Sunday, 13 March 2011

Dairy Coops: What next?

Dairy cooperatives formed under the successful Amul Pattern, operate in a three-tier vertically integrated structure owned by the milk producers. The Dairy Cooperative Society at the village level collects the milk, the Union at the district level does processing, while the Federation at the state level is responsible for milk & milk products marketing. Aggregation of milk at right levels in these three tiers brought the vital economic scale to the micro milk producers of India, and linked them to the national and global markets effectively. This helped transfer a fairer share of the consumer price to the producer, rather than to the chain of intermediaries. The milk business is strengthened through research, knowledge transfer, feed production and marketing, disaggregated in the reverse direction.

Meanwhile, a 2002 amendment to the Indian Companies Act, defined a new institution called "Producer Company", and offered significant flexibility to the producers in managing their affairs vis-a-vis the constraints imposed by the Cooperative Societies Acts of various states.

In this backdrop, I spoke on "what the dairy coops could do next", at a workshop on 'the design and formation of milk producers' companies" organised by NDDB Dairy Services recently. This is what I said:

In the several decades since Amul has been formed, the world has changed. Today's marketplace throws several challenges and offers many new opportunities.

Rapidly evolving consumers seeking variety, quality, safety, convenience etc on one hand, and heightened competition with deep pockets and strong capabilities in consumer understanding, product development, marketing etc on the other hand, throw a challenge! Compared to the past, cooperatives need significantly larger financial - and far superior human - resource to compete and win in this new marketplace.

Let me also hasten to add that several new developments in information technology and better understanding of the dynamic of collaboration in the same period, offer a new opportunity to the milk producers to actualise the benefits of vertical integration without the associated costs. In other words, I am recommending a "virtual vertical integration" through appropriate collaborations.

The economic objective of milk producers can be achieved through a value chain that delivers them a higher net income (a combination of higher productivity, better quality, lower costs) at lower risk. Micro producers at one end and micro consumers at the other end are connected through different business models that aggregate and disaggregate milk at different points of the value chain. Different points also need different levels of labour intensive care, special technology and financial capital as per the business model specifics. Not all of these resources may be present in any one organisation. That's where collaboration comes in.

In the ever changing and hyper competitive marketplace, multiple organisations could come together to leverage their complementary resources & capabilities to create and capture value that is greater than what any one of them individually could.

Of course, every collaborating organisation may need to give up some control, or may not capture all the value they otherwise could, compared to a solo operation by themselves. If the collaborating organisations were to part at some stage, there would also be a risk of creating competition by virtue of shared trade secrets etc.

The trick is in retaining the lever of control in one's hand through key assets such as brands or technology, and make the partners fungible... Or, by recognising and respecting the mutuality of interest with the partners, one could structure a relationship that is built on reciprocal dependency, that all the partners have a vested interest in strengthening...

Any which way, every dairy cooperative must start with a clarity in terms of what they have and what they lack, so that collaboration with partners having complementary capabilities can be forged. For some, it may be expanding distribution into new markets, for others it may be attaining a larger scale to lower costs, and for some it may be new technology to create special products. In addition to these economic frames, given the unique context of cooperatives, it is important to look for organisations with shared vision and cultural fit too. Fortunately, such collaborations are now possible with the new institutional form of "producers' companies", unlike the limitations that the cooperatives face!

I illustrate two specific ways in which collaborations with private sector can add value to milk producers.

Instead of producers' companies trying to build marketing capabilities themselves, they could partner with organisations that possess such capabilities, and focus their efforts on reorganising milk production systems. Given that incremental value generated by improvement in productivity and quality is far greater than value captured through controlling marketing activity, this can multiply producer incomes manifold. In any case, demand for milk and milk products in India is rising rapidly, and the milk production needs to double in less than fifteen years

One such production reorganisation possibility is to move from 'Family Owned Micro Livestock Operations' to 'Collective Dairy Farming Units'. Every village can have a few such units depending on the potential. This can help in rearing animals in a controlled environment to implement best practices more easily. Producers can share work at the farm by "livestock units" or by "legs of operations". This will also facilitate collective decisions on land use, in turn protecting ecology and conserving bio-mass. Well managed dairy farming units can capture ecological credits through controlled release of methane gas. Apex institutions of the Producers Companies can co-opt knowledge & input providers, processors and marketers into the ecosystem and take on the role of a Network Orchestrator to achieve the "virtual vertical integration".

One of the workshop participants mentioned that such collective dairy farming units are already operating in Gujarat, as "Animal Hostels". In this early phase of evolution, it is important that many such experiments are carried out to craft models that suit different contexts. In recent times, other ecosystems in India such as road construction and telecom have grown through such innovative partnerships.

Another interesting collaboration possibility is in the Private Sector building the capacity of producer companies. When cooperatives are thinking in terms of transforming into companies, there is a need for them to create and sustain process driven institutions. Corporates run on SOPs (Standard Operating Procedures) with strong in-built internal controls. Self-correcting systems are part of their culture and ethos. Innovative use of IT systems strengthens these processes further. All these systems promote transparency and accountability, which are critical for the long term sustainability of the newly formed producer companies.

All in all, I think, the Indian dairy sector is ripe for another institutional change.


  1. Very valid point to conclude!

    W.r.t the first point you make about specialization in production by the coops and leaving the marketing function to a partner:
    - Has the traditional mindset of "we need to market our products ourselves, others will take us for a ride" changed substantially to help the leadership of the co-op dairy sector consider collaboration options? What needs to be done to bring this about?

    - Is there a new case to be made on sharing of the value-add, with the higher share going to the producer end, in such a producer-marketer collaboration?

    Apart from focusing on productivity enhancement in already high-production areas, I think NDDB and dairy sector promoters need to focus on the poorer milkshed areas. A case is Nagapattinam district in TN - even Aavin thinks it is not worth having a milk route from Tanjavur. Places like these will return the biggest bang for every investment.

  2. Sir, truly extension of value addition. I liked the idea of moving from individual cattle rearing to community. That not only helps to get the farmers pool their resources right from animals to labor to the finances, but makes the corporates's job easier to collect the milk and at a standardized order. May be to begin with SHGs who own cattle or the financing agencies /NGOs who lend money to buy cattle can practice this.

  3. Liby:

    1) With increasing competition, the people are more open for collaboration now. Partnerships in some small areas that demonstrate quick wins and build credibility is one way.

    2) With demand growing more rapidly than supply, partnerships that benefit producers will occur naturally.

    3) Can't agree with you more on this point. Trouble is that one needs a long term strategy and grit to stick with it...

  4. Reminds me of Gambhira Cooperative (, where pooled land is tilled by a small group of farmers. Though Gambhira is an excellent model, we do not see many such initiatives around. The community based livestock farming is a similar concept and am not sure whether one could be optimistic about the scalability.

  5. Pasting comments from Anantha Narayana Sharma below, as he could not post them here and had to send a mail. I thought these comments will be of interest to other readers too...

    "I have experiential knowledge of incubating milk coops in NGO Format. THis is a Section 25 Company - Seva Milk and Sarvodaya Milk for Assefa - as also in starting two producer companies (one around rice marketing in fishing villages, which is dormant due to withdrawal of French donor working capital support and NGO issues, and another around tiny paddy farmers in Nagaipattinam district, which is finishing its first financial year). I completely agree with what you say. However, your statements have to be "translated" in a language which lay community mobilisers, farmer leaders, and even micro finance investment bankers and government rural development program bureaucrats can understand.

    Marketing is an obvious possibility of collaboration. Voltas did the marketing for AMUL till mid 1970s. (JJ Baxi and company shifted from Voltas to GCMMF?). I would for example have no problem in advising say women SHG funded dairying producer company, to start a seperate private limited company for marketing, where the share holding would be held jointly wih a corporate body. (This is possible under the producer company act?).
    Information technology is another possibility - your own e choupal model can be adapted and put to much more robust use - as milk procurement is a daily cash driven activity. Also a lot of professional mentoring support,is needed, for Tamilnadu SHG federations and community development activists - in terms of "what is acceptable financial behaviour in a market context" (For example employing one's relatives and supporters, and trying to get free technology and management inputs is not exactly a "win win" proposition!)

    Having been an observor to various efforts to start dairy coops in Nagapattinam district - Tharangambadi by SIFFs, the attempted startups by BEDROC and Avvai, apart from NDDB's efforts in Mayavaram - how is that the Karaikal private sector diary, and the few ones in Thanjavur district (Ruchi?) are doing so well? Perhaps there are "institutional political issues" - in this district which has very high profile political figures including the present chief minister, and the previous Union Panchayat Raj Minister, Mani shankar Iyer?

    Regarding community owned milch animal sheds - I did not see this idea take off in Mehsana and Kheda in the 1980s, and in various Assefa Plan projects in Tamilnadu in 1990s. Perhaps times are different in the 21st century?

    Nice thought provoking comment"

  6. I am really impressed by the effort you put in your recommendations. To what extent do people actually react to your suggestions, do they change?