Peri-urban milk production in Peru: Assessing farmers’ decision-making within a changing market

 T Bernet, J Julca*, J Sáenz* and G Prain

International Potato Center (CIP), Apartado 1558, Lima 12, Peru
t.bernet@cgiar.org

*Agrarian University La Molina, Livestock Department, Apartado 456, Lima, Peru.

Abstract

This study assesses past, present, and future development trends of the dairy sector in the surroundings of Lima City. While historical data were used to track the evolution of milk production in the Lima Department in the past, expected future changes were analyzed by the application of a farm household optimization model to representative small-, medium-, and large farms in the region. 

Results show that milk producers on the coast of Lima currently face favorable market conditions, as milk prices are much higher than in other regions, thanks to increased competition among local milk buyers, who are confronted with unused processing capacities and are unable to meet demand from their "local" market, Lima City. This situation is likely to change in the near future, however, as milk production is growing rapidly (7 % per year). Once the Lima market has become saturated with its own bulky and perishable dairy products, milk prices are likely to fall. The drop in price will hurt small and medium farms most, provoking that many of these farms will go out of business. Large farms are in the best position to withstand milk price reduction because of their economies of size. These have considerably lower average production costs which enables them to negotiate with input providers for feed prices and quality. 

As the implementation of economies of size determines the long-term success of milk production on the coast, the only viable strategy for small and medium milk producers is to grow. In that process, smaller farmers might benefit most in merging their herds and in establishing producer associations, which would strengthen their market position, both up- and down-stream. Such associations would also provide better access to information, particularly in the field of feeding and reproduction practices, where improvements are most important for small farmers. For large farms, the key is to manage efficiently the different contracted specialists involved in production.

Keywords: Peru, milk production, peri-urban agriculture, farming system research, regional development.

Introduction

Like other developing countries, Peru has experienced strong urban growth during the last few decades. Today, 72 percent of its 25 million inhabitants live in cities. Metropolitan Lima alone makes up 30 percent of Peru’s total population (INEI 2000). As migration from mountain regions to coastal urban centers continues, urban consumer preferences become ever more significant in determining domestic agricultural production, not only in terms of what is produced, but also how and where it is produced. The proximity between the production region and the market thus becomes particularly meaningful for milk, a bulky, perishable product with high market value.

This study describes how milk production in the Lima Department has evolved in the past and assesses how it may develop in the future. For the latter purpose, a farm household optimization model was used to analyze likely consequences for milk producers when internal and external production variables change.

Past development of Lima’s dairy sector

Milk production around Lima began at the end of the 19^th century, when demand for milk from wealthy urban consumers led to the creation of a regional milk market. Milk was produced around Lima on a few large farms (haciendas). As local urban demand increased rapidly, milk processing became more important. At the beginning of the 20^th century, the establishment of pasteurization plants and the importation of dairy breeds increasingly modernized the regional dairy sector (Gonzales et al 1979).

Although since the 1940s Arequipa and Cajamarca became the largest milkshed in the country, Lima has remained an important milk-producing region. The reason is its own vast market and the fact that the other two milksheds confront high transportation costs to supply especially perishable and bulky dairy products to the Lima market, such as fresh milk and yogurt. In response to this constraint, and to the general lack of refrigeration in urban markets and households, Arequipa and Cajamarca shifted to the production of evaporated milk, which has become the dominating dairy product within Peru, stimulated by a strong product promotion by its multinational producers (Bernet 1998).

From the 1960s to the 1990s, the expansion of milk production was hampered, particularly around Lima, as government policy emphasized the provision of consumers with low-cost goods (Lajo 1986). Domestic milk production was particularly affected, as great amounts of milk powder were imported, directly and indirectly subsidized by both the Peruvian government and industrialized countries (Junta del Acuerdo de Cartagena 1987). These market distortions remained in place until President Alberto Fujimori implemented structural reforms in the 1990s. As a consequence, milk production in Lima Department has grown rapidly since 1992 (Figure 1).

Figure 1: Development of milk production in the main milk-sheds of Peru (* including Moquegua and Tacna).
Source: Ministry of Agriculture (1985 to 1999).

The fact that Lima City, with its more than 7 million inhabitants, has continued to grow at more than 6 percent annually in recent years explains its expanding dominance in terms of demand for fresh dairy products at the national level. Comprising more than 80 percent of national consumption for industrially processed dairy products (McBride 1997), Lima must be considered "the market" for the milk processing industry. Consequently, as a production region, Lima has the advantage to have its market “next door”. It is this geographic advantage that has led to the recent establishment of additional milk processing plants by different companies in peri-urban Lima (USDA 1999). Hence, the considerably higher milk prices in Lima (Figure 2) reflect two things: a certain “geographic protection”, because milk from other milksheds faces higher transportation and refrigeration costs when shipped to Lima, and an enhanced competition among local milk buyers trying to reduce their current processing over-capacity with higher milk purchases. Along with the dairy industry, local milk buyers and municipalities also compete for milk produced near Lima. The first use the milk mainly for own processing (e.g., fresh cheese, “manjar blanco”); the latter provide milk to schoolchildren through food programs.

Figure 2: Development of real prices for milk [* producer price] and potatoes and onions
[** wholesale price][Base is December 1999]; Source: Ministry of Agriculture (1992 to 1999).

Current situation of Lima’s dairy sector

The relevance of milk production in improving the livelihood security of small-scale farming explains why milk is not only produced at the coast in the Lima Department but also in the highlands, the “Sierra” (Figure 3).

Figure 3: Milk production in the Lima Department (average 1994–1996).
Source: Ministry of Agriculture, Lima

In the highlands, milk is produced mostly within mixed farming systems, where cattle are also used for animal traction (Mayer and Fonseca 1979). Milk production is of considerable importance for highland farmers as it provides a secure income throughout the year (Wiegers et al 1999) and entails less risk in terms of price and production than the cultivation of agricultural crops (eg: potatoes). Moreover, cattle represent a "living savings account", providing an economic safety net during harsh climatic conditions (e.g. dryness and frost) (Ørskov 1993). Sierra cattle are mainly landraces or landrace crosses with Holstein-Friesian or Brown Swiss, with lower milk performance than common dairy cattle. In this respect, the cattle in the highlands are adapted to the seasonal lack of high quality feed, when crop residues and natural pastures become important (Horber 1984). Small farm sizes and the general lack of irrigation in the highlands have caused relatively small herd sizes of less than 20 animals (Table 1).

The poor condition of the road system that links the highlands with the coast, and its vulnerability to bad weather, makes milk collection from the highlands difficult for the dairy industry. Because of constrained market access, highland farmers tend to shift toward cheese production (Rodríguez 1994). Based on data from Wiegers et al (1999), cheese producing farmers in the upper Cañete valley obtain a milk price similar to the one received on the coast (US$0.25–0.35 per litre), but they incur additional costs for processing and transportation. Market access problems explain why milk production in the Lima Department has expanded less in the highlands compared to the coast, where now more milk is produced with fewer cows (Table 1).

In contrast, milk producers on the coast have easy market access. The increased number of milk buyers has created a favorable situation for producers, as the dairy industry has stimulated the demand for dairy products during the last few years, particularly in Lima City. Within the context of this increased demand for milk, industrial processors are forced not only to pay higher milk prices but also to guarantee regular milk payments and improved access to production factors (e.g., capital, semen, veterinary products, feed concentrate). The strong incentive for processors to collect more milk for reducing unused processing capacity gives an additional advantage to large farmers, who can even negotiate special services such as support for dairy cattle imports (McBride 1997; USDA 1999).

The recent impetus to milk production on the Lima coast is also reflected in a strong growth in fodder production. In the Cañete Valley, during the 1998–99 growing season, four times more land was dedicated to fodder maize production than in 1996–97 (Figure 4). The fact that the production of maize for grain increased by 3,000 hectares during this same time span (mainly driven by the chicken market) shows the immense potential of the coast to rapidly increase fodder when there is demand.

Figure 4: Production of maize for fodder and grain in the Province of Cañete.
Source: Ministry of Agriculture, Lima (1996 to 1999).

The prevalence of fodder and feed concentrate markets in the coastal zone of Lima has resulted in a wide variety of farm sizes, particularly in terms of number of cattle. Stall-feeding dominates milk production on the coast. The majority of farmers keep more animals than they can feed with their own land. Thus, most "dairy farms" are no more than cattle stables. Many of them are located on desert land, which is much cheaper than irrigated land. Fodder and feed concentrate are purchased daily or weekly from specialized producers or intermediaries, and manure is sold to regional crop growers every couple of months. Since this type of production system has no real upper or lower limit of herd size, the number of cattle on these "farms" ranges from 1 to 800. However, there are considerable differences between small, medium, and large farms in terms of production levels, technologies, and economies of scale (Avni 1996). In general, all these aspects improve with larger herd sizes (Table 2).

Small farms are commonly run by poor people within urban settlements. Milk production is liquidity-constrained and deficient in both feeding and reproduction practices. This is expressed in the low body weights, delayed first-insemination dates, and high mortality rates of their cattle. Small farms are usually pure stall-feeding systems with minimum stable infrastructure, located next to farmers’ houses. Feed quality is low, as small farmers strongly depend on local intermediaries and the feed quality they offer. Because farmers often lack access to high-quality feed and equity, they mainly use maize without cobs and wheat bran to feed their dairy cattle. Whenever possible, milk production is a complementary economic strategy to improve livelihood security. In fact, milk production is a particularly important income source for elderly people, who have limited options to find other work (Julca 2000).

Medium and large farms have far better feed and reproduction practices. They commonly use maize with cobs and feed concentrate mixes, prepared on-farm. Since the dairy cattle on these stables are grouped by age and lactation stage, the quality and quantity of feed are adjusted to the animals’ specific nutrient requirements. Family labor is commonly replaced with contracted labor, including different specialists such as veterinarians, nutritionists, and accounting personal.

The main differences between medium- and large farms result from economies of size, leading on large farms to both lower average costs and higher milk yield per cow. Moreover, medium farms are more equity-constrained and are therefore mostly pure stables on desert land. In contrast, large farms have their own crop land, used for fodder production, as their owners have sufficient equity to make such an investment, besides affording the necessary infrastructure and machinery to guarantee efficient milk and fodder production. Obviously, on large farms cows are always milked by machine, in contrast to small or sometimes medium farms, where hand milking is common (Sáenz 2000).

Methodological approach

Based on farm survey data (Julca 2000; Sáenz 2000), census data (INEI 1995), and milk collection statistics, three farm types were defined for the coast of Lima referring to small farms (10 cows), medium farms (35 cows), and large farms (220 cows). The three farm types reflect average production coefficients for the corresponding farms, as roughly outlined in Table 2. A farm household optimization model (Bernet et al 2000) was used to assess the potential impact on farmers’ profits and production structure when the production context changes (e.g. feed prices and quality, herd management, milk prices and production levels). Each farm type is modeled separately, to take into account the particular production context (e.g. production levels, feed quality, product and factor prices) (see Appendix). Small and medium farms are pure stables; the large farm includes an additional 10 hectares of cropland for fodder production.

The household optimization model (based on linear programming) maximizes annual farm profit within a clearly defined production context. Profit is defined as the return to own labour, equity, and land, being used for consumption expenditures, investments, or savings. Based on four quarters, the model establishes feed balances for crude protein and metabolizable energy, given a guaranteed minimum fibre intake. The model limits the animals’ fresh- and dry-matter intake according to user-defined coefficients in relation to the animals' genotype and to herd management (i.e. body weight, milk production and milk fat content, levels of food intake, mortality rates, date of first successful insemination, and average calving intervals). The basis for each feed balance is "one cow equivalent", defined as a herd unit by metabolic size consisting of one cow plus the relative share of the other animals in the herd. Since the model has a static character, based on a one year timeframe, replacement rates are derived that maintain herd sizes stable. Replaced animals are valued at current market prices. All prices are exogenous.

Analysis of farmers’ current profit levels

Results show remarkable effects of economies of size between the different farm sizes, as profits dramatically increase with larger herd sizes. Small farms can expect an average annual profit per cow of approximately US$250, compared to US$460 for medium farms and US$890 for large farms, assuming that all farms are completely run by the owner (i.e. incurring no administration costs) (Figure 5).

The considerable profit increase per cow of larger farms is related to better feed and herd management, resulting in increased body weight, milk production, and herd fertility of the cattle (e.g. lower mortality rates, shorter calving intervals, earlier first inseminations), and lower input prices. The contracting of nutrition and reproduction specialists drives the first aspect; the latter is a result of improved negotiation power, particularly for purchasing feed. On the cost side, most important are economies of scale referring to labour, infrastructure, and capital (Figure 5).

Figure 5: Income and cost structure per cow of small, medium, and large farms (for "corn" in the figure legend read "maize")

Impact of feed on farm profits

For all farms, feed plays a predominant role. Feed not only accounts directly for more than 50 percent of total production costs, but also represents considerable indirect costs due to the labour requirements for organizing, mixing, and distributing it. To guarantee a high-quality feed mix at low cost, medium and large farms also invest time in price analysis, as the prices of alternative feeds vary strongly between seasons and among providers (e.g. cottonseed, fish oil, and plant residues of marigold and asparagus).

Maintaining access to various high-quality feed sources, particularly fresh maize (with cobs), is crucial for efficient stall-fed milk production. The seasonal variation in planted area of maize, along with growers’ propensity to sell grains and the rest of the plant separately (i.e. maize without the cobs) create frequent supply bottlenecks, which cause an immediate rise in price as well as a drop in quality for purchased fodder. Larger farms can protect themselves to some extent from this phenomenon by growing some of their own maize, using silage, and by making special contracts with maize growers. In this respect, small milk producers are the worst off, having to rely on whatever fodder is available from local intermediaries, usually low-cost maize without cobs.

In fact, the substitution purchase of maize kernels for whole maize lowers farm profits considerably. On small and medium farms, profits decrease by around 30 percent, despite the lower price of the maize without cobs (Figure 6). On large farms, profit decreases only by approximately 10 percent, as to some extent their own high-quality maize compensates for the deficient nutrient content of the purchased low-quality maize. In contrast, for not having access to their own land, small and medium farms are forced to purchase higher levels of [relatively expensive] feed concentrate to equilibrate the required nutrient balance.

For large farms, the results show that varying maize yields do not significantly impact profits. For example, an increment of maize yield by 30 percent only increases profits by 5 percent, given that half of the fodder is produced on-farm. As own-produced fodder results not much cheaper than purchased fodder of the same quality, the main advantage of growing fodder is the ability to ensure and maintain a constant supply of high-quality feed for lactating cows. In this respect, silage production plays an important role, allowing large farms to cope better with seasonal variations in fodder availability and quality. Because of their economies of scale, large farms can produce silage at relatively low cost. A complete shift from fresh maize to silage would decrease profits by only 5 percent.

Figure 6: Expected profits with purchased fodder maize with cobs and without cobs, respectively (for "corn" in the figure legend read "maize".

Overall, the quality of purchased maize is highly relevant. While larger farms have the advantage of negotiating contracts with maize growers to secure better fodder quality, small and medium farms can hardly influence the quality of the maize delivered to them. Along with the above-mentioned 30 percent reduction in profit from the use of maize without cobs (Figure 6), small farmers' profits are further reduced when very old maize is delivered. Because of the drastically reduced nutrient content of old maize, expected profits can be reduced by 10, 20 or even 30 percent (Figure 7). Conversely, profits can be increased if young, tender plants are purchased. However, this is almost never the case, since maize growers wait until the grains have hardened.

For medium and large farms, the quality of the maize delivered by intermediaries is also important.   Larger farms are able to offset the effects of low-quality fodder by producing their own maize (fresh or silage); but medium farms are strongly affected when purchased maize is of poor quality, as profits drop by 20 or even 40 percent in such case.

Figure 7: Income effects of varying quality of purchased feed concentrate and forage maize (for "corn" in the figure legend read "maize").

Small farmers find themselves in a similarly disadvantaged position in the purchase of feed concentrate. On the one hand, because of their small herd size, it is often not worthwhile or feasible for them to acquire all the ingredients required to mix their own feed concentrate. On the other hand, buying a prepared feed concentrate from an intermediary makes them vulnerable to being cheated, as feed mixes tend to be adulterated with lower-quality ingredients. To some extent, this explains why small farmers primarily use wheat bran rather than ordinary feed concentrate (Julca 2000).

Nevertheless, the model results show that either better-quality or lower-priced feed concentrates would lead to considerable profit increases, by 20 to 50 percent (Figure 7 and Figure 8). In either scenario, the consumption of feed concentrate and maize would be increased at the expense of wheat bran. The particular strong profit response of declining prices of feed concentrate on small farms is related to the (low) quality of purchased maize (without cobs), which is partly replaced by feed concentrate as its price decreases. Correspondingly, this effect is weaker in medium and large farms for the use of a higher-quality maize (with cobs). However, higher milk production levels of cows on medium and large farms imply a stronger dependency on feed concentrate. This causes considerable profit reductions when feed concentrate prices increase relative to their quality, provoking profit reductions by around 20 and 10 percent, respectively (Figure 7 and Figure 8).

Figure 8: Effects on profits of varying prices of purchased feed concentrate and forage maize (for "corn" in the figure legend read "maize").

Impact of herd management on farm profits

In practice, it is difficult to separate efficient feed management from efficient herd management, because the latter cannot be achieved without the former (Lotthammer and Wittkowski 1994). However, the conceptual separation of herd management from feed management helps assess what income effects could be expected from better herd management alone. In fact, expected profits change substantially with different herd management practices, defined by lower mortality rates, earlier first inseminations, and shorter calving intervals (see Appendix). With very good herd management, profits can be increased by up to 50 percent in all farms, depending much on current management levels and thus the potential improvements in this respect. Small farmers would suffer severe income losses when very poor herd management is practiced, where the herd size cannot reproduce itself anymore (Figure 9).

Figure 9: Effects on profits of varying herd management levels.

Impact of milk production and milk prices on farm profits

Overall, milk prices and milk production levels have the strongest impact on farm profits. The lower the profits (Figure 5), the greater the effect (Figure 10). Correspondingly, a milk price increase/decrease of 15 percent could increase/decrease small farmers’ profits by more than 60 percent. In this sense, viable milk production in small and medium farms is endangered when milk prices decrease by more than 15 percent, while large farms are in a better position to withstand milk price fluctuations. Although a decrease in milk prices of 30 percent could induce profit losses of almost 60 percent, large farms with 220 cows would still gain approximately US$370 per cow per year, or US$ 80,000 in total.

It must be noted that milk prices are more important than cows’ milk production levels. This is based on the fact that an increment in milk price results in an equal increment in profit, while an increment in milk production also results in an increment in the cost to reach the higher production level. Therefore, an increase in milk production is only half as beneficial as an equal increase in milk price (Figure 10).

Figure 10: Effects on profits of varying milk prices and milk productivity levels of cows.

Expected changes in the regional dairy market and their implications

In the short term, Lima’s milk production is likely to continue to grow. The main reasons for this are:

• the growing demand for fresh (perishable) dairy products within the region (Huapay 1997)
• the over-capacity of the regional milk processing industry (USDA 1999),
• Peru’s relatively low consumption of dairy products (around 65 kg milk equivalents per person per year)
• the country’s low self-sufficiency levels in processed dairy products (around 50 percent) (McBride 1997).

Moreover, as milk powder prices are expected to rise in the next few years due to further reduction of export subsidies in industrialized countries (Konandrades 1999), domestically produced milk is likely to have an increasing comparative advantage over imported milk. This rather positive perspective for milk producers provides an incentive for current producers to intensify milk production and to increase their herd sizes, which is also fomented by the current tax-free status for dairy cattle imports (USDA 1999).

In the long-term, this positive perspective is likely to change once the Lima market reaches a certain level of saturation for bulky and perishable dairy products. This scenario may occur sooner than expected, with a subsequent drop in milk prices, due to

• the current high level of milk prices paid in the region (more than 30 percent higher than in other milk sheds)
• the fast growth of milk production in the region (around 7 percent annually)
• the reduction of competition in the active dairy sector in Lima, as Gloria S.A. has purchased Friesland S.A’s dairy processing plant in 1999.

Further improvements in road systems linking the remote areas of the highlands with the coast may also accelerate this process. As in the past, low labour costs along with reduced transportation costs may stimulate milk production considerably in the highlands when better market access is provided (Mosley 1982; Gallard and Vallier 1988; Seifert 1990).

Nonetheless, there are some uncertain factors in this development path. One is the speed with which such regions can augment milk production, as herd fertility is generally low and the import of dairy breeds is expensive. Another is that it is unlikely that current milk processors will invest in additional dairy plants in these areas because they are now confronted with considerable over-capacity in their milk processing plants in Lima.

Equally crucial for farmers in the coastal zone of Lima will be the development of the regional feed market. In this respect, most important is the evolution of the regional fodder maize market, since maize supplies nutrients at a lower cost than feed concentrate. Since fodder-maize quality and price are strongly correlated — i.e.when fodder is scarce, quality is low and prices are high — this issue is even more important for small and medium farmers, as they entirely depend on purchased feed. The development of the regional and national maize market will strongly depend, in turn, on the development of markets for other agricultural produce. Because of higher profitability of agricultural crops, both for domestic consumption (e.g.vegetables and fruits) and export (e.g. sugarcane and cotton), an expansion of those crops at the expense of fodder crops is likely, if fodder prices don’t increase (Figure 11). Nonetheless, it is very probable that the market for poor-quality fodder maize (maize without cobs) expands further, as a by-product, induced by further growth of chicken production in Peru. In such a scenario, small milk producers would benefit most, as their main feed source would ultimately become cheaper.

Figure 11: Trends in land use in the coastal zone of Lima 
Sources: Census data from INEI for 1961, 1972 and 1993.

Lima’s milk producers will also strongly be affected by the evolution of feed concentrate prices. In this sense, the development of domestic agricultural production is highly relevant, as different crops produce interesting by-products used in feed concentrates (e.g., cotton, sugar cane, and asparagus). The domestic and international maize grain markets are also relevant, since about 50 percent of the maize grains used in feed concentrate are imported. However, no drastic price changes are expected in the international maize market.

To sum up, despite the fact that the currently high milk prices in the region seem to promise a good future for the Lima milk shed, longer-term perspectives are not overly favorable, as milk prices are expected to decrease, leading to severe income losses for all farm types. Due to the resulting milk price reductions, many producers may go out of business, especially small and medium farms due to their low economies of size, as other income generation opportunities become economically more interesting. In this sense, the upkeep of small-scale milk production will crucially depend on available job-opportunities to make a living. This is the reason why milk production under these conditions is expected to keep its importance for elderly or handicapped people, for the low opportunity costs of their labour.

Promising farm strategies

In general, the most important strategy for farmers is to reach beneficial economies of size in the long-term. In the short-term farm strategies vary according to the farm size, given the different production context.

For small farms, any increase in profits is significant, given profit levels of around US$5 per day. Consequently, access to good milk prices and the implementation of better feed and herd management is of primary importance. In this respect, small farmers should form local producer associations linked to a milk collection center to strengthen their negotiation position vis-a-vis milk buyers and feed providers. Such associations would provide better access to production-relevant information and technologies and could facilitate other relevant activities for its members (e.g. collective purchase and preparation of feed concentrate, contracts with fodder-maize producers, implementation of artificial insemination). It should be noted that such associations also help improve farmers’ record-keeping, a precondition for successfully implementing improved farm and herd management, which ultimately increase profits and herd size (Julca 2000). Whenever possible, small milk producers should supplement their dairy business with other working opportunities, even more as profits are expected to decline in the future.

Regarding the vulnerability of medium farms to price decreases, the main strategy must be to attain a larger herd size and thus better economies of size to enhance farm profits. Most important is the implementation of optimal herd management to achieve maximum herd growth. When herd sizes cannot be sufficiently increased in the short-term, farmers should consider merging their herds to achieve the necessary economy-of-size effects to withstand lower milk prices. This option seems more feasible than individually importing dairy cattle, due to common financial constraints of medium farms. Merging among medium farmers is likely to provide the necessary equity to acquire irrigated land for implementing high-quality on-farm fodder maize production (fresh and silage) to offset seasonal feed scarcity.

Large farms are in the best economic situation by far. Although their profits also decline when milk prices decrease in the region, they will be least vulnerable for relying on favorable economy-of-size effects. Correspondingly, they will be the least affected when milk prices fall. As the number of industrial milk processors declines, causing lower producer prices and higher consumer prices — and higher gain margins for processors —, large farms may start to process their own milk, given their high levels of daily production and their proximity to Lima City. On the production side, large farms should concentrate on implementing and maintaining optimal farm management practices, based on contracting highly specialized professionals in the fields of animal nutrition, breeding, and reproduction. Moreover, close links to research institutes seems relevant to guarantee good access to knowledge and technology (e.g. milking techniques, oestrus detection, cooling of cows during summer months). Good management of the combined efforts of different specialists ultimately determines a large optimal farm size and thus maximum farm profit.

Suggested policy interventions

With regard to the high share of milk imports, a cost-effective public sector promotion of milk production seems justified in the short-term. This would complement current exoneration of import taxes for dairy cattle imports. For small farmers, policy interventions should target the creation and assistance of milk producer associations, which can benefit farmers in numerous ways, as already discussed above. In this respect, the public sector should purchase the milk used for its local school food programs from these associations to generate secure income for these farmers. For medium and large farmers, explicit policy interventions are less relevant. In fact, in the long-term, when imports of dairy products are reduced, it may be more constructive if public policy interventions emphasized the promotion of milk production in the highlands than milk production on the coast. However, further research is needed to analyze the comparative advantage for milk production at the national scale.

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