Pro-Poor

Livestock
Policy
Initiative

International
Farm Comparison
Network IFCN

A Review of Milk Production in

Bangladesh with Particular Emphasis
on Small-Scale Producers
T. Hemme, O. Garcia and A. R. Khan

A Living from
Livestock PPLPI Working Paper No. 7
TABLE OF CONTENTS

Preface................................................................................................................ ii
1 Executive Summary ............................................................................................... 1
Introduction ....................................................................................................... 1
Methodology ...................................................................................................... 1
Results ............................................................................................................. 1
2 Overview Milk Production in Bangladesh .................................................................... 4
2.1 Bangladesh Dairy in the Global Context ................................................................. 4
2.2 Recent Dairy Developments in Bangladesh .............................................................. 6
2.3 Processing and Marketing Channels for Dairy Products................................................ 8
3 Analysis of the Dairy Sector in Sirajganj District............................................................10
3.1 Recent Dairy Developments in Sirajganj................................................................10
3.2 Natural Conditions and Farm Structure in Sirajganj ..................................................12
3.3 Description of the Typical Farms in Sirajganj........................................................14
3.4 Farm Comparison: Household Approach ................................................................16
3.5 Farm Comparison: Whole Farm Approach ..............................................................18
3.6 Farm Comparison: Dairy Enterprise Approach .........................................................20
3.7 International and Regional Dairy Farm Comparisons .................................................24
3.8 Margins in the Dairy Chain: Farmer to Consumer .....................................................27
Annex 1 Methodological Background ...........................................................................29
Introduction ......................................................................................................29
The Central Objectives of IFCN ...............................................................................29
Methods and Principles.........................................................................................29
Cost Calculations ................................................................................................31
Farm Economic Indicators (IFCN Method) ...................................................................32
Cost of Milk Production Only ..................................................................................33
Annex 2 Information on Bangladesh and Sirajganj ...........................................................35
Annex 3 Major milk Processors in Bangladesh.................................................................36
Annex 4 Description of the Dairy Chain Calculations ........................................................37
References...........................................................................................................38

i
PREFACE

This is the seventh of a series of Working Papers prepared by the Pro-Poor Livestock
Policy Initiative. The purpose of this series is to review issues affecting livestock
development in relation to poverty alleviation.
The livestock sector plays a vital role in the economies of many developing countries. It
provides food, or more specifically animal protein in human diets, income, employment
and possibly foreign exchange. For low income producers, livestock also serve as a store of
wealth, provide draught power and organic fertiliser for crop production and a means of
transport. Consumption of livestock and livestock products in the developing countries,
though starting from a low base, is growing rapidly.
The purpose of this study is to assess the economics of dairy farming in Bangladesh and to
gauge the prospects for improving the dairy income for small-scale producers, which
currently form the backbone of the dairy industry. The document begins with a general
overview of milk production in the country, followed by a detailed study of dairy farming
in the northern district of Sirajganj. The study only addresses milk production from
bovines although the majority of the milk in Bangladesh is produced by goats. Preliminary
estimates of the margins in the dairy chain are provided. It is concluded that milk
production from bovines in Bangladesh is not competitive internationally and that under a
liberal trade regime for dairy products dairy farmers in Bangladesh are unlikely to fully
benefit from the vast increase in milk demand predicted to occur over the next ten years
unless productivity is significantly improved.
It is hoped that the paper stimulates discussion and any feedback would be gratefully
received by the authors and the Livestock Information and Policy Branch of the Animal and
Production and Health Division of FAO.

About the authors

Torsten Hemme (PhD): Head IFCN Dairy, Dairy economist at FAL-Federal Agricultural
Research Center, Network management at Global Farm GbR, Germany.
Otto Garcia (MSc): Dairy economist, PhD researcher University of Minnesota, USA.
A.R. Khan (MSc): Dairy economist, PhD researcher at the Bangladesh Agricultural
University, Faculty of Agricultural Economics and Rural Sociology, Mymensingh,
Bangladesh.
The authors co-operate in the IFCN to analyse dairy farming systems worldwide. For
details contact [email protected] or have a look on http://www.ifcnnetwork.org .

Disclaimer
The designations employed and the presentation of material in this publication do not
imply the expression of any opinion whatsoever on the part of the Food and Agriculture
Organization of the United Nations concerning the legal status of any country, territory,
city or area or its authorities or concerning the delimitations of its frontiers or boundaries.
The opinions expressed are solely those of the author(s) and do not constitute in any way
the official position of the FAO.

Keywords
Costs of production, Bangladesh, milk, policy, poverty reduction, small scale dairy, typical
farms.
Date of publication: 5 January 2004.

For more information please visit the PPLPI website at: http://www.fao.org/ag/pplpi.html
or contact: Joachim Otte , Project Coordinator, Pro-Poor Livestock Policy Facility
Email: [email protected] [email protected] Tel: +39 06 57053634 Fax: +39 06 57055749
Food and Agriculture Organization, Viale delle Terme di Caracalla, 00100 Rome Italy

ii
1 EXECUTIVE SUMMARY

Introduction
Milk production is a livestock enterprise in which small-scale farmers can successfully
engage in order to improve their livelihoods. Regular milk sales also allow them to
move from subsistence to a market based income. The main purpose of this study was
to gain insight into the household and farm economics of small-scale dairy farmers in
Bangladesh and to obtain estimates of their costs of milk production so as to gauge
their vulnerability to international competition. A case study approach is used, the
aim being qualitative insight rather than quantitative extrapolation.

Methodology
The district of Sirajganj, one of the major milk producing districts in Bangladesh, was
chosen for this study. The methodology applied for the economic analysis was
developed by the International Farm Comparison Network (IFCN) and utilises the
concept of typical farms. Farm types are determined on the basis of the knowledge
of regional dairy experts. The first (small) farm type in this study has been defined in
a way to represent the size that is close to the statistical average in the study area.
The other typical farms represent larger farm types and illustrate economies of scale
or exemplify a different dairy production system. Management levels on the typical
farms are average to slightly above average compared to other farms of their type.
In the case of Sirajganj, typical farms were defined by the criteria (a) location, (b)
size and (c) production system so as to cover the farm types that make important
contributions to milk production in the region. Data was collected using a standard
questionnaire, and a computer simulation model, TIPI-CAL (Technology Impact and
Policy Impact Calculations), was used for biological and economic simulations. The
farm input data and the related output figures were discussed and validated with local
experts and farmers.

Results

Milk Production in Bangladesh and Sirajganj District

At 2.11 million tons, milk production in Bangladesh in 2002 was relatively low, and
Bangladesh has to import around 250,000 tons of milk equivalent annually to satisfy
national milk demand. While 36 and 1 percent of the milk in Bangladesh are produced
by local cattle and buffaloes, it is goat milk that contributes the largest share of 62
percent to total milk production. Milk yields per dairy bovine (mainly cattle) are less
than half of those achieved in Pakistan and India. The vast majority (over 70 percent)
of dairy cattle are kept in herds with an average of 3.5 animals.

Analysis of Typical Farms in Sirajganj

Based on the IFCN methodology described, three farm types have been identified as
typical and were subjected to detailed analysis:
BD-2: This farm represents a rural household with 2 local cows and 0.4 ha of land. The
farm sells about 62 percent of its milk to the local milkman. This farm represents the
vast majority of farms and is close to the average farm size in the area.
BD-10: This farm is also located in a rural area but has 1.6 ha of land used for growing
small grain crops. Ten dairy animals (2 local and 8 crossbred cows) are kept. 90

1
 1 Executive Summary

percent of the milk is sold to a nearby milk collection point. The household depends
on the farm as the only source of income.
BD-25: This rural farm has 1.8 ha of land and keeps 25 crossbred cows. Milk (98
percent) is sold to a milk processing company with a collection centre nearby.
Although BD-10 and BD-25 might be considered as untypical dairy farms in Bangladesh
due to their larger herd sizes, a closer look at the dairy sector in Sirajganj shows that
these farms represent the fastest growing farm types in the district. Their selection
thus provides an outlook into the future of the dairy sector in Bangladesh and allows
the analysis of economies of scale.

Dairy Production Systems

On the two larger farms, the dairy animals are kept in tied stalls at all times while the
animals on the smallest farm graze several hours per day on communal land. Milking is
done by hand on all three farms. Feed rations are based mainly on home-grown fodder
and straw and have a small component of energy-rich agricultural by-products such as
cereal bran, broken rice, molasses, and oilseed cakes. Urea is also commonly utilised
by the two larger farms. On the latter, crossbred cows are the main type of dairy
animal whereas the smaller farm uses only indigenous breeds. The family is in charge
of the management of the farms and provides 100, 88, and 57 percent of farm labour
on BD-2, BD-10 and BD-25 respectively. Production per dairy animal ranges from 1,024
to 1,936 kg energy corrected milk per year.

Household Comparison
All farms have a diverse income structure, income sources being the sale of milk, cash
crops, vegetable, eggs, poultry and / or fish, and off-farm employment. Annual
household incomes lie between 1,160 US$ (BD-2) and 3,680 US$ (BD-25).
For all the farms, the main cash income source is on-farm (self-)employment (77 to 90
percent). Off-farm employment contributes only 6 percent to the household income of
the smallest farm and none on the two other farms. The non-cash benefits obtained
from the dairy (in the form of milk and manure for the household) contribute between
10 and 16 percent to the household income on the three farms.

Whole Farm Comparison

The returns from farming range from 1,362 to 16,576 US$ per year. Net cash farm
income closely follows the level of total farm returns. The highest net cash farm
income (3,270 US$/year) is achieved by farm BD-25. The net cash income of farm BD-2
is at a low of 898 US$ year. This is due mainly to the low share of milk sold.

Comparison of the Dairy Enterprises - Costs of Milk Production

The cost of producing 100 kg of energy corrected milk (ECM) lies around 22 US$ on all
three farms. Interestingly no cost difference was found between the small and the
large farms. This can be explained by the differing production systems, particularly
the related feed costs. The smallest farm (BD-2) grazes cattle for free on public
land. Therefore feed costs are very low while the larger farms have to purchase feed
or grow feed on their land. It appears that this feeding strategy of farm BD-2
compensates for the economies of scale of the two larger farms.
In the year 2002 all farms were able to cover their full economic costs. As long as milk
prices remain at the current level and the production systems (grazing on public land)
will remain unchanged, all farms can be classified as competitive in the short as well
as in the long run.

2
 1 Executive Summary

International Competitiveness of Milk Production

The costs of production of 22 US$ per 100 kg milk (ECM) in Bangladesh can be
classified as intermediate within the costs levels estimated by the International Farm
Comparison Network (IFCN) for the year 2002. Costs in Bangladesh are about 20
percent below the cost of production in the EU (28 US$ per 100 kg) but 40 to 50
percent above the levels in other countries in the Southern Hemisphere. The large
farms in India and Pakistan can achieve production costs below 15 US$ per 100 kg. All
three farm types will have difficulties to compete with imports of dairy products as
long as the world market prices for milk range between 15 and 18 US$ per 100 kg milk.
Moreover, milk producers in Bangladesh will have difficulties in competing with
producers from other countries in the region such as India and Pakistan.

Margins of the Dairy Chain in Sirajganj (preliminary estimates)

The prices paid to the farmer for milk with 4.5 percent fat vary between 53 and 83
percent of the consumer prices for milk at different fat contents. The extracted
cream value ranges from 0.03 to 0.10 US$ per kg. The returns obtained from
processing and retailing one kg of 4.5 percent fat milk in the formal sector are about
13 percent higher than in the informal sector.
The margin for milk processing and retailing in Sirajganj amounts to around half of
what the dairy chain in Europe covers to deliver the milk to the consumer. The highest
margins (0.23 US$/kg) in the chain are achieved by the co-operatives, while the
lowest margins (0.07 US$/kg) are made by farms that sell milk directly to consumers
with a fat content of 4.5 percent (no cream extraction).

Conclusions
Based on the consideration that 130 million people in Bangladesh should consume at
least 120 g of milk per day (as fluid or processed in any form), the annual milk
demand would be about 5.70 million tons. This estimate of milk demand in Bangladesh
demand is over two and half times FAOs recorded national milk production for the
country (for 2002). Therefore, meeting Bangladeshs potential milk demand is a huge
national task and the question arises how well-positioned Bangladesh is to meet this
milk demand.
This study shows that the 2 cow farm (BD-2) does not only cover its full economic
costs, but can produce milk at a cost almost as low as the larger farms included in the
study. This should be very encouraging for more than 7.2 million Bangladeshi families
involved in small scale cattle rearing, of which few make a profit and most consider it
a highly risky activity.
The small farm (BD-2) is competitive at the national level but not at the international
level. The cost of milk production of all farms in comparison to larger farms in India,
Pakistan and Oceania is around 50% higher. Assuming a liberal trade of dairy products
in the future all farms analysed will have to improve the production systems
significantly to gain from the growing demand of dairy products in the country.
Further studies of small dairy farms in Bangladesh need to include a land-less milk
production system, a typical goat milk production system and a more exhaustive
evaluation of the non-cash benefits obtained from dairy cattle (like draught power).
Moreover the cost reduction potential of the farms by improvements in farm
management, should be analysed.

3
2 OVERVIEW MILK PRODUCTION IN BANGLADESH

2.1 Bangladesh Dairy in the Global Context

World Milk Production

In 2002, with a production volume of 2.11 million tons Bangladesh produced 0.35
percent of total world milk production. This represents around 6.7 and 2.5 percent of
the milk production of Pakistan and India respectively or less than 2 percent of the
milk production of South Asia.

Dairy Bovines
Bangladesh has 24 and 0.8 million cattle and buffalo respectively, over two and a half
as many bovines as New Zealand, one of the major dairy exporters worldwide. Unlike
in India and Pakistan, milk production from bovines in Bangladesh relies heavily on
cattle rather than on buffaloes while goats contribute more than half of national milk
production.

Dairy Farm Sizes

The graph on the following page shows how small the dairy farms in India and
Bangladesh are in comparison with those of other major milk producing nations. The
most common herd size ranges between 1 and 2 cows per farm. These figures are
based on expert estimates as official farm structure statistics for the whole of
Bangladesh are not available. Saadullah (2000) estimates that over 70 percent of the
dairy farms would have an average of 3.5 bovines.

Milk Yields
The average milk yield per bovine reported for Bangladesh is extremely low. On
average a Bangladeshi cow is reported to produce around 200 kg/year, which is below
30 percent the production of an Indian cow. This low milk yield is mainly due to poor
feed resources and low milk productivity of the most common types of animal, which
are of one of the local breeds.

Milk Prices
Farm gate milk prices in Bangladesh are about 40 to 50 percent higher than in India
and New Zealand, but about 30 and 17 percent lower than in the USA and Germany
respectively.

Milk Production per Capita

A comparatively low national milk production and a high population result in a per
capita milk production in Bangladesh of 13 kg/capita/year, which is 16 percent of the
per capita milk production achieved in India.

Explanations of variables; year and sources of data:

Milk Production per Country: FAO Statistics at http://www.fao.org (as in May 29, 2003)
Dairy Farm Sizes (Average): IFCN Dairy Report 2003, Saadullah (2000).
Milk Yields per Milch Animal: Directorate of Livestock Services, Government of Bangladesh (2002)
Number of Live Animals: FAO Statistics including all bovine animals; at http://www.fao.org (as in May 29, 2003)
Farm Gate Milk Prices: Monthly Statistical Bulletin of Bangladesh (2002)
Production per Capita: total milk production in Bangladesh (given by FAO Statistics (at http://www.fao.org as in May 29,
2003) divided into the country population.

4
2.1 Bangladesh Dairy in the Global Context

5
 2 Overview Milk Production In Bangladesh

2.2 Recent Dairy Developments in Bangladesh

Developments of Milk Production in Bangladesh

From 1996 to 2002 milk production in Bangladesh increased by merely 3 percent. Over
62 percent of the countrys milk is goat milk whereas cattle contribute 36 percent.
Buffalo contribute about 1 percent to national milk production, comparable to the
contribution made by sheep (under others in the graph).

Regional Shares of Bangladesh Milk Production

Nearly half of the milk in Bangladesh is produced on the northern region, where
Sirajganj district is located. Good availability of fodder and multiple dairy
development programs are main reasons for the higher share of milk production from
this area.

Development of Milk Yields

Bangladesh has seen a slight improvement in milk yields in the period 1996 to 2002.
The majority of animals, which are local cattle breeds, increased milk yield by around
5 percent, while milk yield of crossbred cows and buffaloes increased by 4 to 8
percent.

Development of the Numbers of Live Animals

Between 1996 and 2002, the number of bovines in Bangladesh has increased by no
more than 1 percent. The buffalo population increased by about 4 percent in this
period, while the number of cattle increased by less than 1 percent. The main reasons
for the stronger increase in buffaloes are the establishment of the Rampal Artificial
Insemination Centre in Bagarhat District and a loan program for buffalo rearing.

Development of Milk Prices

While nominal milk prices in Bangladesh grew by 50 percent from 1996 to 2002 (in
Taka), the exchange rate to the US Dollar rose only by 40 percent and the national
inflation was 35 percent (1996 to 2002). In real terms, milk prices received by farmers
have increase by about 16 percent over the past six years.

Explanations of variables; sources of data:

Local Cattle: Dairy animal of local origin (Bos indicus)
Crossbred: local cattle crossed with a highly productive breed (Bos taurus; usually Holstein)
Milk production: FAO Agricultural Statistics (2003), http://www.fao.org, May 2003.
Regional Milk Production: Calculations from Directorate of Livestock Services, (2002); and Bangladesh Bureau of
Statistics (2003).
Daily Milk Yield: Directorate of Livestock Services (1996-2002).
Number of Live Animals: FAO Agricultural Statistics (2003), http://www.fao.org, May 2003.
Milk Price Development: Monthly Statistical Bulletin of Bangladesh (2002); data converted into ECM (Energy Corrected
Milk).

6
2.2 Recent Dairy Developments in Bangladesh

7
 2 Overview Milk Production In Bangladesh

2.3 Processing and Marketing Channels for Dairy Products

It is estimated that about 3 percent of the milk produced in Bangladesh flows through
the formal channels of processing. The remaining 97 percent are informally handled as
liquid milk through small travelling traders (locally called Farias) and distributing
traders (locally called Paikers) as shown in the diagram overleaf.

Liquid Milk
Subsistence farmers usually consume most of their farm milk in the form of fresh
liquid milk and various home-made dairy products such as curd and butter oil (ghee).
The surplus milk products are sold in the village or bartered in exchange for other
products.
More commercially oriented rural farmers (over 3 animals) sell their surplus milk
either to the local milkman or deliver it to the village milk collection point of the
local dairy co-operative society or, less frequently, to collection points of corporate
processing companies. Commercial farms near major population centres usually sell
their milk directly to the customer as the milk prices in towns are very attractive.

Dairy Products
A list of dairy products available in urban centres of Bangladesh will include
pasteurised liquid milk, butter, ghee, ice-cream and ice lollies, full cream milk
powder, skim milk powder, flavoured milk, sweet curd, cream and rasa malai
(sweetmeats).
Although both the formal and informal sectors process milk, their processing and
marketing systems are quite different. The formal sector, led by co-operative
societies, extracts cream from the raw milk to produce ghee and butter. The resulting
creamless milk is utilised as the main raw material for their pasteurised (3.5 percent
fat content) milk. This milk is sold in plastic bags of 0.5 and 1 litre.
Although most milk processing is done at the household level, sweetshops producing
sweetened dairy products are the main player. Sweetmeat is the local term for a
coagulated and sweetened milk product, which is consumed as a sweet snack and or
dessert. Sweetmeat is by far the most popular dairy product sold by the informal
sector followed by Ghee and some other typical sweets.

8
 2.3 Processing and Marketing Channels for Dairy Products

Formal Sector Informal Sector

3% of the raw milk 97% of the raw milk

Dairy Farmers

Milkman- I
Village Collection Point (Small travelling traders)
(Coop. or Private)

Milkman- II
(Distributing traders)

Central Processing Plant

(Coop. or Private) Retailers
(Sweetshops)

Distributors

Retailers

Consumers

Source: Own illustration (based on Saadullah, 2000).

9
3 ANALYSIS OF THE DAIRY SECTOR IN SIRAJGANJ DISTRICT

3.1 Recent Dairy Developments in Sirajganj

Milk Production
The total milk volume obtained from local cattle increased by about 20 percent from
1996 to 2002, whereas milk obtained from crossbred cows increased by 14 percent
over the same period. These increases were driven by higher milk yields for both types
of cows and by the replacement of local cattle with crossbreds. Buffalos are not very
prevalent in Bangladesh.

Milk Yields
Starting from a much lower milk yield level (around 3 kg per day), daily milk output of
local cows increased by 22 percent from 1996 to 2002 while for crossbred cattle the
increase was 11 percent (staring from around 6.2 kg per day).

Composition of the Dairy Herd

The total number of cattle in Sirajganj increased by less than one percent from 1996
to 2002. However, the number of cows of local breeds shows a small decrease of
about one percent over the period while the number of crossbred cows rose by around
2 percent. This substitution of local cattle with crossbred cattle is a result of the
experience that milk production with crossbred animals is more profitable and that
most farmers in the region can, with minor changes, achieve higher incomes.
Nevertheless, local cattle still constitute around three quarters of the cattle
population of the district.

Explanations of variables; year and sources of data:

Local Cattle: Original dairy animals (mostly Bos indicus), which have a relatively low milk yield but are well adapted to
local conditions.
Crossbreds: Dairy animals with varying degrees of a highly productive dairy genetics (Bos taurus; usually Holstein
Friesian) and one of the many Iocal breeds.
Milk Production: Bangladesh Milk Producers Co-operative Union Ltd, 2002.
Sirajganj Daily Milk Yields: Bangladesh Milk Producers Co-operative Union Ltd, Sirajganj, 2002.
Composition of the Dairy Herd: Bangladesh Milk Producers Co-operative Union Ltd, Sirajganj, 2002.

10
 3.1 Recent Dairy Developments in Sirajganj

Sirajganj M ilk Production Growth of Milk Production

110
140
100
90 120

80
100
70

1996 = 100%
'000 Tons

60 80

50 Local Cattle Milk

60
40 Crossbred Milk
30 40
Local Cattle Milk
20
Crossbred Milk 20
10
0 0
1996 1997 1998 1999 2000 2001 2002 1996 1997 1998 1999 2000 2001 2002

Composition of the Dairy Herd Changes in Herd Composition

100 104
90
103
Local Cattle Crossbred
80
70 102
1996= 100%
'000 Heads

60
50 101
40 Crossbred Local Cattle
100
30
20 99
10
0 98
1996 1997 1998 1999 2000 2001 2002 1996 1997 1998 1999 2000 2001 2002

Sirajganj Daily Milk Yields Growth of Milk Yield

7 140

6 120
Kg Milk/ Animal/ Day

5 100
1996= 100%

4 80

3 60

2 40
Local Cattle Crossbred Local Cattle Crossbred
1 20

0 0
1996 1997 1998 1999 2000 2001 2002 1996 1997 1998 1999 2000 2001 2002

11
 3 Analysis Of The Dairy Sector In Sirajganj District

3.2 Natural Conditions and Farm Structure in Sirajganj

Sirajganj district is situated between 240 01 and 240 47 North latitudes and between
890 15 and 890 49 East longitude. Sirajganj has an area of 2,498 km2 (964 sq. miles)
which including riverine areas, which is around 1.7 percent of the total area of
Bangladesh. Sirajgonj ranks 4th in size among the 16 districts of Rajshahi division and
25th among the 64 districts of Bangladesh.

Natural Conditions

Temperature
Sirajganj experiences moderate and high temperatures throughout the year with only
slight variation between seasons. Summer begins in mid-April and lasts up to mid-
June. Winter normally lasts from December to late February.

Rainfall
The monsoon (rainy) season commences towards the end of June and continues to
September. The level of rainfall is highest during the monsoon and the lowest in
March. Demand for irrigation from tube-wells in the area peaks in March.

Farmland Structure in Bangladesh

In Bangladesh, about 70 percent farms hold under 6 hectares of land. Most, if not all,
of these small farmers engage in some livestock farming as a parallel activity to the
crop and/or fish farming. Less than 8 percent of the farms have land holdings of more
than 18.5 hectares.
The economy of Sirajganj district is mainly dependent on agriculture. Over 60 percent
of the holdings perform multiple farming activities all year long. The most common
mixtures of enterprises are crop production (mainly paddy, wheat, pulses, vegetables
and other minor crops) and animal production (mainly dairy, goat, poultry, sheep and
fish farming).

Explanations of variables; year and sources of data:

Temperature: Bangladesh Meteorological Department. 2002.
Rainfall: Bangladesh Meteorological Department. 2002.
Farm Structure: Saadullah and Hossain. 2000.

12
 3.2 Natural Conditions and Farm Structure in Sirajganj

Rainfall in Sirajganj Region

300

250

200
Average (mm)

150

100

50

0
Jan Feb March April May June July Aug Sept Oct Nov Dec

Temperatures in Sirajganj Region ( C)

40

35

30

25

20
Days High Days Low

15

10
Jan Feb March April May June July Aug Sept Oct Nov Dec

Farm Structure in Bangladesh

Farm Type Land less Small Medium Large

Farm Land Size (ha) 0 - 0.019 0.02 - 1.00 1.01 - 3.03 > 3.04

Average Cow Number (hd) 2 2,9 3,7 4,4

Shares of Farm Types (%) 28,5 39,6 23,5 8,4

13
 3 Analysis Of The Dairy Sector In Sirajganj District

3.3 Description of the Typical Farms in Sirajganj

Three typical milk production systems have been identified by IFCN in the district of
Sirajganj. One farm from each category has been analysed for this study. In the
following part each farm is briefly described. More details, particularly about the
dairy production systems can be found on the next page.

2-cow farm (BD-2)

Location: A family farm with 0.4 ha of irrigated land located in the rural upland.
Activities: The farm keeps 2 indigenous cows of the Pabna type. Its feeding system
consists of 3 to 4 hours/day of grazing on communal land and stall feeding with some
concentrates. About 63 percent of the milk produced is sold to the local milkman. The
farm raises its own heifers as replacement. Off-farm income is minimal (6 percent of
total household income).

10-cow farm (BD-10)

Location: A rural farm with 1.55 ha of irrigated land (no land rented).
Activities: The farm keeps 2 indigenous and 8 crossbred cows. It delivers 90 percent
of the milk produced to the nearest collection point. The feed basis is provided by
crop residues and fodder, both grown on-farm. Lactating cows are supplemented with
cottonseed cake, molasses and urea. The farm raises its own replacement heifers. No
off-farm income is earned by any of the family members.

25-cow farm (BD-25)

Location: A farm in the rural area with 1.8 ha of irrigated land.

Activities: The farm keeps 25 crossbred cows. Over 97 percent of its milk is sold at
the nearest milk collection point. The feed rations consist of cereal straw, green
fodder, concentrate by-products such as oilseeds, wheat bran, molasses and urea. The
farm raises about 15 percent of its own heifers and purchases cows early in their
lactation or near calving.

14
 3.3 Description of the Typical Farms in Sirajganj

Farm BD-2 BD-10 BD-25

Units
Land Owned ha 0.40 1.55 1.80
Land Rented 0 0 0
Dairy Enterprise
Milk Animals no. 2 10 25
Indigenous 2 Indigenous
Breed description (Pabna type) 8 Crossbreds 25 Crossbreds
Liveweight kg 275 300 300
Milk yield kg ECM/cow/yr 1.024 1.385 1.937
Fat and protein content % 4.5% / 3.7% 4% / 3.5% 4% / 3.5%
% milk sold % 62% 90% 97%
Land use Dairy enterprise
Land use for dairy ha 0.180 0.540 1,100
Milk produced per ha Kg ECM / ha 10.900 25.454 44.015
Stocking rate LU / ha 5 7 14
Labour
Full time employees persons 0 0 2
Share of family labour % of total 100% 88% 57%
Hours per milking cow h / cow/ yr 1.463 937 607
Buildings
Mud & bricked house Bricked house + Bricked shed + roof
Housing type description + thached roof tiled roof (steel frames).
Building Built year 1999 1996 1998
Milking
Milking system description hand hand hand
Calves/ Animal/ Year head 0.91 0.98 0.98
Length of lactation days 270 295 295
Collection Centre km (far) 7 5 4
Herd management
Seasonality yes / no no no no
Dry period months 4 3 3
Feeding times per day 1 3 3
Death rate % cows 1.0 1.0 1.0
Cow Culling rate %/ year 15 15 25
Feeding
Feeding systems description Grazing + stall fed stall fed stall fed
grasses * + rice
Roughage feed source description grasses * + rice straw straw grasses * + rice straw
Broken rice/ bran Broken rice/ bran
+molasses +molasses
Broken rice + rice bran +oilseed** cake + +oilseed** cake +
Concentrates fed description +oilseed** cake +salts urea +salts urea +salts
Concentrate use in total t per cow 0.33 0.53 0.89
Concentrate input g / kg ECM 322.00 381.50 459.90
Calf rearing
Death rate of calves % calves 20% 20% 25%
Weaning period months 6 *** 6 *** 3 ***

Notes: * Grasses include millet types of green chops (and for BD2 native local grasses on road sides and public land).
** means cakes from Cottonseed and or Mustard seed.
*** calves are kept apart from the cows and at the milking time used to help the milk letdown.

15
 3 Analysis Of The Dairy Sector In Sirajganj District

3.4 Farm Comparison: Household Approach

Size of the Household - Labour Utilisation

The three farm families each consist of five or six members, which corresponds well
with the average family size in the region (six persons/family). Only family members
from the smallest farm work off-farm. The estimation of the allocation of family
labour to the dairy enterprise and its valuation have proven difficult, and the
estimates should be considered as tentative. It was estimated that household BD-2
sums a total of 4,080 working hours per year of which 56 percent are for its dairy, 14
percent for off-farm employment, and the remainder for other farm activities. BD-10
accumulates a total of 6,720 working hours (80 percent for the dairy and 20 percent
for the crop enterprise). BD-25 utilises 7,350 hours of labour per year (75 percent for
the dairy and 25 percent for the crop enterprise).

Household Income Levels

The household income includes the net cash farm income, the salary brought home
from off-farm employment and the value of manure (heating) and milk used in the
household. The annual household incomes range from 1,160 US$ (BD-2) to 3,680 US$
(BD-25). BD-10 has a relative high household income of 3,240 US$, which can be
explained by its low production costs.

Household Income Structures

The non-cash benefits obtained by BD-2 constitute 17 percent of its household
income, whereas 77 and 6 percent of its income come from its own farm employment
and off-farm sources respectively. These non-cash benefits do not include the draft
power provided by the dairy cows on farms BD-2 and BD-10 (used for soil preparation
and transportation mainly) the value of which lies in the order of 10 and 7.5
US$/cow/year for BD-2 and BD-10 respectively. BD-25 has a power tiller or simply
contracts out any heavy farm work when required.

Household Living Expenses

The family living expenses increase with increasing farm/herd size. All households are
able to cover their living expenses from their farm incomes. It should be noted that
the family living on the farm BD-2 on 1,160 US$/year (232 US$/person/year) survives
under poor living conditions. The households on BD-10 and BD-25 dispose of more
than 540 and 736 US$/person/year.

Explanations of variables; year and sources of data:

Size of the household: People living together in one house
Labour utilisation: Family labour used to generate income
Household income: Includes cash and non-cash incomes from farm and off-farm activities
Off-farm incomes: Includes all salaries for all family members
Non-Cash Benefits: Value of manure (7.5 US$/animal/year) & milk used by the family.
Net cash farm income: Total farm receipts minus total farm expenses
Household living expenses: Annual cash expenses for the family to maintain current living conditions.
Exchange rate used: 1 US$ = 59.63 Bangladeshi Taka.
Sources of Data: IFCN data collection based on expert estimations and statistics, year 2002.

16
 3.4 Farm Comparison: Household Approach

Size of the Households Labour Utilization

6 100%
90%
5
80%
Number of Persons

70%
4
60%
3 50% Off-Farm Activities
40% Farm/ Household W ork
2 30%
20%
1
10%

0 0%
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Household Incomes Income Structures

4.0 3.68 100%

3.5 3.24 90%

80%
3.0
70%
1000 US$/ year

2.5 60%
2.0 50%
40% Off-Farm Income
1.5 1.16 Off-Farm Income
Non-Cash Farm Benefits
Non-Cash Farm Benefits 30%
1.0 Net Cash Farm Income
Net Cash Farm Income 20%
0.5 10%
0.0 0%
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Non-Cash Benefits Household Living Expenses

0.50 1.75

Milk Manure 1.50

0.40
1.25
1000 US$/ year

1000 US$/ year

0.30
1.00

0.20 0.75

0.50
0.10
0.25

0.00 0.00
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25
Farm Types Farm Types

17
 3 Analysis Of The Dairy Sector In Sirajganj District

3.5 Farm Comparison: Whole Farm Approach

Farm Returns
Farm returns range from 1,362 (BD-2) to 16,576 (BD-25) US$ per year. The farm
returns are highly dependent on the herd size of the farms. The return structure show
that the larger the herd size the lower the contribution of the crop and other farm
activities to the total farm returns.

Net Cash Farm Income (NCFI)

The net cash farm income mainly follows the level of farm returns. However, although
BD-10 only had two fifths of the farm returns of BD-25, its net cash farm income
amounts to more than four fifths of the NCFI of BD-25. This can be explained by BD-10
having higher milk returns and considerably lower cash costs than BD-25.
The low share of milk sold (about 62 percent) explains BD-2s low net cash farm
income (about 900 US$/year).

Farm Assets
On a whole farm basis, land is the most important asset given that land prices are very
high (about 7,800 US$/ha). Therefore, land values represent from 60 to 70 percent of
farms assets. Cattle constitute the second most important asset category varying from
19 up to 31 percent of farm asset value. Other Animals in the graph overleaf refers
to goats, sheep, or poultry kept on the farm (relevant only for BD-2). Machinery,
buildings and cash on hand, are combined in the category of other assets and make
up between 15 and 8 percent of the value of farm assets.

Explanations of variables; year and sources of data:

Total returns: All cash receipts minus the balance of inventory (for example livestock).
Returns from the dairy: Milk, cull cows, heifers, calves, sale of manure, etc.
Returns from the crops: Sale of surplus crops like rice, wheat, vegetables, etc.
Other returns: returns from raising goats and poultry (for BD-2); fish and vegetable (BD-10); and selling manure (BD-25).
Net cash farm income (NCFI): Cash receipts minus cash expenses of the farm.
Profit margin: Net cash farm income divided by total farm returns.
Farm assets: All assets related to the farm (land, cattle, machinery, buildings, etc.)
Exchange rate used: 1 US$ = 59.63 Tk.
Sources of data: IFCN data collection based on expert estimations and statistics, year 2002.

18
 3.5 Farm Comparison: Whole Farm Approach

Total Returns of the Farm Return Structure

18 100%
16.576
16 90%

80%
14
70%
1000 US$/ Farm

12
60%
10
6.795 50%
8
40%
6
30%
4
1.362
20% Dairy Crops Other Farm Activities
2 10%

0 0%
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Net Cash Farm Income (NCFI) Profit Margin

4.0 70%

3.270
3.5 60%

2.882
3.0 50%
1000 US$/ Farm

2.5
40%

2.0
30%
1.5
20%
0.898
1.0
10%
0.5

0.0 0%

BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Farm Assets Asset Structure

23.155 100%
24
90%
21
80%
17.617
18 70%

15 60%
1000 US$/ Farm

50%
12
40%
9
30%
4.503
6 Land Cattle
20%

3 10%
Others Other Animals

0 0%

BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Farm Types Farm Types

19
 3 Analysis Of The Dairy Sector In Sirajganj District

3.6 Farm Comparison: Dairy Enterprise Approach

Cost of Milk Production

Milk production costs are very similar, 22.4 and 22.9 US$/100 Kg ECM milk for the
largest (BD-25) and the smallest farm (BD-2) respectively. The absence of any
apparent economies of scale can be explained by the following factors: (1) BD-2
reduces its production costs by grazing its animals on public land for free and has low
marketing costs by directly selling its milk at farm gate ; while (2) BD-25, by having a
relatively small farmland area allocated to its dairy enterprise, is forced to purchase
most of its feed, raising production costs, and the farms large volume of milk
produced requires haulage to the processing plant for around 0.85 US$/100 kg milk
(paid by the farm). In a typical year BD-25 culls 6 of its lowest producing cows which
leads to high replacement costs and increases what is referred to as Other Means of
Production) on the graph.

Return Structure
The returns per 100 kg ECM produced range from 28.0 to 29.85US$. This variation of
1.85 US% per 100 kg ECM is mainly attributable to differences in the milk returns
achieved. The returns from the sale of livestock (heifers and cull cows) vary between
4.35 to 4.70 US$ per 100 kg ECM. The market value of the non-cash benefits (manure
used by the household) are over three and a half times higher in BD-2 than in BD-25
(0.73 and 0.20 US$ per 100 kg ECM respectively).

Cost Structure
On the smaller farm, the main component of the production costs are the opportunity
costs for family labour since BD-2 has its cows grazing in communal lands for 2 to 4
hours per day and someone must vigilate them at all times. Thus, for BD-2 only 24
percent of the production costs are cash expenses. The two larger farms employ
workers and use more purchased feed such as concentrates and fodder, which
increases the cash costs significantly (75 and 85 percent of total cost). Furthermore,
the two larger farms have a 3-year loan each, whereas the small farm has none.
Contrary to expected economies of scale, BD-25 has higher feed costs and higher costs
for other means of production per litre of milk than BD-10. The higher costs of BD-25
for other means of production are mainly a result of purchasing cows in or near
lactation while the other farms raise their replacements.

Farm Income
All farm types cover their production costs from the profit and loss account and
produce a positive farm income. Per 100 kg milk this income is highest, 21.80 US$ on
the small farm (BD-2). The profit margin in the dairy enterprise ranges from 20 to 76
percent of the total farm returns. The figure for BD-10 differs significantly from the
whole farm margin. It seems that in this farm the margins non dairy farm activities are
above the dairy activities.

Entrepreneurial Profit and Returns to Labour

All the farms cover their full economic costs and generate an entrepreneurial profit
from 0.15 to 2.37 US$ per 100 kg milk. The returns to labour on the larger farms
(wage level earned by working on the dairy farm) are higher than the wage level in
the area around the farms.
Explanations of variables; year and sources of data:
Explanations of variables and IFCN method: s. Annex 2 and 3
Other returns: Manure at market value (for that used at home and on own farm).
Sources of data: IFCN data collection based on expert estimations and statistics, year 2002.

20
 3.6 Farm Comparison: Dairy Enterprise Approach

Costs of Milk Production Only Return Structure

35 35

Opportunity Cost
Other Costs- Non Milk Returns 30
30
Milk Price

25 25

US $/ 100 Kg ECM
US $/ 100 Kg ECM

20 20

15 15
Milk Returns Other Returns Cattle Sales

10 10

5 5

0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Costs Items Structure Cash/ Non-Cash Cost Structure

30 30

25 25
US $/ 100 Kg ECM

20 20
US $/ 100 Kg ECM

15 15

Other Means of Production

10 10
Land Costs Opportunity Costs
Capital Costs Depreciation
Labour Costs Cash Costs
5 5
Purchased Feed

0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Farm Types Farm Types

21
 3.6 Farm Comparison: Dairy Enterprise Approach

Farm Income Profit Margin

22 80%

20
70%

18
60%
16
US $/ 100 Kg ECM

14 50%

12
40%
10
30%
8

6 20%

4
10%
2

0 0%
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Entrepreneurs Profit Return to labour

3.0 0.3
Wage Level

2.7
Entrepreneurs Profit Return to labour
Return To
done for
2.5each farm separately. 0.3 Labour
0.25 Wage Level
2.4
Return To
2.1 Labour
0.25
0.2
2.0
100 Kg ECM

1.8
US$/ hour US$/ hr

0.2
0.15
1.5
ECM

1.5
Kg $/

1.2
US $/ 100 US

0.15
0.1
0.9
1.0
0.6 0.1
0.05

0.3
0.5
0.05
0
0.0

0.0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25
Farm Types Farm Types

22
 3.6 Farm Comparison: Dairy Enterprise Approach

Labour Costs Labour Input per Milch Animal

20.0 1600

17.5 1400

Costs of Family Labour 1200

15.0

Hours/ head/ year

US $/ 100 Kg ECM

Wages Paid
12.5 1000

10.0 800

7.5 600

5.0 400

2.5 200

0.0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Land Costs Stocking Rate

2.5 16

14
2
Cow/ ha of farmland
12
US$/ 100 Kg ECM

Land Rents Paid Calc. Rents f. own land

10
1.5
8
1 6

4
0.5
2

0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25

Capital Costs Capital Input per Milch Animal

1.8 500

1.6

1.4 400
US$/ 100 Kg ECM

1.2
US$/ Head

300
1.0

0.8
200
0.6

0.4
100
0.2

0.0 0
BD-2 BD-10 BD-25 BD-2 BD-10 BD-25
Farm Types Farm Types

23
 3 Analysis Of The Dairy Sector In Sirajganj District

3.7 International and Regional Dairy Farm Comparisons

For the comparisons in this section, two typical (small and large scales) dairy farms
were chosen for selected countries representing the regions of South Asia, Oceania,
Central and Western Europe and North America. The comparisons should only be
considered to provide indicative results and generalizations should not be made.

Milk Yields
Milk yields per cow range from 960 to 10,000 kg per year. These differences are due to
different production systems, genetic potentials and farm management. Only the
larger Indian farms, which are very well managed and rely on European dairy genetics
reach milk yields around the 4,000 kg mark, equal to the yields of New Zealand cows.
Within Asia, there are two interesting trends and opportunities for development: (1)
lactating animals in small farms in Pakistan yield 44 and 35 percent more than those
of small farms in India and Bangladesh. And (2) a lactating cow in the large Indian
farm yields 77 and 100 percent above the yields of cows in large farms in Pakistan and
Bangladesh. Small Pakistani farms may reveal directions for small scale farm
development in South Asia, while the large Indian dairy farm may do so for large-
scale dairy in South Asia.

Returns to the Dairy Enterprise

Milk prices range from a low 10 US$/100 kg in Pakistan to a high 29 US$/100 kg in the
USA. In South Asia, Bangladesh dairy farmers receive the highest price of over 23
US$/100kg, which is 1.28 times what New Zealand farmers get. This high price seems
to be due to the strong demand for milk in relation to the relatively low production
and availability.
With a couple of exceptions, cattle returns are more relevant for small farms than for
the large ones. Other Returns which includes milk and manure utilized on the farm
and or by the farm family are very important for all Asian farms, but particularly for
small dairy farms. Direct payments are only a feature of Poland, Germany and the
USA.

Cost of Milk Production Only

This indicator describes the long term competitiveness of milk producers. Results
indicate the following:
! Costs within countries, particularly within India, Pakistan, Poland and Germany
differ significantly. This is a clear indicator of strong structural change in the
future.
! In all small farms the main cost component are the opportunity costs of family
labour.
! The Indian and Pakistani milk producers are more competitive than those of
Western Europe (Germany) and the USA. The cost difference is more than 10 US $
per 100 kg milk.
! The small scale farmers in South Asia are more competitive than their small scale
counterparts in Poland (and presumably other EU accession countries).
! Average sized farms in South Asia have higher production costs (by 20 to 50
percent) than New Zealand dairy farms.
! Large sized dairy farms in Pakistan and India have lower costs than New Zealand
farms and can be competitive milk producers in the future on the world market by
having a competitive dairy chain.
! The farms in Bangladesh will have difficulties to compete against imports for the
world market and also from the other countries in South Asia such as India and
Pakistan.

24
 3 Analysis Of The Dairy Sector In Sirajganj District

Explanations of variables; year and sources of data:

Country codes: IN=India, PK=Pakistan, NZ=New Zealand, PL=Poland, US=USA, DE=Germany
Sources of data: Dairy Report 2003, data refer to the year 2002.

25
 3.7 International and Regional Dairy Farm Comparisons

Milk yields
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

PL-3
PK-1

BD-2
IN-2

IN-22

BD-25

NZ-239

NZ-447

PL-20

DE-35

DE-80

US-135

US-700
PK-10R

Returns of the Dairy Enterprise

35
Cattle returns Direct payments Other returns Milk price
30

25

20

15

10

0
PL-3
IN-2

PK-1

BD-2

BD-25

NZ-239

NZ-447

PL-20

DE-35

DE-80
PK-10R
IN-22

US-135

US-700
N

U
P

Cost of milk production only

Costs from P&L account - non-milk returns Opportunity cost (excl. quota)
79
Quota costs (rent and opportunity costs) Milk price
50

45

40

35

30

25

20

15

10

0
IN-2

PL-3
PK-1

BD-2

BD-25

NZ-239

NZ-447

PL-20

DE-35

DE-80
IN-22

US-135

US-700
PK-10R

26
 3 Analysis Of The Dairy Sector In Sirajganj District

3.8 Margins in the Dairy Chain: Farmer to Consumer

In this section, the margins in the dairy chain in Sirajganj are analysed. Due to
practicality and comparability among dairy channels, it is assumed here that each
dairy channel buys one kg of 4.5 percent fat milk, processes it into their most popular
liquid milk product, without adding any other ingredient (i.e. water, milk powder,
etc.) and sells milk and cream, if extracted, at local (retail) prices.
Although there is a value-adding business through combining locally produced milk
with imported milk powder and water to produce dairy products, this is beyond the
scope of this analysis. Therefore, these dairy chain calculations should be seen as an
exploratory exercise intended to support other sections of this study.

The Dairy Channels

Co-op 3.5 %: Co-operative buying milk at 4.5 percent fat and selling at 3.5 percent
fat.
Sweetshop 1.5 %: Private local processor buying milk at 4.5 percent fat from the
milkman, extracting fat and casein to produce sweet dairy products, and selling milk
at about 1.5 percent fat. The fluid milk business is marginal.
Direct sale 4.5 %: Dairy farmer selling milk directly to the consumer with 4.5 percent
fat.
The Co-op represents the formal sector whereas the others represent informal
channels.

Input Costs of the Dairy Chain

Milk prices paid to the farmer by the co-operatives are slightly lower (12 percent)
than the prices paid by the sweetshop, through its milk collectors, commonly known
as milkmen. Due to the high milk demand from nearby population centres and the
competition with dairy cooperatives operating in the area, these travelling milkmen
often pay higher prices than the competition as a way to secure supply for the
sweetshops in urban areas.

Returns of the Dairy Chain

The average consumer prices are 0.48 and 0.42 US$ for the milk and cream produced
from an initial kg milk in the formal and informal sectors respectively. The formal
sectors 15 percent higher premium is largely due to its milk pasteurisation and
packaging. However, this difference between the sectors will diminish as other value
adding steps are considered. The sweetshops are versed in adding value to the milk by
separating and adding value not only to the cream but also to the casein and the
whey. The Bangladeshi consumers seem to pay less attention to the fat content of
their milk than their Indian or Pakistani counterparts; which might partially explain
the low number of buffaloes in Bangladesh.

Margins (Output - Input Value)

The margins attained from processing and retailing vary between 0.07 and 0.23
US$/kg milk by dairy channel. The formal sector (co-op) has a 50 percent higher
margin than the informal sector (sweet shop). Farms selling their milk directly have
the lowest margin as they do not participate in the cream business. It should be
mentioned that in the analysis for the farm selling directly the marketing costs were
included in the production cost. The formal channels and the sweetshops have about
half and one quarter of the margin of European dairy chains (0.3 to 0.5 US$/kg).

Margins and Farmers Shares

Farmers shares in the total consumer prices are higher in the informal
sector(sweetshop) than in the formal one (65% vs. 53%).

27
 3.8 Margins in the Dairy Chain: Farmer to Consumer

Input costs of the Dairy Chain Returns of the Dairy Chain

Basis 1 kg milk from the farmer 4,5% fat Basis 1 kg milk from the farmer 4,5% fat
0,5 0,5

0,45
Farmers Milk Prices

0,4 0,4

0,35

0,3 0,3

US/ kg Milk
US/ kg Milk

0,25 Output 2: Cream sold

Output 1: Milk sold

0,2 0,2

0,15

0,1 0,1

0,05

0,0 0
Coop 3.5% Sw eetshop Direct Sale Coop 3.5% Sw eetshop Direct Sale
1,5% 4,5% 1,5% 4,5%

Margins (Output - Input Value) Margins and Farmers Shares

0,40 100%

90%
0,35

80%
0,30
70%

0,25
60%
US$/ Kg

0,20 50%

40%
0,15

30%
Margins for processing/ retailing
0,10
20%
Farmers Milk Price

0,05
10%

0,00 0%
Coop 3.5% Sw eetshop Direct Sale Coop 3.5% Sw eetshop Direct Sale
1,5% 4,5% 1,5% 4,5%

28
ANNEX 1 METHODOLOGICAL BACKGROUND

Introduction
In this annex we will present the methods and sources of information used to collect
data about the Indian dairy sector and how the costs of production for the selected
typical production systems are calculated.
This project has followed the framework used by the International Farm Comparison
Network (IFCN). IFCN is a world-wide association of agricultural researchers, advisors
and farmers. These participants select typical agricultural systems in key production
regions in their individual countries. In 2002, the number of participating countries
extended to 24 countries that represent 74 percent of the world milk production.
Within this scientific Network, FAL-Federal Agricultural Research Centre (Germany)
through its Institute of Farm Economics and Rural Studies is acting as the co-
ordination centre for scientific issues.

The Central Objectives of IFCN

The central objectives of the international farm comparison network are:
1. To create and maintain a standardised infrastructure through which production
data of the major agricultural products (milk, beef, wheat, sugar, etc.) and from
major producing regions of the world can be effectively compared and discussed.
2. To analyse the impact of the structure of production, technology applied and
country-specific policies on the economic performance of agribusinesses, their costs of
production and global competitiveness.

Methods and Principles

In order to achieve these objectives, IFCN employs the following methods and
principles:
Direct contact with the production protagonists. A team of advisors and farmers is
put together to set up the typical production models and to revise the final results.
This approach brings the results closest to reality.
The principle of Total Costs. IFCN considers both direct costs and margins, and the
indirect (fixed) costs (i.e. depreciation and interests of the infrastructure used) and
the opportunity costs for owned assets and production factors (i.e. family labour,
land, capital).
A single and homogeneous method is utilised to calculate the costs of production for
all participating countries. The IFCN standard is not the only truth, but a) it is
scientifically correct, b) it includes all the existing production costs, and c) it creates
transparency and international comparability in the arena of costs of agricultural
production. Each IFCN member and client can reorganise the costs at his convenience
and present them in the particular format of his country while he maintains an
internationally comparable set of results.
The concept of setting (regional) typical agricultural models. A team of country
experts, advisors and producers is formed to identify and set up the typical regional
production models for each agricultural product. Typical production models must
represent the common production structures in the region or country.

29
 Annex 1 Methodological Background

In the case of dairy production, for example, a working team composed of advisors,
consultants and producers is formed as a panel. The first working step is to define the
typical milk production systems of the major dairy regions in country. This model may
be a 4-cow farm, feeding mostly cut grasses to fully confined animals, combine milk
production with some other agricultural activities such as wheat and rice production
in 3 ha of irrigated owned land, and milking is done by hand twice a day.
The second working step is to collect all the needed information from these typical
models. For this, IFCN has developed a standard questionnaire. It is crucial that these
data collected should neither reflect an individual farm (too many particularities may
hurt the ability to generalise the results) nor be an arithmetic average (an average
does not show much about the technology and the economics involved). The typical
model should rather represent real and common situations of the region and show
clearly the predominant technology and infrastructure. Such models will be preferred
by analysts.
The model TIPI-CAL (Technology Impact and Policy Impact Calculations) is utilised for
the simulations of these typical models and the calculations of their costs of
production. TIPI-CAL can be easily shared with all IFCN members since it is a
spreadsheet in MS-Excel. This model is a combination of production (physical data)
and accounting (economic data). TIPI-CAL also consists of both a structure of costs of
production and a simulation component (without optimisation). The simulations can
be done for a period of up to 10 years in order to evaluate the growth, investments,
policies or market conditions. For each year, TIPI-CAL produces a Profit and Loss
Account, a balance and cash flow statement.
Allocation of costs of production. When the typical milk production systems have
several agricultural activities besides dairy, fixed costs and expenses (i.e.
depreciation) are distributed to each activity according to their use. For example, the
depreciation of the machinery, which is used, for the dairy and the crop enterprises is
allocated according to the hours worked in each.
Data about farm and off-farm household economics. IFCN takes into account all
activities of the typical production systems, plus all the off-farm incomes and
expenses realised by the owner and his family. This more complete picture of the
typical model is necessary to obtain reliable information about the current economic
situation of the model (and the household) and about the future of the farm
(simulations).
All the methods and principles above have been applied in this project. Full panels
were not set up since these models have already been part of the IFCN activities for
the year 2002. The IFCN fieldwork experience supports that the analysis of costs of
production shows no significant difference between the participation of one advisor
and a full panel. Therefore, it was decided that an IFCN scientist first visit each and
every model, talk with the owners to collect project-specific information, analyse the
data and then have the results cross-checked by local experts and farmers.
The analysis of costs of production and the competitiveness of the typical models are
found in parts 3.6. The graphs follow the same structure as those in the IFCN Annual
Dairy Report. The main objectives of this report are a) to analyse the main typical
milk production systems in the district of Sirajganj, Bangladesh, and b) to assess the
impacts of risks and changes made to key farm variables on the economics of the
small-scale-dairy-farm household. This report shows the comparative world position of
the Bangladeshi dairy industry, a comparison of the costs of production for the main
milk production systems in Sirajganj, and a modelling chapter.
The modelling chapter utilises the simulation capability of TIPI-CAL in order to assess
the effect of changing prices (for all models), policies, production practices and
technology, and farm risks assessments for the small-scale dairy model.
For more information about IFCN, visit www.ifcnnetwork.org and www.ifcndairy.org

30
 Annex 1 Methodological Background

Cost Calculations
The cost calculations are based on dairy enterprises that consist of the following
elements: Milk production, raising of replacement heifers and forage production and/
or feed purchased for dairy cows and replacements.
The analysis results in a comparison of returns and total costs per kilogram of milk.
Total costs consist of expenses from the profit and loss account (cash costs,
depreciation, etc.), and opportunity costs for farm-owned factors of production
(family labour, own land, own capital). The estimation of these opportunity costs
must be considered carefully because the potential income of farm owned factors of
production in alternative uses is difficult to determine. In the short run, the use of
own production factors on a family farm can provide flexibility in the case of low
returns when the family can chose to forgo income. However, in the long run
opportunity costs must be considered because the potential successors of the farmer
will, in most cases, make a decision on the alternative use of own production factors,
in particular their own labour input, before taking over the farm. To indicate the
effects of opportunity costs we have separated them from the other costs in most of
the figures.
For the estimations and calculations the following assumptions were made:

Labour costs
For hired labour, cash labour costs currently incurred were used. For unpaid family
labour, the average wage rate per hour for a qualified full-time worker in the
respective region was used.

Land costs
For rented land, rents currently paid by the farmers were used. Regional rent prices
provided by the farmers were used for owned land. In those countries with limited
rental markets (like NZ), the land market value was capitalised at 4 per cent annual
interest to obtain a theoretical rent price.

Capital costs
Own capital is defined as assets, without land and quota, plus circulating capital. For
borrowed funds, a real interest rate of 6 per cent was used in all countries; for
owners capital, the real interest rate was assumed to be 3 per cent.

Depreciation
Machinery and buildings were depreciated using a straight-line schedule on purchase
prices with a residual value of zero.

Adjustments of fat content

All cost components and forage requirements are established to produce ECM (energy
corrected milk with 4.0 percent fat and 3.3 percent protein).

Adjustment of VAT
All cost components and returns are stated without value added tax (VAT).

Adjustment of milk into ECM

The milk output per farm is adjusted to 4 percent fat and 3.3 percent protein.
Formula: ECM milk = ((total marketable milk production * 0.383*milk fat in percent)+
(total marketable milk production * 0.242*milk protein in percent) + (total marketable
milk production * 0.7832))/3.1138.

31
 Annex 1 Methodological Background

Farm Economic Indicators (IFCN Method)

+ Total receipts =

+ Crop (wheat, barley, etc.)

+ Dairy (milk, cull cows, calves, etc.)

+ Government payments

- Total expenses =

+ Variable costs crop

+ Variable costs dairy

+ Fixed cash cost

+ Paid wages

+ Paid land rent

+ Paid interest on liabilities

= Net cash farm income

+ Non cash adjustments =

- Depreciation

+/- Change in inventory

+/- Capital gains / losses

= Farm income (Family farm income in Dairy Report 2001)

- Opportunity costs =

+ calc. interest on own capital

+ calc. rent on land

+ calc. cost for own labour

= Entrepreneurs profit

32
 Annex 1 Methodological Background

Cost of Milk Production Only

Returns
& Costs
US $ / Non-milk
100 kg returns
milk Opportunity Entrepreneurs profit
costs
Family
Opportunity farm income
costs
Other costs

Returns =
Other costs
Milkprice
- Non-milk
returns

Returns of the Costs of the Costs of milk

dairy enterprise dairy enterprise production only

Method
The total costs of the dairy enterprise are related to the total returns of the dairy
enterprise including milk and non-milk returns (cattle returns and direct payments).
Therefore the non-milk returns have been subtracted from the total costs to show a
cost bar that can be compared with the milk price. The figure beside explains the
method.
Other costs: Costs from the P&L account minus non-milk returns (cattle returns and
direct payments, excl. VAT).
Opportunity costs: Costs for using own production factors inside the enterprise (land *
regional land rents, family working hours * wage for qualified workers, capital: Own
capital * 3 percent).

Returns of the Dairy Enterprise:

Milk price: Average milk prices adjusted to fat corrected milk (4 percent excl. VAT).
Cattle returns: Returns selling cull cows, male calves and surplus heifers + /- livestock
inventory (excl. VAT).
Other Returns: Selling/home use of manure

Costs by Cost Items

Costs for means of production: All cash costs like fuel, fertiliser, concentrate,
insurance, maintenance plus non-cash costs like depreciation for machinery and
buildings (excl. VAT).
Labour costs: Costs for hired labour + opportunity costs for family labour.
Land costs: Land rents paid + calculated land rents for owned land.
Capital costs: Non-land assets * interest rate (equity * 3 percent, liabilities * 6
percent).
Quota costs: Payments for rented quota and depreciation for quota bought.

Cash and Non-Cash Costs

Cash Costs: Cash costs for purchase feed, fertiliser, seeds, fuel, maintenance, land
rents, interest on liabilities, wages paid, vet + medicine, water, insurance,
accounting, etc (excl. VAT).

33
 Annex 1 Methodological Background

Depreciation: Depreciation of purchase prices for buildings, machinery and quotas

(excl. VAT).
Opportunity costs: Costs for using own production factors (land owned, family labour
input, equity).

Economic Results of the Dairy Enterprise

Farm income per farm: Returns minus costs from P&L account of the dairy enterprise.
Farm income per kg milk: Farm income per farm (dairy enterprise) / milk production
Profit margin: Share of farm income on the total returns: Farm income divided by the
total returns.
Entrepreneurs profit: Returns minus costs from P&L account of the dairy enterprise
opportunity cost allocated to the dairy enterprise.
Net cash farm income: Cash receipts minus cash costs of the dairy enterprise or: Farm
income + depreciation
Return to labour: Entrepreneurs profit plus labour costs (wages paid plus opportunity
costs) divided by total labour input.
Average wages on the farm: This figure represents the gross salary + social fees
(insurance, taxes, etc.) the employer has to cover. Calculation: Total labour costs
(wages paid plus opportunity costs) divided by the total hours worked. To calculate
this the number of hours worked by the employees and the family has been estimated
by experts.
Labour input: The estimation of hours worked and the valuation of these hours is
extremely difficult especially in family farms. In the IFCN network this method will be
intensively discussed and improved during the next workshops.
Labour costs: Paid wages and opportunity costs for own labour of the dairy enterprise.
Land costs: Paid land rents and opportunity costs for own land (calculated rent) of the
dairy enterprise.
Stocking rate: Number of dairy cows (young stocks excluded) / ha of total farmland.
Capital costs: Paid interests and opportunity costs for own capital (excluding land
capital and quota capital). For equity 3 percent and for liabilities 6 percent interest
rate is used in all countries. This reflects the method of capital using costs
developed by Isermeyer 1989.
Capital input: Total Assets (land, buildings, machinery, cattle)/ number cows.

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ANNEX 2 INFORMATION ON BANGLADESH AND SIRAJGANJ

Bangladesh Sirajganj
Items % of BD
(Area in Acres) (Area in Acres)
Number of holdings 17,828,187 399,875 2.24
% of small holdings 79.87 79.06
% of medium holdings 17.60 18.22
% of large farm holdings 2.52 2.72
Operated area
Operated area of all holdings 20,484,561 453,387 2.21
Average operated area per holding 1.15 1.13
Operated area of all farm holdings 19,957,144 422,845 2.12
Average operated area per farm holding 1.69 1.79
Homestead area 1,318,415 37,296 2.83
Average homestead area per holding 0.07 0.09
Average homestead area per non-farm household 0.05 0.06
Average homestead area per farm holding 0.09 0.11
Cultivated area 17,771,339 348,677 1.96
Average cultivated area per farm holding 1.50 1.47
Net temporary cropped area 16,450,528 340,944 2.07
Average net temporary cropped area per farm holding 1.39 1.44
Gross cropped area 28,616,451 629,832 2.20
Intensity of cropping (%) 174 185
% of HYV rice to gross cropped area 36.7 37.3
Wheat local 508,042 15,856 3.12
Wheat HYV 1,013,947 24,983 2.46
Average bovine animal per holding 1.25 1.04
Average goat-sheep per holding 0.82 1.04
Average poultry per holding 7.10 5.90
Agricultural labour
Number of agricultural labour household 6,401,453 108,417 1.69
% of all holdings 35.91 27.11

Small: A farm holding having a minimum operated/cultivated area of 0.05 to 2.49 acres.
Medium: A farm holding having an operated area 2.50-7.49 of lands
Large: A farm holding having an operated area of 7.50 acres and above

Source: Census of Agriculture, 1996 and Bangladesh Bureau of Statistics (2001), GOB, Dhaka.

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ANNEX 3 MAJOR MILK PROCESSORS IN BANGLADESH

Average milk sales

Name of the Enterprise Market share (%)
( 103 litres/day)
Milk Vita 110 62.16
Arong 38 21.48
Amomilk 4 2.26
Shelaida 4 2.26
Bikrampur 3 1.69
Savar Dairy 3 1.69
Aftab Dairy 5 2.82
Safa Dairy 3 1.69
Tulip Dairy 7 3.95
Total 177 100

Source: Saha, G. C. and. Haque, S.A.M.A. (2001). (From Milk Vitas primary data. 2000)

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ANNEX 4 DESCRIPTION OF THE DAIRY CHAIN CALCULATIONS

Formal Milk Channels Informal Milk Channels

Coop 3.5% Sweetshop 1,5% Direct Sale 4,5%
Variables Units

Dairy Processing activities based on 1 kg milk bought from the farmer

INPUTS
Input: Milk from the farmer
Quantity Kg 1 1 1
Fat Content % estimation 4.5% 4.5% 4.5%
Protein Content % estimation 3.5% 3.5% 3.5%
Purchase Price US$/ Kg 0.25 0.28 0.33

FARMERS MILK PRICES US$ 0.25 0.28 0.33

OUTPUTS
Output 1: Milk sold Description Standard Creamless Whole
Quantity Kg 0.966 0,900 1.0
Fat Content % 3.5% 1.5% 4.5%
Protein Content % estimation 3.1% 3.5% 3.5%
Consumer Price US$/ Kg 0.47 0.38 0.40

Output 2: Cream sold

Quantity cream Kg 0.034 0.1 0,000
Fat content of cream % 30% 30% 0
Quantity of fat Kg 0.03 0.03 0
Consumer price for cream US$/ Kg 0.96 0.96 0

TOTAL CONSUMER PRICES US$ 0.48 0.44 0.4

MARGINS
Sum of all Returns US$ 0.48 0.44 0.4
-Farmers Milk Price US$ 0.25 0.28 0.33

FINAL MARGINS US$ 0.23 0.155 0.07

Notes: Exchange rate: 60 Tk. per US$

1- Milk handlers in Sirajganj use multiple methods and accurate information on them is seldom shared. For this preliminary calculations,
we found necessary to collect the most important variables and use a standard and simplified method to compare the main dairy
channels.
2- The assumptions of the method chosen are: 1- each channel buys one Kg 4.5 % fat milk from the farmer, 2- each channel processes
this Kg milk into its most popular milk plus cream when applicable, 3- no other input is added (i.e. water, fat, milk powder, etc.), and 4-
this milk and cream are valued at the (final) consumer market prices in Sirajganj.
3- The selected method is weakest at analysing the Sweetshop channel since it makes its main business from non-fluid milk products
(which are completely excluded by this method).

Source: Prices and processing channels were gathered in Sirajganj through personal communications; fat and protein contents for the
Informal sector are based on assumptions from the Authors.
37
REFERENCES

Chapter 1: Summary

Chapter 2: Bangladeshi Dairy Sector

Bangladesh Bureau of Statistics (1996 - 2003). Statistical Year Book of Bangladesh,
Statistics Division, Ministry of Planning, Government of the Peoples
Republic of Bangladesh.
Bangladesh Bureau of Statistics (1999). Structure of Agricultural holdings and Livestock
Population Census of Agriculture 1996, Volume-2, Ministry of Planning,
Government of the Peoples Republic of Bangladesh.
Bangladesh Meteorological Department. (2002). Government of the Peoples
Republic of Bangladesh, Dhaka, Bangladesh.
Directorate of Livestock Services (1996-2002) Development and Activities of Livestock
(in Bengali) Department of Livestock Services-An overview, Government of
the Peoples Republic of Bangladesh, Dhaka, Bangladesh.
FAO Agricultural Statistics (1996-2002). At http://www.fao.org (last checked by
authors on March 29, 2003)
IFCN Dairy Report 2001.
IFCN Dairy Report 2002.
Milk Vita (2002). Bangladesh Milk Producers Co-operative Union Ltd.
Baghabari Dairy plant, Sirajganj.
Monthly Statistical Bulletin of Bangladesh (2002). Government of the Peoples
Republic of Bangladesh, Dhaka, Bangladesh.
Saadullah (2000). Small Dairy Production and Marketing in Bangladesh,
Department of Animal Science, Bangladesh Agricultural University,
Mymensingh, Bangladesh.

Chapter 3: IFCN Analyses of Dairy Farming in Sirajganj

Personal Communications (Interviews with main players in the dairy sector of
Sirajganj) (Done between September 2002 and May 2003).
IFCN Methods and Internal Databases.

Annexes
Saha, G. C. and. Haque, S.A.M.A. (2001). Small-scale processing and marketing in
Bangladesh including reference to micro-credit facilities (good market
access)Milk Vita: A case study. Bangladesh Milk Producers' Co-operative
Union Ltd. Dugdha Bhaban, Bangladesh.
Census of Agriculture (1996) and Bangladesh Bureau of Statistics (2001), Government
of the Peoples Republic of Bangladesh, Dhaka.

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