year period which is indicative of viability of investment.

The payback period is slightly higher than one year which is indicating of the fact that in terms of cash flows the FPO would be able to recover its capital cost within an year of its operations. This indicates financial viability of this business model.

A DSCR greater than one that indicates that the business has enough income to comfortably cover principal and interest payments for capital loan and also working capital loan. In this case DSCR is coming to 4.52 in the first year and in the subsequent years too is higher than 3, thereby indicating that the business is generating sufficient income to meet its debt obligations.

LOANS

It is envisaged that for this business model the FPO would require a loan of INR 54.40 lakhs for capital expenditure and a loan of INR 148 lakhs for meeting the working capital requirements. Working capital would be required for 6 months each year. From the third year the value of procured commodities is expected to increase with the result that the FPO would require working capital of INR 600 lakhs.

Table 6: Working capital loan for FPO

The repayment of loan of INR 54.40 lakhs for capital expenditure would be initiated from second year onwards and it is expected to be repaid over a period of 10 years.

Table 7: Capital expenditure loan for FPO