A farm economic analysis in different dairy production systems in Bangladesh

M M Uddin, M N Sultana*, O A Ndambi*, T Hemme* and K J Peters

Department of Animal Breeding in the Tropics and Sub-tropics, Humboldt University of Berlin, Germany
* IFCN Dairy Research Center at the Department of Agricultural Economics, University of Kiel, Schauenburger Str. 116, 24118 Kiel, Germany
muddin_bau@yahoo.com

Abstract

Dairying in Bangladesh is growing fast but faces problems of high input and low output prices leading to lower profitability. Due to globalization and the impact of world milk price changes, dairy farmers need to find ways of reducing costs and increasing returns in order to be more competitive. The objective of this study is to provide a detailed farm economic analysis of extensive, intensive and traditional dairy production systems in Bangladesh by using the (Technology Impact Policy Impact Calculations) TIPI-CAL model in order to identify points of intervention for cost reduction. Two typical farms (one average-sized and one large-sized) from each production systems were selected in three regions.

The results showed that each system differed in terms of inputs, outputs, costs, returns and entrepreneur’s profit. The large-scale intensive production system had the lowest milk production costs (30.88 US-$/100 kg Energy Corrected Milk (ECM) compared to 43.46 US-$/100 kg ECM for the small-scale traditional system. The highest milk yield was observed in the large-scale intensive dairy farming system (1600 kg ECM/year). Milk yield increased and the cost of milk production decreased with increasing farm size. Small-scale farmers of extensive and traditional farming system had a negative entrepreneur’s profit (-0.93 and -0.27 US-$/100 kg ECM, respectively), and were not able to cover their full economic costs from dairying. The high opportunity cost for own factors of production (land, family labour and capital), the differences in economies of scale and institutional support (infrastructure, provision of support services such as artificial insemination and veterinary services) are the key drivers for differences in costs of production in different systems and low profitability.

From these results it is suggested that, farmers need to adopt new cost reducing management strategies and the government should take initiatives to reform the institutional arrangements by liberalizing input markets, developing basic infrastructure and facilitating access to yield increasing technology which can, ultimately, reduce costs, improve on productivity and farm profit.

Key words: Costs and returns, dairy farming systems, entrepreneur’s profit, typical farms

Introduction

Bangladesh has 24 million cattle, out of which 6 million are dairy cattle of local and crossbreds (DLS 2008). The majority of the dairy cattle are in the hands of smallholder dairy producers. The country has one of the highest cattle densities of 145 large ruminants/square kilo meter (sq.km) compared with 90 for India, 30 for Ethiopia, and 20 for Brazil (Karim 1997). The numbers of dairy farms are estimated at about 1.4 million with an average herd size of 1-3 cows (Hemme 2008). Also dairying is part of the mixed farming systems in Bangladesh (Saadullah 2001) and a predominant source of income, nutrition and jobs (Miyan 1996; Haque 2009). Dairying is also considered a strong tool to develop a village micro economy of Bangladesh (Shamsuddin et al 2007) in order to improve rural livelihoods and to alleviate rural poverty. More regular cash income can be generated through market-oriented dairies and more employment per value added unit has been observed in dairying than in crops (Asaduzzaman 2000; Omore et al 2002). There are three major dairy production systems in the country based on input and outputs: extensive, intensive and traditional (Uddin et al 2009a).

Milk production growth has increased from 4.1% to 7.4% per annum in 2000-2005 and 2005-2008, respectively (Hemme 2008). Even with this faster growth the per capita milk availability in 2008 was only 19 kg (Hussain et al 2008), which was far below the requirements (92 kg/person/year) as indicated by the World Health Organization (WHO). The growth of consumption increases at a rate of 4% per year (Hemme 2008). This means that in future the dairy industry of Bangladesh will be ‘demand-’ or ‘market-driven’ which corresponds to the doubling of demand for milk and milk products in 2020 in all developing countries including Bangladesh (Delgado et al 1999, Ndambi et al 2007). The key drivers for this increased market demand for dairy products are the rapid urbanization, increased population growth, and rise in absolute income (Delgado et al 1999). According to Bangladesh Economic Review (2006), the per annum growth rate of 7.23% in GDP in 2004-05 for livestock was the highest of all sub-sectors. This increase in demand has created an enormous market opportunity that can be exploited by the smallholder livestock owners who represent 70-80% of the total milk produced in the country (Jabbar et al 2005). In order to take advantage of emerging market demands for reducing their poverty, smallholders have to face challenges to improve production costs and productivity (Uddin et al 2009b). The recent historical rise in world food prices has further aggravated the situation of dairy input prices (e.g. higher price for feed, artificial insemination, veterinary services and medicine) which has also increased farm costs and ultimately affects farm profitability. This increasing input price coupling with recent historic fall of milk price push the dairy farmers in more difficult situation. The institutional arrangement in the study areas does not favour dairy farmers. The economic situation of the dairy farmers is aggravated by lack of basic infrastructure, poor access to artificial insemination and veterinary services, disorganised market structure and lack of access to technological facilities. This also limits dairy farmers’ access to inputs and support services.

Therefore, there is a growing need for information about detail economic production parameters to enhance competitiveness of both the factor market and product market, locally and internationally. While farmers need to know more about the economic indicators such as cost and profitability, research on this aspect is very limited and controversial (Saadullah 2001; Alam 1994; Rao and Odermatt 2006; Khan 2007). This creates the necessity of conducting research on detailed economic indicators considering not only profitability but also input prices, factor market, product market as well as productivity.  Moreover, there is a lack of knowledge on detailed economic parameters of milk production systems especially at farm level (Ndambi et al 2008) which is also true in the case of Bangladesh dairying. Studies show that management strategies that ensure low cost milk production and favour local competitiveness compared to foreign production as well as high returns from dairying are the key incentives for farmers to continue their business (Ndambi and Hemme 2009).

For this reason, this study focuses on in-depth economic analysis to compare different farming systems (extensive, intensive and traditional) in terms of costs, profit and productivity in three regions (Dinajpur, Sirajgonj and Kishorgonj) of Bangladesh. The analysis is based on a typical-farm approach. A panel of dairy experts was formed to select the typical farm in each region and validate the data. A typical farm represents the most common milk production systems in a particular area or region or country (Hemme 2000). The incentives for this study is to find the optimum ways for minimizing the cost and increasing the profit to become competitive which is essential for future sustainability of dairy development in Bangladesh.

Methodology  

This study applies the method developed by International Farm Comparison Network (IFCN). This method utilises the concept of ‘Typical Farms’ and the Technology Impact Policy Impact calculations (TIPI-CAL) model developed by Hemme 2000 (Typical farm is defined as the farms which represent the most common dairy farms available in specific study areas or region or country in terms of herd size, milk yield, farming systems and management level. In a statistical sense, typical farm is the modal farm (based on calculation of mode) but not the average farms (Dillon and Skold 1992). The typical farm has an average management and performance and produces a high proportion of the total milk in the region compared to the total milk in the country). This method has been refined to suit its applicability on an international scale. Therefore, this method comprises of two major parts (a) Analytical model (TIPI-CAL model) that is used to analyse the data and (b) Typical Farm Approach (TFA) to select typical farms, data collection, and data validation.

The limitation of IFCN method is that it relies on the selection of few typical farms (one small farm and one large from each production system) to represent the whole dairy farm population in the area. The selection of typical farm is done in such a way that it represents the majority of the dairy farms in the study areas. This method is beneficial in a complex dairy production system with scarce resources and limited data and less time to understand the milk production systems because it uses the less data but produces better results than other available economic analytical methods (Ndambi and Hemme 2009). This is because of its strong scientific basis, capability to have access to data on all existing costs, transparency in analysis and comparability in international scale in the arena of costs of agricultural production and produce results which are closer to the reality than the statistical average (Isermeyer et al 2003; Hemme et al 2004; Holzner 2004).

The use of typical farm approach in agricultural research is not new rather it has history of century. The concept of typical farm was first used by Elliot in 1928 and there after a number of scientists support the concept of typical farms (Elliot 1928; Taussig 1939; Marshall 1952; Hatch et al 1982; Dillon and Skold 1992)

Analytical model (TIPI-CAL)

The TIPI-CAL model is a production and accounting model which can be used for economic simulation. This model is also a very good analytical tool for better understanding of farming systems and milk production worldwide. The TIPI-CAL model considers the following calculations and runs through a number of indicators stepwise, in order to analysis the farm economic result as shown in Figure 1.

Return calculations

The economic indicators related to returns are entrepreneur’s profit, total net cash farm income, non-milk return (i.e. cull cow return, manure etc.) and return on investment. The net cash farm income is obtained deducting total expenses from total receipts. From this, non-cash adjustments are made. The entrepreneur’s profit is calculated by deducting the cash-costs, profit and loss account and opportunity costs from total returns (Figure 1). The estimation of returns is based on the following:

Milk returns: Average milk prices adjusted to fat and protein corrected milk (4% fat and 3.3% protein) multiplied with the quantity of milk in Energy Corrected Milk (ECM).

Cattle returns: Amount obtained from selling cull cows, male calves, and surplus heifers +/- livestock inventory. Other returns: Returns from sales or value of manure used at home.

Cost calculations

The economic indicators related to costs of input and productivity are based on variables such as: milk production, raising replacement heifers, and forage production and/or feed purchase for dairy cows, veterinary services, medicines and artificial insemination.

The costs and returns analysed in this study were expressed per 100 kg of milk ECM produced on the farm. Total costs comprise expenses from the ‘profit and loss’ (P&L) account (cash costs, depreciation, etc.), and opportunity costs for farm-owned factors of production (family labour, own land, own capital, etc.). The estimation of these opportunity costs was carefully considered and they have been separated from the other costs.

For estimations and calculations of opportunity costs, the following assumptions were made:

Labour costs: Cash labour cost currently incurred was used for hired labour and the average wage rate per hour in the region was used for unpaid family labour.

Land costs: Rents currently paid by the farmers. Regional rent prices provided by the farmers were used for owned land.

Capital costs: Own capital is defined as assets, without land, plus circulating capital. For borrowed funds, a real interest rate of 6 percent was used; for owner’s capital, the real interest was assumed to be 3 percent.

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

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

Adjustment of milk to ECM: The milk output per farm is adjusted to ECM with 4% fat and 3.3% protein. ECM was obtained using the formula: ECM = Milk production / ((0.383* fat in percent +0.242 * protein in percent + 0.7832)/3.1138) (IDF 2003).

The cost of milk production only

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). In this study, this method was applied to know the cost of milk production alone within dairy enterprise. The principle behind calculating the cost of milk production only is that the costs for other products such as beef and non-milking cows were subtracted from the total costs. Since it is difficult to quantify such costs, the non-milk returns have been subtracted from the total costs to show a cost bar that can be compared with the milk price. This method is further explained in Figure. 2.

Typical Farm Approach (TFA)

In this study, a ‘typical farm’ (i.e. sampling unit) was defined according to location, size, milk yield and dairy production systems to represent the most common farm type within a production system or region or country. The typical farm was selected by using the method of ‘Typical Farm Approach (TFA)’. The TFA consists of three basic steps:

a)                              Selection of typical farm

b)                              Data collection

c)                              Data validation

Selection of typical farm

The selection of typical farm consists of three subsequent steps:

Step 1: The Pre-specification of typical farm is done by studying a number of dairy farms with the help of existing national and regional statistics in combination with the use of Transect Study ( Transect study: transect study means to conduct informal surveys without any pre-designed questionnaire to ask the farmers randomly about herd size, milk yield, management practices, feeding systems, etc. in order to pre-assess the dairy production systems) and Spatial Map Distribution (Spatial Map Distribution: means to draw a map by the researchers on the basis of personal experiences or by using secondary data to identify how dairy farms are distributed in the study areas). This step helps to identify the probable dairy region and to pre-specify the probable size of the typical farms.

Step 2: In this stage, pre-specified dairy region and typical farm is consulted with the local expert by organising a formal discussion whether the pre-specified typical farm is the representative to the region’s dairy farms.

Step 3: This stage is conducted by consulting with farmers in addition to local experts whether the pre-selected typical farms could be real representation of the whole dairy farms. After adjusting the corrections raised by the previous two steps, the typical farm is selected.

Farm data collection

The typical farm was selected from the north and north-eastern part of the country belonging to three administrative districts of the country namely, Dinajpur (DP), Sirajgonj (SG) and Kishorgonj (KG). The northern and north-eastern parts of the country are considered the prominent dairy regions. Nearly half of the milk is adding from that area to the supply chain due to good availability of fodder, multiple dairy development programmes, availability of  high yielding local breeds, the soil condition and low opportunity cost of family labour (Hemme et al 2004; Hemme 2008). Thereafter, three production systems were identified such as extensive, intensive and traditional.

The data collection was done by using the ‘Panel Approach’. This approach can be compared with a modified Delphi Technique (Custer et al 1999) or Guided Group Discussion (Peters, Personal communication 2009). This technique secures input data regarding dairy production systems from widely dispersed experts. Their opinions and views are discussed in successive sittings (usually three) until a consensus is arrived at. The panel approach has been proven efficient in studying dairy farms in Bangladesh (Hemme et al 2004) and several other countries (Hemme 2000; Kirner 2003; Garcia et al 2005, 2006; Ndambi et al 2008; Ndambi and Hemme 2009).

A panel per region and per production system was built, comprising of three farmers, one national dairy expert, one regional dairy expert, one representative from the Ministry of Fisheries and Livestock (District Livestock Officer), and one external dairy researcher. After identification and selection of dairy regions as well as typical farms, data were collected by panel and put into the TIPI-CAL model. Data was collected on the following broad categories i) general information regarding the farming systems (cow number, total land base, family activities etc.), ii) data of the dairy enterprise, iii) whole farm data, dairy allocation factors (for costs and returns of the dairy enterprise), and iv) detailed household data.

In cases where there were high discrepancies in data from different members of the panel, additional information was obtained through farm visits by the external researchers.

Data validation

The data collected from the panel and farm visit was validated again with the panel members in order to ensure the quality of data. After collection and validation, the data were inserted into the computer and analysed by using TIPI-CAL version 5.0. The results obtained were discussed among panel members in order to check the plausibility of the results.

Results 

General description of typical dairy farms in the country

Dairy production systems can vary considerably in different regions. In this study, the selected typical farms are BD-2DP and BD-14DP representing small-scale extensive and large-scale extensive systems. The BD-4SG and BD-22SG represent small-scale intensive and large-scale intensive systems, respectively. The BD-2KG and BD-10KG represent small-scale traditional and large-scale traditional systems. The differences between all the farming systems are mainly driven by the differences in inputs and outputs (Uddin et al 2009a). An overview of all of those selected dairy farming systems is depicted in Table 1.

Small-scale extensive system

This farming system is more common in rural areas where dairying is considered part of the mixed farming agricultural systems. Farmers usually have higher proportion (75%) of local, non-descript, indigenous cows and few (25%) improved cows. The average herd size ranges 1 to 4. The land base of the farm is 0.50 ha. Farmers practise a cut and carry feeding system and also have access to larger public land for periodic grazing. They use scanty amount of concentrates only during the peak lactation period. Family labour is the only source for labour in dairying. Milk production is around 700 kg/cow/year. The farmer does not solely depend on dairying as a significant portion of their income comes from cash crops such as rice and off-farm activities. To represent this farming system in the detailed economic analysis, a two-cow farm (BD-2DP) was selected.

Large-scale extensive system

This farming system comprises farms with 10-20 dairy cows of which 35% are cross-bred.  The land size is 2.5 ha. Farm grown crop residues (i.e. rice straw) are used for feeding. More purchased concentrates feeds are used than in the small-scale extensive system. This farming system uses the hired labour. The milk production per cow per year is about 900 kg. A 14-cow farm (BD-14DP) was selected for analysis of this system.

Small-scale intensive system

This farming system is exceptional from other regions because of its very high potential for milk production. This production system belongs to the most important milk shed area in Bangladesh and produces more than 350,000 litres milk per day. The Bangladesh Milk Producers Cooperatives Union (Milk Vita, which was established in 1973) operates in this region. Farms have 3 to 7 cows, about 80% of the cows are graded and land size is 0.25 ha. The cows are provided with more concentrates both purchased and home grown than any other systems and kept under a zero grazing system. The milk yield per cow is around 1400 kg per annum. This system is confined in peri-urban areas and milk is sold mostly to the nearby urban market, cooperative centre or private company. A 4-cow farm (BD-4SG) was chosen for detail economic analysis.

Large-scale intensive system

This system uses the highest proportion of graded cows. The land size is 2.5 ha. They enjoy the benefit of a higher milk prices as they supply higher portion of milk to the city or to the cooperative. Inputs (i.e. feeds, medicines, fertilizer, etc.) are purchased in bulk at a lower price per unit. More concentrates and supplementary feeds such as vitamins, minerals and other feed additives etc are used. The provision of veterinary health care, artificial insemination and other support services are available at lower costs. Hired labour is used and dairy is the main source of income. The milk yield per cow per year (1600 kg) is the highest than in any other farming systems in Bangladesh. A 22-cow (BD-22SG) was analysed for the in-depth economic analysis.

Small-scale traditional system

This farming system mainly keeps local cows with little access to pasture and support services. The land size is 0.25 ha. The milk yield is around 750 kg per cow per annum which is somewhat larger than small-scale extensive farming system. This type of farming system does not cover all family living expenditure. A majority of the farmers do not provide concentrates and depend on natural grass. A 2-cow farm (BD-2KG) was analysed for detailed economic indicators.

Large-scale traditional system

This rural farming system has also poor access to services and markets but better than smallholder system. They have no pasture land but have possibilities to utilize fallow land, grasses from river embankments, and other public lands. The average land size is 1.0 ha. The average milk yield per cow per year is around 900 kg ECM. They use high yielding local cows as well as some graded cows. A 10-cow farm (BD-10KG) was selected to represent this farming system in the economic analysis.  

Farm return analysis

Return structure of the whole farm

The return structure consists of returns from dairying, cash crops, off-farm activities etc. The intensive farming systems have the highest returns from dairying than the other regions (93 and 95%) of all farm returns, respectively (Figure. 3).

Extensive                            Intensive                     Traditional

Figure 3.  Return structure of the whole farm

The dairy farmers in intensive farming system are highly experienced and have better resource endowment (high yielding breeds, support services, good market access) which makes the dairying an attractive source of income for their livelihoods and therefore, the farmers have more motivation on dairying.

The farmers from extensive dairy farming system receive a substantial return from cash crops such as rice. Due to the nature of the soil and high altitude, these farms are not usually flooded with water during the monsoon period. This allows for triple rice cropping in a year. The traditional dairy farming systems (BD-2KG and BD-10KG) have higher returns than extensive farming systems. Approximately 30% of the returns come from crops (mostly rice).

Returns from the dairy enterprise

The sale of milk is the single largest source of returns for all farms (Figure. 4).

Extensive                            Intensive                            Traditional

Figure 4.  Returns from the dairy enterprise

The intensive farming system has the highest returns from dairying per 100 kg milk which is approximately 80% for the BD-22SG compared to the traditional small-scale dairying (70%). Cull cow return is the second largest source of returns for the dairy farmers because of high market value for cull cows in Bangladesh.

The lowest return is derived from culled heifers because of the shortage of heifers. Therefore, farmers cull only heifers in affordable circumstances.

Non-milk returns 

There is a high return from selling cattle for beef, especially in the intensive and extensive farming systems (Figure. 5 ) because there is a general tendency of keeping the best male calves in the farm and raising them until they are sold for slaughter.

Extensive                        Intensive                          Traditional

Figure 5.  Non-milk return

Other returns are from manure and are found considerably high for the traditional farms (BD-2KG and BD-10KG) because manure can be sold as organic fertilizer for fish farms and rice fields. 

Return to labour 

Since labour is one of the important drivers for varying the profit of dairy farming, a special attempt was made to compare the return to the labour in relation to the average wage rate of the farm and region (Figure 6).

Extensive                        Intensive                          Traditional

Figure 6. Wages and returns to labour

The large-scale extensive farm has considerably higher returns (0.80US-$/hour) than the average wage rate (0.20US-$/hour) in the region. This means dairying generates more income per hour than working in other jobs in their region. Figure 6 shows that the intensive dairy farm (BD-22SG) is highly competitive in the labour market compared to the small-scale extensive and traditional farming systems (BD-2DP and BD-2KG), which imply that smaller farms are not competitive at the average local wage rate. This results in small-scale farmers seeking alternative jobs, thus stopping dairying. This is a potential threat to the sustainability of dairy farming.

Farm inputs, costs and productivity analysis

Cost of milk production only

The cost of milk production varies between 23 US-$/100 kg ECM and 31 US-$/100 kg ECM (Figure 7).

Extensive                        Intensive                          Traditional

Figure 7. Cost of milk production only

The key reasons for this variation is the differences in opportunity costs for own factors of production (e.g. labour, land and capital). The small-scale extensive farms (BD-2KG) have 89% higher opportunity cost than the large scale intensive farms (BD-22SG). The main reason for the higher opportunity cost is due to the fact that smallholders use more family labour for dairying. The higher opportunity cost pushes the milk production cost higher, leading to a disadvantageous position for smallholders in terms of economies of scale and profitability. If the alternative wage rate is higher then dairy labour will shift to other jobs.

Cost structure (cash cost, opportunity and depreciation costs) of the dairy enterprise

Total costs and feed costs

The large-scale farming systems both extensive (BD-14DP) and traditional (BD-10KG) have higher total farm costs than large-scale intensive farming systems (BD-22SG). The highest total farm cost is observed for BD-10KG which is 30 US-$/100 kg ECM compared to 25 US-$ /100 kg ECM for BD-22SG (Figure 8).  

Extensive                        Intensive                          Traditional

Figure 8. Total cost structure of the dairy enterprise

Within large farms a 17% higher cost is observed in traditional large-scale farming than intensive large-scale farming. The higher milk production is the key driver for lower cost. While comparing smallholder dairy farming systems, the extensive farming system has the lowest total farm cost which is about 23 US-$/100 kg ECM while the highest is for intensive farming system (BD-4SG) which is about 25.5 US-$/100 kg ECM. The lowest cost for smallholder farms in extensive system is due to the fact that they have lower feed cost because of the access to larger public land for periodic grazing.

Feed cost is the largest cost in all of the farming systems. The highest feed cost in large-scale farm is due to the fact that they purchase high amount of concentrate feeds than smallholder dairying. The purchased feed costs for intensive dairy farming systems vary between 93 % to 94%. The lowest purchased feed cost is observed for BD-2DP which is about 60% (Figure 9).

Extensive                        Intensive                          Traditional

Figure 9.  Cost of purchased feed and home grown feed

This variation is due to the fact that extensive and traditional farms mostly rely on by-products collected from public land and purchase less feeds than intensive farms.

The co-operative society situated in the intensive farming areas provides good veterinary and artificial insemination (AI) services with minimal fee that makes the service cheaper for the intensive farmers. The costs for veterinary services (treatment and medicine) and AI services are the highest for the small-scale traditional farms and the lowest costs for large-scale intensive farms (4.3 US-$ and 0.6 US-$/100 kg ECM, respectively). The lower costs in respect of large-scale intensive farms are associated with good access to veterinary and AI services.

The costs related to machinery use for dairying vary considerably ranging from 0.4 US-$ in traditional smallholder farming systems (BD-2KG) to 3.4 US-$/100 kg ECM in large scale extensive system (BD-14DP). The large-scale intensive farm has significantly lower building cost (0.1 US$) than large-scale extensive farm (2.9 US-$/100 kg ECM). The key driver for such differences is the economy of scale as the large-scale farm has the advantages of using proportionately less space for a higher number of dairy cows leading to the efficient utilization of barn capacity. Other costs including insurance, tax, VAT balance and other dairy inputs vary from 0.9 US-$ to 3.6 US-$/100 kg ECM.

The small-scale traditional system (BD-2KG) has much higher costs for land, labour and capital which is 1.0, 16.1 and 1.0 US-$/100 kg ECM, respectively compared to 0.5, 4.4 and 0.7 US-$/100 kg ECM, respectively, for land, labour and capital for BD-22SG (Figure 10).

Extensive                        Intensive                          Traditional

Figure 10.  Total cost of factors of production

Within production factors, labour cost is the single largest cost items all of the farming system. The small-scale farms in the traditional system have higher labour costs than in all other farming systems. This is due to very high opportunity costs from family labour since all the family members are involved in catering for just for two cows.

Land input, costs and productivity

The land input per dairy animal (which includes owned land used for grazing and to produce crop residues such as rice straw fed to animals) varies from 0.06 to 0.25 ha per dairy animal (Table 2).

In the intensive dairy farming system of Sirajgonj, both small-and large-scale farms use proportionately less land because those farming systems use mainly purchased concentrates throughout the year, particularly from May to November, when animals are compelled to be confined at home due to annual floods and excessive rainfall. In relation to the cost of land per 100 kg ECM, the small-scale intensive farm has the lowest cost than all other farms. The land productivity is related to cost and returns, therefore, smallholder farms in intensive farming system have lower cost for land and consequently has higher return from land.

Labour input, cost and productivity

The highest labour input (1425 man-hours/dairy cow/year) is observed in smallholder traditional system (BD-2KG) compared to large scale extensive farming system (BD-14DP) (365 man-hours/cow/year) (Table 3).

This implies that traditional small farms use approximately 75% more labour input than large extensive farmers. The main reason for the high use of labour is that in the traditional farming system, all the family labour is used only for two cows due to the lack of alternative jobs. The costs of labour, the large-scale intensive farm (BD-22SG) pays proportionately much higher wages for the hired labour than for the family labour.

The traditional small-scale system (BD-2KG) pays the highest wage for family labour. The lower labour use by BD-22SG leads to lower cost per 100 kg ECM and higher labour productivity. The higher productivity is achieved due to the use of skilled and experienced hired labour in the farm for high yielding animals which improves the management of the farms leading to increased milk production. The other reason might be that proportionately less labour is used per cow due to higher scale of production.

Farm profitability analysis

The intensive farms in (BD-2SG and BD-22SG) receive much higher income per 100 kg ECM than all other farms in extensive and traditional farming systems (Figure 11).

Extensive                        Intensive                          Traditional

Figure 11.  Farm income and entrepreneur’s pro

The positive farm income is due to exclusion of the opportunity costs for land, labour and capital. The entrepreneur’s profit is calculated by subtracting the cash costs and opportunity costs for land, labour and capital. While comparing the entrepreneur’s profit among the farms, it is observed that the small-scale farms from extensive and traditional systems make a negative entrepreneur’s profit; meanwhile, the small-scale farm from the intensive system makes a positive entrepreneur’s profit.

The variation is due to the opportunity costs. The small-scale extensive and traditional farms used more family labour and as such have high opportunity costs. This means that the production systems have a pronounced effect on the profitability. The other reasons could be that intensive systems are operated with higher management skills and have high yielding cows. Table 4 provides a detailed estimation of costs, farm income, opportunity costs, and entrepreneur’s profit.

Return on investment

The return on investment (ROI) in real term is an indicator that is calculated as the percentage of farm profits on the investment costs, adjusted to the inflation rate. The highest ROI is observed for intensive farming system which corresponds to 40% (Figure 12).

Extensive                    Intensive               Traditional

Figure 12.   Return on investment (real) and inflation rate

The possible reasons for higher (ROI) milk yield (higher milk return), higher economy of scale due to lower cost per unit of input and overall good management practices applied to the intensive farms.

Discussion

Dairying is considered as an important tool for improving the rural livelihood. Therefore, improving dairy farming system will greatly enhance the process of economic development in Bangladesh. There is a growing demand for more updated and day-to-day knowledge particularly on economic indicators to be more competitive and making dairying profitable in the era of highly volatile milk price and feed price.

Milk is the most important output of dairying and therefore, cost of production is the key aspects of economic analysis. The cost of milk production varies from 30.9 US-$ to 43.5 US-$/100 kg ECM. The lowest milk price is seen for intensive large-scale dairy farming system in Sirajgonj (BD-22SG) compared to BD-2KG (traditional dairying) in Kishorgonj. The results for cost of milk production observed in this study are higher than those found by Shamsuddin et al (2006) and Hemme et al (2004). This can be explained by impact of recent increases in the world feed prices and other input prices as well as increasing cost of the support services such as veterinary health care.

The single most important driver of milk cost is the purchased feed cost which varies between 19% for BD-2KG to 66% for BD-22SG meaning that purchased feed cost increase with the size and scale of dairy farming. This result lies between those obtained by Shamsuddin et al 2006 who found the range of feed cost to be 52.5% to 92.1% of total cost. Other results showed that feed cost for the smallholder dairying represent 58.72% (Hossain et al 2005), and 50% (Alam et al 1999), respectively. The feeds, especially forage management, help to improve the profitability (IDT 2009) which is necessary to cope with the recent milk price crisis and very low dairy income in all over the world including Bangladesh.  The cost of support services such as veterinary health care and AI services are also high. This is confirmed by Uddin et al (2010) who found that the role of private sector AI service is not well developed, which limits access to the service and causes higher costs for the services.

In relation to the costs of production factors, labour cost (which includes both hired and family labour) is considerably higher for producing 100 kg ECM than land and capital. Labour cost decreases with the increase in farm size, showing economies of scale. For example, the BD-22SG farm (large-scale intensive system) has labour costs of only 4.04 US-$ as compared to 16.12 US-$/100 kg ECM for BD-2KG. The differences in the cost are due to the fact that BD-22SG (large-scale intensive) needs 70% fewer hours to produce 100 kg ECM due to higher milk yield. This result is supported by Saadullah 2001 who found that large farms employ 60% fewer labour hours than small farms. This implies that smallholder farmers are not efficient in terms of labour productivity and underutilize the labour. The labour in the large farms can carry out task faster than smallholder farms due to higher skills and experiences. On the other hand, in large farms hired workers need to work more efficiently to maintain their jobs, whereas the family members work in a more relax atmosphere.

In this study, intensive farms in Sirajgonj make a very high return from dairying corresponding to 93-95% of total return while Shamsuddin et al 2007 reported a return of 71% from the dairy in the same region and same farming systems. The differences in the results can be attributed to the fact that all the dairy development programmes are concentrated in this area in addition of having high yielding local cows. The other important reason is the lack of alternative off-farm jobs and the historical inheritance of dairying from generation to generation which compels farmers to employ all of their resources in dairy. It is observed that returns from milk is the highest followed by cull cows, male calves, and manure. The range of milk return (72-83%) in this study follows the similar pattern of the study of Hossain et al (2005), who found approximately 77% of the total return from milk.

All the farms analysed in this study produce a positive farm income. Contradictory results were reported by Alam (1994) and Kabir and Talukder (1997). While the previous author claim a much higher cost of milk per liter than the return per liter, the latter one opposed and found a positive profitability. On the other hand, Hossain et al (2005) found that out of the surveyed dairy farm, 70 % are profitable. Khan (2007) found all the farms whether small, medium or large, are producing higher returns than the costs. The possible differences can be explained by differences in calculation, inclusion of cost items, accuracy of method, production systems and variable input prices.

The entrepreneur’s profit indicates whether the farm can recover its full economic costs from the dairy enterprise. All small-scale farms, except the intensive dairy farms, produce a negative entrepreneur’s profit. The positive entrepreneur’s profit for intensive farming system in this study is in line with the results obtained by Hemme et al 2004. The opportunity costs for own factors of production is the key driver variation in entrepreneur’s profit. Although negative entrepreneur’s profit is an obstacle for moving toward more market-oriented dairying in Bangladesh, small-scale farmers mainly look on the cash transactions and farm income because they rely on dairy for daily cash earning to maintain their everyday life. In the short term, farmers can continue dairying but in the long run it would be rather difficult for them and dairying will be under threat. Therefore, a more market-oriented dairy production system is desirable for improvement of the profitability of dairying and improvement of the livelihoods of farmers and all others involved in the dairy chain. Therefore, all the dairy development programmes and policies should focus on improving the entrepreneur’s profit by reducing cash costs and opportunity costs.

Conclusions 

• Different milk production systems studied in this research vary with the magnitude of input (feeds, land, labour, etc.) and output (i.e. milk). The degree of intensification and potential availability of input and support services play a great role in reducing the costs with increasing the return and improving productivity. The institutional arrangements and natural resource endowments in each system also influence the costs of inputs and support services. Therefore, intensive dairy farming system produces higher milk with lower cost and hence it is more competitive. On the other hand, the extensive and traditional farming systems produce low amount of milk with a reasonably high cost. The intensive farmers are in better position in terms of costs and profits than extensive and traditional systems and are more competitive due to lower per unit costs, higher milk prices, higher milk production, higher land and labour productivity. From these results, the one option might be that it is necessary to take initiatives by the policy makers and development planners to intensify the dairy production systems for sustainable dairy development. But while doing so, it should be kept in mind that intensification is not the only solution rather the role of extensive and traditional dairy farming systems should be acknowledged at least for a short term. Even with negative entrepreneur’s profit extensive and traditional farming systems will provide the regular cash income which is necessary for daily livelihoods. Therefore, in the long term, it is necessary that farmers adopt new cost reducing management strategies. It is suggested that government should take initiatives to reform the institutional arrangements by liberalizing input markets, developing basic infrastructure and facilitating access to yield increasing technology in each of the production system which can ultimately reduce costs, thus improve on productivity.

Acknowledgement

The authors highly acknowledge the International Foundation for Science (IFS) from Sweden for providing field study grant to conduct this study.

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Received 20 January 2010; Accepted 20 April 2010; Published 1 July 2010

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