Assessing the Contribution of the Dairy Sector to Economic Growth and Food Security in Malawi

Fractured supply chains have been identified as a barrier to growth for the agricultural sector (Gorton and White, 2007). In this regard, African agriculture is particularly handicapped. The purpose of this project is to address some of the key challenges through an assessment of the current and potential contribution of the dairy sector to economic growth and food security in Malawi.

Dairy is a key investment sector for the Government of Malawi (MIPA, 2011) , donors such USA, Japan and Belgium have focused part of their development aid on the sector. Despite this, domestic production response is unimpressive, with FAO data showing an increasing trend between 1961 and 1987, followed by periods of poor growth. This is not surprising several factors hamper the sector development. These include: (1) a processing sector comprised of five firms employing only between 20% to 40% of their capacity; (2) processed products produced from imported reconstituted powder milk; (3) the processing sector attains profits despite high costs by targeting only the affluent part of the urban population; (4) a high percentage of the milk sent to the formal channel is rejected due to quality (estimated at 17%); (5) only a relatively small percentage of the milk produced domestically is destined to formal channels (the proportion undergoing pasteurisation), the rest is sold through informal channels (estimated at around 27,000 tons or 50% of total milk supply, including imports) to the rural population and less affluent urban segment; (6) Malawi has the lowest consumption of milk per capita in Africa (estimated at 4.7 kg/capita/year compared to an Africa average of 15 kg/capita/year).

There is a need either to address supply chain ineffectiveness or to find alternative ways to increase the income of smallholder producers while improving the country's food security (e.g., promoting shorter supply chains as in Omore et al., 2004). The first strategy requires understanding the reasons behind the marketing into informal channels, and a strategy to integrate them with the formal dairy supply chain. Addressing these barriers offers scope for pro-poor development through the sector. This occurs directly through the potential impact on incomes of smallholder producers. An indirect economic impact will be felt in terms of the sector GDP, and multiplicative effects via linkages with other industries. The analysis will also has implications for food security; i.e. the availability, accessibility and affordability of safe milk products.

The analytical approach proposed in this project combines supply chain analysis (e.g., Taylor, 2005) with industrial organisation theory (e.g., Carlton and Perloff, 2005) to consider possible imperfect competition at the processing level, presence of transactions costs, asymmetric information and risk. These problems have subsequent impacts on incomes and, crucially, impede the appropriate adoption and diffusion of technological improvements in the dairy supply chain.

The first stage of the project will consist of seven studies, using secondary information, and semi-structured interviews of key informants along the dairy supply chain. This stage will provide a complete overview of the sector and will guide the subsequent modelling exercise.

Evaluation of the supply chain potential requires integrating all the chain parts into a regional multimarket model of the entire dairy supply chain (e.g., Sadoulet and De Janvry, 1995). The second stage of the project will construct such a model to be used to illustrate alternative scenarios of policy strategies for the sector and their impact on the GDP, the income of different supply chain stakeholders and food security. We suggest that this model will provide useful analytical insights to illustrate policy options for Malawi.

The project duration will be three years and will involve the multidisciplinary interaction of SAC and Malawian researchers.

This research will ultimately identify barriers that hamper the development of the dairy industry in Malawi, an industry that has the potential to have a positive impact on the income of smallholder farmers, on employment opportunities, food security outcomes, and overall performance of businesses that contribute to Malawi's GNP.

In terms of the Millennium Development Goals we see this research as directly impacting goals 1 (i.e., eradicate extreme poverty and hunger) and 8 (i.e., develop a global partnership for development, particularly target 8B namely to address the special needs of the Least Developed Countries) as the development of the entire dairy supply chain will contribute to the income of the smallholder farmers and to their food security in a sustainable way. Furthermore, by identifying key barriers, it will help international development agencies to target cooperation funds according to the special needs of Malawi in an effective and efficient way.

We anticipate that this research will have an impact in clarifying aid objectives in the dairy sector and potentially supply chains more generally. For instance, JICA supplied the Bvumbwe (Thyolo district) with a milk pasteuriser and a packaging machine in 2003 for the cooperative to sell milk directly to consumers and not through the major milk companies. Whilst this can have a positive impact for consumers in terms of food security (e.g., access to lower prices for safe milk), it also increases the degree of fragmentation and inefficiency of the supply chain, as dairy plants are operating with a high degree of unutilised capacity. A related issue is the discussion of whether the monetisation of milk powder as part of USAID's Programme of Food for Peace would distort the Malawian dairy domestic market (Fintrac Inc., 2008). On the one hand Fintrac Inc., in the report produced for USAID to provide guidance about what commodities should be monetised, states that selling milk powder to processors will expand their production and reduce their prices with obvious benefit to consumers. However, Land O' Lakes/Malawi, which works on a USAID programme to support the development of the dairy industry, and smallholder milk production in particular, makes it clear that it does not support milk powder for monetization due to its possible effects on the domestic market. The project will provide evidence to illustrate these contradicting impacts.

The research results in the form of briefings and presentations will be useful to the Ministry of Agriculture and Food Security and Ministry of Industry, Trade and Private Sector Development. The dairy supply chain falls under the jurisdiction of both ministries and a consistent policy needs to integrate the actions from both offices as the operation of supply chains has impact on the well-being of the agricultural sector and consumers. The research will contribute knowledge about the determinants of marketing milk to the informal sector and whether the processing sector operates in a competitive way. Furthermore, we anticipate that this type of analysis will also encourage similar research in other food supply chains.

The results will be useful to other dairy sector stakeholders, including farmer associations and NGOs that support them, consumers, processors and traders associations. All will be informed by the results by means of presentations, discussions and briefings.

In terms of training, the project will transfer research skills to Malawian research collaborators in areas such as supply chain analysis and industrial organisation theory. Regarding the latter, many of the approaches used in industrial organisation have been applied to development economics creating an area known as development microeconomics (see for instance Bardhan and Udry, 1999). Another area will be in the use of econometric modelling of supply chain for the simulation of policies.