31 Aug 2012

Social business in the Philippines (1) : the case with buffalos in the milk line

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As part of my recent business trip in the Philippines, I visited a pilot project of buffalo husbandry aimed at producing milk. This project has been run for 2 decades around. Carabaos (the main subspecy of domesticated buffalos in the Philippines or “Kalabaw” in Filipino) are as common as cows in Europe, except that they are used for farming labor (ploughing mainly) instead of being used for producing milk or meat.

Asia : the Promised Land ?

Buffalo milk brings many advantages against cow milk. It is highly nutritive for the children, and it provides more than 85 % less cholesterol than cow milk.
While the main Western countries’ markets reached their milk consumption’s peak more than 10 years ago – with a slight and steady decrease since then – Asian ones have hardly never consumed milk so far. The Asian cooking overlooks this product and children are not used to drinking milk at breakfast time. But big efforts have been undertaken by the major food companies to change this trend. Many of them are supporting national nutritional programmes. Their involvement is not selfless : they see the Asian market as the last continent where the consumption is starting from scratch. The recent launch of the social joint-venture between Grameen and Danone in Bangladesh to provide poor communities with yoghurts at a very cheap price has been a further sign that the big players of the dairy industry are looking for the keys to enter these new markets.

Agriculture in the Philippines

Nestlé has been active in Asia for much more time, with leading products like the milk powder. Considering the Filipino market only, it results that today 98 to 99 % of the dairy products are imported by Nestlé and their competitors from New-Zealand, Australia and USA … despite the local climate conditions and the soils are very favorable for breeding ruminants. Today, the dairy products are the second biggest import of food products in the Philippines after rice !
The agriculture including farming, fishery, livestock and forestry contributes 20 % of the GDP ( Gross Domestic Product) but the dairy industry represents only 2 % of it. It means that all is still to be done in this sector.
At the political and economic levels, agriculture is seen as a tremendous leverage to fight against poverty. During the last 20 years, many reforms and ambitious governmental programmes of development in the agricultural sector have been launched with the underlying aim to reduce the migration flow from rural to urban areas … that often results in only growing the slum’s population. These programmes have been undermined by various factors. The most prominent are : 1) a decrease of the agricultural surface because of attractive land’s prices that have pushed farmers to sell instead of planting rice and earning low revenues from this. The lands acquired are used for the construction of residential areas, malls and resorts or industrial parks. 2) the pressure of multinationals like Monsanto that acquire or are allocated large areas to test GMO cereals.
The access to the land for local farmers must be secured in order to provide the conditions for a domestic and sustainable agricultural development.

Rebuild rural communities and reduce rural poverty, commercially

The concrete objective of the project I visited is to expand the consumers’ choice with setting up a pure local production of (true !) fresh milk. Despite being labeled as “fresh”, the imported milk is not. In the same time, this project contributes to the creating of local jobs and revenues.
Another aspect that gets this project socially valuable is the utilisation of practices familiar to the microfinance and the cooperative sector. One of the two co-managers said : “Industrial dairies use enormous milking sheds to process their herd through the daily ritual on their milking machines in large batches to achieve a lower labor cost. By contrast, we specifically aim to employ more local farmers and use their under-employed land for grazing. This brings down the unit labor and feed cost but shifts the capital allocation from sheds & milking machines to a centralized monitoring & training process to maintain quality and reliability across the network”.
The approach is quite similar to a microfinance institution as local households are among the direct beneficiaries : a capital in-kind (buffalo herd) is allocated to small-hold farmers whose mission is to breed them for producing milk. The milk revenues generate income for the households. Last but not least, a free and close assistance is provided in order to help them take care of the animals.
At the moment, +70 small-hold farmers have partnered with the project … against +7.500 being engaged in the milk line all over the country. The operational performance is largely depending on the portfolio quality (hence, SH farmers are selected upon rigorous criteria in order to be qualified)
As one of the project’s managers mentions : “Our failure to continually train would raise the operational risk and reduce the potential return on capital”.
This project works like a cooperative also as the production output from the small-hold farmers is entirely bought by the dairy plant (which is owned by the project) at a price double as high as the conventional price.

Stepping forward …

The scaling-up of the project seems to depend on 3 key-success factors :
Animal sourcing and crossbreeding (i.e. the capacity to set up a scalable livestock of high-yield buffalos). The current herd living in the Philippines has never been bred to produce milk.
Training, monitoring and steady coaching of the farmers (= microfinance techniques) : the involvement / adhesion of SH farmers to the concept of dairy production developed (decentralized dairy units) is vital.
Access to the middle- to high-income consumers : the financial and technical support to the SH farmers requires the project to generate high profit margins with the sales of “sophisticated” products such as cheese, ice-cream or yoghurt. The output should be secured by a steady growing demand in large cities like Manila but also in the neighbouring countries like Singapore, Hong-Kong or Taiwan.

You can get more information on this project on : DVF Dairy Farm


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