A budgetary analysis of the relative costs of establishing a standard dairy cooperative-owned milk collection centre; a case study of the Zambian smallholder dairy sector

Market access has been identified as one of the foremost factors influencing the performance of small scale producers in developing countries (more particularly in least developing countries). Therefore the objective of the study was to assess the minimum relative costs for establishing a standard and viable milk collection centre (MCC) so as to boost milk production and create market access among the scattered small scale dairy farmers in Zambia. Data used for the assessment was purposively obtained from 19 out of the 25 active dairy cooperative-owned milk collection centres in Zambia.

Findings indicated that all the milk collection centres in Zambia are run by farmers in the form of a dairy cooperative (one-tier cooperative market model). In order to be able to operate sufficiently and efficiently, the cooperative needs to pay a salary to a minimum of 4 workers (manager, milk receiver cum cleaner, driver and watchman) depending upon volume of milk it is handling. This is the minimum human resource required at the beginning, but as the business grows, more human resources and other requirements would be needed. In addition, the cooperative-owned MCC needs to pay for electricity, water, fuel for transportation of milk and to run the generator. In order for a milk collection centre to be viable and sustainable in Zambia, a minimum of 500 litres of milk will be needed to be supplied by farmers every day in the initial stages of establishment. A margin of 20-25% should be retained by the cooperative as commission for its operational costs during these initial stages. When the milk volume and cooperative membership increases, this margin should slowly come down to 15-19% in order to encourage dairy development and ensure more income generation by the farmers and group investment. In addition to the milk collection centre building, a borehole, cooler tank, generator, lactoscan, milk cans, weighing scale and buckets will be required. Thus, the relative costs of establishing a standard and viable milk collection centre was estimated to be US$ 116,500. Availability of land is not a problem in Zambia and the Government is very supportive to provide free land for such community owned development work.

These estimates are cardinal for the government, donors and other stakeholders in issues relating to interventions and resource allocation to the smallholder dairy farming subsector. There is need for the Government and donors to firmly support dairy cooperative development through technical and financial schemes, particularly in establishment and support of milk collection centres in form of a grant.

Keywords: establishment cost, dairy cooperative, market access, milk collection centre

Introduction

The Zambian Government has shown interest in using the livestock sector to accelerate economic growth and poverty reduction especially among rural poor smallholder farmers (GRZ 2011). Market access has been identified as one of the foremost factors influencing the performance of small scale producers in developing countries, particularly in least developing countries and therefore smallholder access to market for higher value for agricultural and food products is recognised as a vital opportunity to enhance and diversify the livelihood of lower income farm household and reduce poverty (World Bank 2007).

As a result of the perishable nature of milk and the range of skills involved in its production and marketing, dairying requires a number of services that can best be provided by cooperative action (Sulastri and Marhajan 2002). It is not surprising therefore that the cooperative movement has featured prominently in the development of the dairy industry in many countries worldwide. According to Gour (2009), the idea of dairy cooperative originated first in Switzerland in the village of Kiesen in 1815. Later-on it spread over Denmark, Europe, and USA. In India the seed of cooperation was sown in 1904 with the passing of first Cooperative Act, thus India is currently the largest producer of milk in the world marketed through milk collection centres, owned by smallholder farmers through dairy cooperative, unions and federations (Gour 2009).

According to Uotila and Dhanapala (1994), most dairy cooperatives adopt either a two - or three - tier system. In a one tier (primary cooperative), one village or a group of two or three villages form the basic unit of a primary cooperative. Only dairy farmers are allowed to enrol as members and they must commit to supply milk exclusively to the MCC owned by the cooperative. While the day-to-day functioning of the cooperative is managed by full-time employees, the committee or board of the directors of the cooperative, consisting of elected members, make the decisions on the affairs of a cooperative. Primary-level cooperatives bring together members with similar interests at village level to work towards common goals. This system also identifies good leadership talent that would be given a chance to develop through interaction with other community leaders and initiates learning of democracy.

In a two tier system, a group of primary-level cooperatives form a union, which can be for a district, region or milk shed area. In three tier, the unions joining up to form a federation at state or national level, depending on the size and system of administration in the country. The federation has the power to act on such issues as pricing policies, extension, training, control of milk and milk product imports, subsidies and credit, influencing the government on dairy development related activity and policy.

The successful development of dairy cooperatives in India is based on the cooperative business model. It is worthwhile to note that from a humble beginning this country's dairy cooperative programme has grown into the largest in the world and is owned by millions of rural-producer cooperative members (Uotila and Dhanapala 1994). The Indian Dairy Cooperatives are organized on the three-tier structure, where the Primary Milk Producers' Cooperative Societies work at the village level followed by the District Milk Cooperative Union which works at the district level (Gour 2009). A state level Cooperative Milk Federation supports and guides district unions. All the unions in a state are normally members of a federation whose prime responsibility is the marketing of milk and milk products outside the state. There is also a fourth tier, the National Cooperative Dairy Federation of India (NCDFI), which is a national-level body that formulates policies and programmes designed to safeguard the interests of all milk producers in the country (Gour 2009).

Dairy producers' cooperatives have been adopted successfully in India, Japan, the Republic of Korea, USA, New Zealand, Indonesia, Sri Lanka, Thailand, Malaysia, Myanmar, Nepal, Pakistan and the Philippines, etc resulting in well-established dairy industries (Uotila and Dhanapala 1994; Sulasstri and Mahajan 2002). The respective governments have firmly supported this development through legislation as well as through technical and financial schemes. In Africa Kenya, Uganda, Tanzania, Ethiopia, Malawi and recently in Zambia smallholder dairy market access is taking root through MCC’s owned by farmers' cooperative.

Through the efforts of the many development partners and the Zambian Government, the country has seen a good beginning of smallholder dairy development through one-tier dairy cooperatives (ACF 2012). In 2001 there were only 3 functional dairy cooperatives in Zambia but by the end of 2012 there were 25 active dairy cooperatives owned and managed by smallholder dairy farmers and of which two are able to process their milk into different dairy products for sale in the community and local market, thus expanding their business and income base and making available affordable nutritious food in the community (Mumba et al 2013). All MCC’s in Zambia are owned by dairy cooperatives. All of them have been built with donor/Government support while a few are in rented premises (Mumba et al 2011). With smallholder dairy development taking place at fast rate, there are several requests by the farmer groups to the government and other stakeholders to establish MCC's for them. In many countries the dairy processors do establish MCC's with very basic facility of only a cooling tank with no scope of further extension. To the knowledge of the authors, there are no MCC’s built or supported by a dairy processor in Zambia.

According to Draaijer (2002), some of the advantages of marketing milk through dairy cooperatives are as follows;

There is no information available in Zambia or elsewhere in the developing countries on the minimum budgetary requirement including equipments needed for the establishment of a standard and viable milk collection centre / milk bulking point owned by cooperative, hence necessitating this publication.

Methodology

Study areas and data collection techniques

A cross sectional study design using purposive sampling technique was employed to generate data for this study. Patton (1990) claims that: "The logic and power of purposive sampling lies in selecting information-rich cases for an in-depth study. Information-rich cases are those from which one can learn a great deal about issues of central importance to the research". In this study information rich cases were the active and viable established milk collection centres. Data was collected from 19 out of the 25 active and viable already established cooperative-owned milk collection centres (MCCs) as study sites from Lusaka, Central, Southern and Western provinces of Zambia as shown in table 1. These four provinces were purposively selected based on the presence of smallholder dairy activities and presence of viable and active MCCs run by dairy cooperatives. Managers/accountants and Golden Valley Agricultural Research Trust (GART) provided the information on the various requirements and their current market costs of establishing a milk collection centre which should be run by farmers in form of a dairy cooperative as a business venture.

Table 1. Study sites (province, district and name of MCC )
Province	District	MCC	Number of employees
Lusaka	Kafue	Mapepe	3
	Chongwe	Palabana	2
Southern	Mazabuka	Magoye	9
	Mazabuka	Pelusa	2
	Monze	Monze	9
	Monze	Nteme	0
	Monze	Silwili	2
	Choma	Batoka	4
	Choma	Choma	8
	Choma	Masopo	3
	Choma	Mutandalike	3
	Choma	Mbabala	3
	Kalomo	Kalomo	4
Central	Chibombo	Chibombo	2
Central	Chibombo	Liteta	2
	Kabwe	Mpima	4
Western	Mongu	Mongu	3
	Mongu	Limununga	3
	Senanga	Senanga	3
Average number of permanent employees			3.63

Data analysis

Data generated were analysed using budgetary analysis as described by Osotimehin et al (2006). The various requirements and their current market costs for establishing a standard and viable milk collection centre were provided by managers/accountants and GART from the 19 established milk collection centres using an interview based questionnaires/data collection sheets and the average estimates were analysed using Microsoft Office Excel 2007.

Results and discussion

A milk collection centre is a place with facility to receive, test milk for freshness and quality from different farmers, store / preserve and dispatch it to milk processors or deliver to milk processor or process the milk for further marketing as a value added products. It can be run by the farmers themselves as a cooperative or run by processors or privately managed on behalf of processor or cooperative. In Zambia some MCC’s also sell a small quantity of raw milk within the community.

In Zambia all the MCC’s are run by farmers as a farmers' dairy cooperative (one-tier dairy cooperative market model) as a business. The cooperative buys the milk on behalf of farmers group from individual members, stores and markets to processors or sells locally and at the end of each month it pays the member farmers, their entitlement for supply of milk. A small amount of commission ranging from 20-25% is kept by the cooperative to run operational costs.

In order to run the MCCs owned by cooperatives, it needs to pay the salary to a minimum of 4 workers (manager, milk receiver cum cleaner, driver and watchman) depending upon volume of milk it is handling as shown in table 1. This is the minimum human resource requirement. The average salary expense per month for the four permanent workers was estimated at US$ 851. As the business grows and diversification takes place, more human resources (employment) and other requirements will be needed. In addition the cooperative needs to pay for electricity, water and fuel for transport of milk and use in generator and levies.The average operational costs for a viable milk collection centre were estimated at US$ 466, with total monthly expenses amounting to US$ 1,317.

Based on our study we found out that in order for a MCC to be viable and sustainable, a minimum of 500 litres of milk will be needed to be supplied by farmers every day in initial stage of the establishment. Currently, this volume generates monthly income of US$ 8, 611 at a price of US$ 0.57 per litre. A margin of 20-25% (average 22.5%) of sale of milk value should be retained by the cooperative for its operational costs in the initial stages of establishment. This was estimated at an average of 22.5% as a commission of total income which translates to US$ 1,937.47, with the balance of US$ 6,673 as a monthly income for farmers (table 2). When the milk volume and membership increases, this commission should slowly come down to 15-19% in order to encourage dairy development and milk procurement from outlying areas and promote more income generation by farmers and cooperatives.

Table 2. Minimum monthly volume of milk required, income generated and profit for the cooperative running an MCC
Milk volume per month in litres	15,000 (500 litres x 30 days)
Price of milk per litre US$	0.57
Total income from milk sale / month US$	8,611.00
Income for farmers / month US$	6,673.53
Income through commission for cooperative (22.5%) US$	1,937.47
Salary Expenses US$	851
Operation costs US$	466
Total expenses US$	1,317
Monthly savings for the MCC	620.47

In addition to the milk collection centre building, a borehole, a cooler, a lacto scan, a generator, milk cans, a weighing scale and buckets will be required to be in place at MCC either through donor support as a grant or Government or processors in a Zambian situation. Farmers should be able to manage, and maintain this asset. Thus the average relative cost of establishing a standard and viable milk collection centre in Zambia is estimated to be US$ 116,500 (table 3).

Table 3. Estimated Cost of Establishment of a MCC / milk bulking points
Item	Amount (US$)
MCC Building and other amenities including offices	45,000
Milk cooler tank	26,000
Generator	12,000
Electricity connection	4,000
Borehole + overhead tank	7,000
Milk cans/ buckets/filters/ alcohol gun	4,000
Lacto scan	2,500
Office furniture	1,000
Airfreight/ VAT/Tax/ Insurance on imported capital items	15,000
Total	116,500

According to Keyser (2006), cited by Steven et al (2011), in Kenya the capital equipment required for a typical milk bulking centre with 4,000 litre capacity of chilling tank was about US$ 80,000 which may be correct, while in Zambia, the authors stated that the cost of opening a new milk collection centre with a small 1,500 litre capacity cooling tank was estimated at around US$ 30,000. The authors of this paper feel that this estimate is not convincing and we believe that the Keyser’s (2006) estimate in case of Zambia was based only on the costs of milk cooler, buckets and cans and did not include other necessary basic infrastructure requirements costs for an MCC to be ideally acceptable and fully functional. Our estimates given in this paper covers all aspects of establishing a basic but viable MCC acceptable to Ministry of Health, Ministry of Agriculture and Livestock and the local authority. The MCC building should have a minimum of a milk receiving and storage room, office, store, committee room, toilets and room for generator.

A cow population of 600–1000 (local and dairy crosses) will be required which is estimated to be owned by about 200 farmers, within the radius of 15-20 Km of the proposed MCC with provision of breeding, feeding, water and animal health facility/ services. The MCC should be linked to a milk processor or MCC’s having their own milk processing, packaging and market unit. With this cattle population, it is possible to receive about 500 litres of milk per day (180,000 litres per year) which is in agreement with Keyser (2006) cited by Steven et al (2011) whose estimate was 200,000 litres per year for a viable MCC.

Initially the MCC’s will be able to earn a commission of about US$ 1,937.47 monthly and its operation cost will be US$ 1,317 per month as long as the MCC is built through a grant or contribution from the members. The monthly savings for the cooperative will be about US$ 620.47 towards future investment, repair and unforeseen expenses.

Conclusion

Recommendation

References

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A budgetary analysis of the relative costs of establishing a standard dairy cooperative-owned milk collection centre; a case study of the Zambian smallholder dairy sector

C Mumba, G S Pandey, K L Samui, C van der Jagt* and S W Muliokela**

Abstract