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21ECONOMIC SCIENCES
DIRECTIONS OF DEELOPING THE MILK SECTOR OF THE REPUBLIC OF KAZAKHSTAN FOR ITS EFFICIENT INTEGRATION TO THE GLOBAL MARKET
Abraliev O.
Kazakn National Agrarian University, Almaty, Kazakhstan
Beysenbaeva A.
Kazakn National Agrarian University, Almaty, Kazakhstan
Kenzhyev Sh.
Kazakn National Agrarian University, Almaty, Kazakhstan
Abstract
Impact of protectionism, autarky and government subsidies on prices in the dairy market are analysed in the market. Moreover, the trade-off between government subsidies and protectionism is defined. The purpose of the research is to define practical and theoretical bases which may help to offer recommendations on how to apply economic mechanisms to develop the dairy sector in the Republic of Kazakhstan.
The research methodology is based on economic, comparative and graphical methods.
The research practical significance is in describing why protectionist policy is not efficient for developing the dairy industry in the Republic of Kazakhstan. The research results illustrate that the milk industry of the Republic of Kazakhstan may benefit more from improving the production quantity and quality indicators and partly from the government subsidies despite the welfare benefits of the protectionist policy.
Keywords: dairy sector, protectionism, government subsidies, welfare analysis, positive external production effects, global dairy market, free trade, autarky.
The milk production worldwide has increased by 1.4% in 2017 if compared with 2016 and reached to 811 million tonnes [1]. According to the Food and Agriculture Organization of the United Nations the global milk production is expected to grow [2]. However, Kazakh-stani enterprises may miss opportunities related to the expected global demand growth on dairy products due to not offering enough competitive product price and quality in the international market [3, 4]. Moreover, the structure of the international agricultural trade illustrates that the dairy sector of the Republic of Kazakhstan does not have competitive advantage in the global agricultural market.
According to the International Dairy Federation (IDF) the majority of the global milk production is coming from cows. Moreover, India and Pakistan are considered as significant players in the global buffalo milk market [5]. Buffalo milk is also produced in Egypt, People's Republic of China, Italy and Iran. In addition, the biggest goat milk producers are located in Asia. According to the Food and Agriculture Organization of the United Nations the European Union and India are among the top milk producers in the world. New Zealand and the European Union are among the top exporters in the international dairy market [6]. New Zealand and the European Union are among the top exporters in the international dairy market [7]. The following products are considered as the most significant dairy products traded in the global market: whole and skim milk powders, butter and cheese, whey products, condensed milk and casein.
According to the International Dairy Federation (IDF) focusing on production of butter and other types milk fats as ghee has potential for agricultural ventures as their production is expected to grow. In addition, there is no precise data on how much dairy products are
consumed globally due to the following reasons: often information about animal feed purpose, usage of technical milk, how much milk is delivered to plants, public and private stocks is not available for every single country in the world.
There are three major organisational types focused on milk production: commercial, private and family holdings.
Commercial farms often have competitive advantage in the milk market due to the following factors:
- having higher number of cattle;
- in the developed countries they often own mechanised systems for milking or cooling;
- they often better fulfil requirements on quantity and quality compared with smaller and financially weaker private or family holdings.
Family dairy farmers in countries as the Republic of Kazakhstan which are part of the Eurasian Economic Union often have one or two cows, and poor storage, milking and feeding facilities [4, 8, 9]. Family holdings in the developing countries often struggle to fulfil animal health, product quality and quantity standards. Moreover, improvement of the living standards often brings economic changes which may shift the consumption patterns. Therefore, rise in disposable income may increase the population share which may afford to buy dairy products.
According to the International Dairy Federation (IDF) dairy prices in the global market tend to have cyclical nature. Moreover, crises of the financial or credit origin also have their impact on prices. For instance, the tinancial crisis of 2007-2008 caused price decline in the global dairy market in the end of 2008 which continued in the beginning of 2009. Prices recovered in the end of 2009 due to demand rise.
Monopolistic position in dairy processing may cause milk supply shortage. Therefore, milk production is often regulated in different countries throughout the world. For instance, the dairy industry in the European Union is regulated by the Common Agricultural Policy (CAP). The European Union tries to ensure secure price levels on dairy products through various economic mechanisms as intervention prices for skimmed milk powder and target prices on milk.
Defining a model of dairy is possible through defining Cobb-Douglas exponential functions which may look the following way:
lnY = an +
^aMli)
(1)
Abbreviations: Y - output; Ii - inputs;
ai - model coefficients.
The demand function is described the following way [10]:
qd(pd) = d(pd)ed (2)
Abbreviations:
ed - demand elasticity; qd - quantity demanded; d - demand constant; pd - demand price.
The demand elasticity defines how much quantity, which is demanded, may change when price for demand rises by 1%. This value mostly is negative as normally demand decreases when prices become higher. Another side of the market, supply, could be defined by the following formula:
qs(ps) = c(ps)es
(3)
Abbreviations: es - supply elasticity; qs - quantity supplied; c - supply constant; ps - supply price.
The supply elasticity describes the change in how much quantity supply may change when supply price goes up by 1%. The simplest model that may define the state of the dairy market is the linear model which is shown in the figure below.
Figure 1 - The linear model of the diary market in a closed economy.
Abbreviations:
qd - quantity demanded in the dairy market; qs - quantity supplied in the dairy market; pd - inverse demand function; pd - demand price in the dairy market; ps - supply price in the dairy market; ps - inverse supply function; c - the saturated situation; d - demand function slope; pw - demand price of dairy products in the global market;
pa - autarky price in the dairy market.
The figure above illustrates what may happen in the dairy sector if a country has a closed type of economy. The autarky price would dominate despite the fact that the price in the global market is lower. Moreover, the figure above does not illustrate presence of any type of government intervention. Under the free trade conditions prices in the internal market would not be able to compete with the global prices.
In the market economy government usually does not tend to have direct control of economic actions as trade, consumption and trade in order to set prices for
every single item available on sale. However, governments often use economic policies to impact on economic indicators as prices. For instance, prices in the internal market can be kept higher that in the global market through export subsidies and tariffs. Therefore, a model that defines prices in the global dairy market should take into consideration if consumers or producers are subsidised or internal protection rates when prices in the domestic market are set. As a result, demand price in the global dairy market may be defined the following way:
pd = (1 + r )(1 + s)pw (3)
Abbreviations:
pd - demand price of dairy products;
pw - demand price of dairy products in the global market;
r - protection rate of the dairy industry;
s - dairy producer subsidy rate.
Protection rate of the dairy industry defines how much prices in the internal market of Kazakhstan is higher than prices in the global dairy market. Dairy producer subsidy rate illustrates how much demand price for diary products deviates from producer's prices based on the principles of the market mechanism.
Supply price formula for the international dairy market may defined the following way:
ps = (1+r )(1 — v)pw (4)
Abbreviations:
ps - supply price of dairy products;
pw - demand price of dairy products in the global market;
r - protection rate of the dairy industry;
v - dairy consumer subsidy rate.
Dairy consumer subsidy rate illustrates how much supply price for dairy products deviates from consumer's prices based on how the market principles operate.
Demand constant in the dairy market can be described the following way:
d =
qd
(pd)ed
(5)
Abbreviations:
d - demand constant in the dairy market; ed - demand elasticity in the dairy market;
qd - quantity demanded in the dairy market; pd - demand price in the dairy market.
Supply constant in the dairy market may be defined the following way:
c =
qs
(ps)es
(6)
Abbreviations:
es - supply elasticity in the dairy market; qs - quantity supplied in the dairy market; c - supply constant in the dairy market; ps - supply price in the dairy market.
Analysis of the formulas above may help to define demand function in the dairy market of the Republic of Kazakhstan:
qd(v,r,pw) = d((1 + r)(1 - v)pw)ed (7) Abbreviations:
qd - quantity demanded in the dairy market; v - dairy consumer subsidy rate; r - protection rate of the dairy industry; pw - demand price of dairy products in the global market;
d - demand constant in the dairy market; £d - demand elasticity in the dairy market.
On the other hand, supply function in the dairy market of Kazakhstan may be described by the following way:
qs (s, r, pw) = d((1 + r) (1 + s)pw)es (7) Abbreviations:
qs - quantity supplied in the dairy market; s - dairy producer subsidy rate; r - protection rate of the dairy industry; pw - demand price of dairy products in the global market;
c - supply constant in the dairy market; £s - supply elasticity in the dairy market.
Kazakhstan is an active participant in the global trade, therefore, the internal dairy market is open for imports. As a result, the foreign exchange has an impact on the domestic dairy product trade. The figure below illustrates how this indicator impacts dairy product price in Kazakhstani market.
Figure 2 - Impact of the foreign exchange on dairy product prices in the Republic of Kazakhstan.
Abbreviations:
FE - quantity demanded in the dairy market; B - government revenue; pw - demand price of dairy products in the global market;
pa - autarky price in the dairy market.
The figure above illustrates that the foreign exchange can be defined by the following formula:
FE(p,pw) = (qd(p) - qs(p)) (p - pw) (8)
Abbreviations:
p - domestic price in the dairy market of the Republic of Kazakhstan;
pw - demand price of dairy products in the global market;
qd - quantity demanded in the dairy market of Kazakhstan;
qs - quantity supplied in the dairy market of the Republic of Kazakhstan.
The welfare analysis is one of possible ways to analyse how different economic policies may impact the dairy sector of the Republic of Kazakhstan through indicating how the social welfare may change. The welfare indicators are illustrated in the figure below.
Figure 2 - Total benefit and cost indicators in the dairy industry of the Republic of Kazakhstan. Abbreviations:
pd - demand price in the dairy sector of Kazakh- qs - quantity supplied in the dairy sector of Ka-
stan; zakhstan;
ps -supply price in the dairy sector of Kazakhstan; pw - demand price of dairy products in the global
qd - quantity demanded in the dairy sector of Ka- market. zakhstan;
The figure above illustrates that the maximum willingness for customers to pay for the specific dairy products in Kazakhstan is known as a total benefit or an indicator of welfare for consumers:
qd(p)
TB(p) = J pd(v) dv
(9)
*d - inverse demand function;
Abbreviations:
TB - total benefit;
Pd
qd - quantity demanded in the dairy market;
v - integration variable.
The formula above illustrates that the total benefit is related an inverse for the demand function. Moreover, focus on production on one type of dairy products may mean that consumption and production level for other type of dairy products may decrease. As a result, there may be some foregone benefits related to that sort of action:
qs(p)
C(p)= J ps
(v) dv (10)
Abbreviations:
C - cost which defines benefit foregone and opportunity cost;
ps - inverse supply function;
qs - quantity supplied in the dairy market;
v - integration variable.
Analysing formulas 9 and 10 may help to make the conclusion that the welfare function may look the following way:
W(p, pw) = TB(p) - C(p) + FE(p,pw) (11)
Abbreviations:
W - welfare;
TB - total benefit;
C - cost which defines benefit foregone and opportunity cost;
FE - foreign exchange;
p - domestic price in the dairy market of the Republic of Kazakhstan;
pw - demand price of dairy products in the global market.
The application of economic impact analysis may help to understand what may happen if the Republic of Kazakhstan implements the protectionist policy in the dairy market.
q*(p") qHp) Qd(p) qd(p") <n<7d
Figure 3 - The economic analysis of the protectionist policy in the dairy sector of the Republic of Kazakhstan.
b(p, pw) = (qd(p) - qs(p)) (p - Pw) (12)
Abbreviations:
p - domestic price in the dairy market of the Republic of Kazakhstan;
qd - quantity demanded in the dairy sector of Kazakhstan;
qs - quantity supplied in the dairy sector of Kazakhstan;
pw - demand price of dairy products in the global market.
Abbreviations:
B - the government budget (revenue) function; qd - quantity demanded in the dairy sector of Kazakhstan;
qs - quantity supplied in the dairy sector of Kazakhstan;
p - domestic price in the dairy market of the Re
The figure above illustrates that the government public of Kazakhstan;
budget function would look the following way:
pw - demand price of dairy products in the global market.
0
0
On the other hand, the protectionist policy has several drawbacks:
- this policy is against the WTO regulations;
- in the long-term can make domestic dairy producers to become more competitive because of absence of the pressure from the foreign competition.
There are potential gains from the international trade that are shown in the figure below.
Figure 4 - Trade gains for the dairy market of the Republic of Kazakhstan.
Abbreviations:
p - domestic price in the dairy market of the Republic of Kazakhstan;
qd - quantity demanded in the dairy sector of Kazakhstan;
qs - quantity supplied in the dairy sector of Kazakhstan;
pa - autarky price in the dairy market.
pw - demand price of dairy products in the global market.
The figure above illustrates that dairy product enterprises in Kazakhstan may gain profits from the international trade. Their revenues could be defined by the formula below:
R(p) = qs(p) x p (13)
Abbreviations:
R - dairy ventures's revenue;
qs - quantity supplied in the dairy sector of Kazakhstan;
p - domestic price in the dairy market in Kazakhstan.
The welfare state of dairy enterprises in the Republic of Kazakhstan may be defined by the producer surplus function which defines differences between their revenues and costs.
PS(p) = R(p) - C(p)
qs(p)
= qs(p) x p - J ps(v) dv (14)
0
Abbreviations:
R - dairy ventures's revenue;
C- costs;
qs - quantity supplied in the dairy sector of Kazakhstan;
p - domestic price in the dairy market in Kazakhstan;
ps - inverse supply function;
qs - quantity supplied in the dairy market;
v - integration variable.
The economic analysis of figures 3 and 4 illustrate that the dairy market of the Republic of Kazakhstan may improve its state mainly through positive external effects. Those effects are caused by economic activities that impact different indicator functions in the dairy market of the Republic of Kazakhstan, e.g. quantity or quality indicators as production volume, but they are not directly reflected by prices. The figure below illustrates how positive external production effects may benefit the diary sector of the Republic of Kazakhstan.
Figure 5 - Benefits gained from the access to the international market for the dairy sector of the Republic of Kazakhstan facing positive external effects from production.
Abbreviations:
- EE - external effect;
- MC - marginal cost;
- W - welfare;
- Ws - adjusted social welfare;
- pd - demand price in the dairy market of Kazakhstan;
- ps - supply price in the dairy sector of the Republic of Kazakhstan;
- qd - quantity demanded in the dairy sector of Kazakhstan;
- qs - quantity supplied in the dairy sector of the Republic of Kazakhstan.
The figure above demonstrates that the function of positive external effect can be defined by the following formula
EE(ps) = f(qs (ps)) (16)
Abbreviations:
EE - external effect;
qs - quantity supplied in the dairy sector of Kazakhstan;
ps - supply price in the dairy market of the Republic of Kazakhstan.
Therefore, an adjusted social welfare may look the following way:
qd(pd)
qs(ps)
Ws(ps,pd,pw) = J pd(v) dv — J ps(v) dv
00 + (qs(ps) — qd(pd))pw
+ f(qs(ps)) (17)
Ws(ps,pd,pw) = TB(pd) - C(ps) + FE (ps,pd,pw) + EE(ps) (18)
Abbreviations: EE - external effect; MC - marginal cost W - welfare;
Ws - adjusted social welfare; pd - demand price in the dairy market of Kazakhstan;
ps - supply price in the dairy sector of the Republic of Kazakhstan;
qd - quantity demanded in the dairy sector of Kazakhstan;
pd - inverse demand function; pd - inverse supply function; qs - quantity supplied in the dairy sector of the Republic of Kazakhstan.
Analysing figures 4 and 5 may show that giving up the protectionist policy may have its impact on the welfare of producers. The figure below demonstrates why how subsidisation policy may differ from protectionist policy in the dairy market of the Republic of Kazakhstan.
Figure 6 - The relationship between welfare indicator and positive external effect from production in the dairy
market of the Republic of Kazakhstan.
Abbreviations:
EE - external effect;
W - welfare.
The figure above demonstrates that free trade may help to maximise profit if the dairy sector is competitive in the global market. However, free trade may not help to improve the state of the welfare in the dairy market towards its maximum possible condition.
Analysing the figure above demonstrates that if the Republic of Kazakhstan decides to subsidize dairy enterprises may cause welfare loss at the external effect gain. On the other hand, the protectionism in the dairy market can make the external effect internal through improving social welfare (supply) at the cost of losses on the demand side of the market.
In conclusion, the main direction of developing the dairy sector in the Republic of Kazakhstan should be focusing on the production quality and quantity improvement through different measures as introducing new technologies and improving production chains. In addition, government subsidies should be used as an additional but not the main instrument of helping to improve the state of the internal dairy market in the Republic of Kazakhstan.
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