CC BY
150
DOI http://dx.doi.org/10.18551/rjoas.2016-03.03
ECONOMIC ANALYSIS OF MILK MARKETING CHANNELS IN SOUTH REGION OF PUNJAB, PAKISTAN: AN EMPIRICAL ESTIMATION OF MARKETING AND
PROFIT EFFICIENCY
Mazhir Nadeem Ishaq*, Li Cui Xia, Rukhsana Rasheed, Nhu Bang Nguyen
College of Economics & Management, Northeast Agriculture University, Harbin, China
Muhammad Abdullah Muhammad Nawaz Shareef University of Agriculture, Multan, Pakistan
Nadeem Abbas
Plan International, Muzaffargarh, Pakistan
*E-mail: [email protected]
ABSTRACT
This paper aims to understand the structure of milk supply and to make a comparison between informal and formal milk marketing system with a view to measure the extent of transaction costs divergence in Punjab province of Pakistan. Livestock contribution in Pakistan's GDP is 11.6 percent and the total milk production for year 2015 was recorded as 52.632 million tons. The descriptive research design was used with stratified sampling techniques for gathering primary data source from four districts having a rich population of livestock and milk producers. Different analytical techniques as marketing efficiency, marketing margin and DEA analysis for profit efficiency were applied for comparative estimation of two marketing systems. The empirical results indicate that the marketing margin (MM) of various middlemen, milk producer's share in consumer price (DPP) was 20%, 12% higher respectively. The mean value of measure of marketing efficiency (MME) and profit efficiency for informal and formal milk marketing channels was estimated 1.8 and 0.77 respectively. Profit efficiency value for informal marketing channels was 0.37 higher in comparison to formal system. For informal milk marketing system, the traditional milk collector (Dhodi) is alone significant player in marketing chain whereas formal milk marketing chain is occupied by a series of middlemen, further there is involvement of huge fixed cost for producing UHT packed milk. Thus informal milk marketing system is dominating over formal milk marketing channels in Pakistan. Finally, we document some policy recommendation as a potential source amid at improving the situation of milk supply in Pakistan.
KEY WORDS
Marketing channels, informal and formal milk supply chain, middlemen, transaction costs, margin, marketing efficiency, profit efficiency, Punjab.
An efficient marketing system is an important tool for achieving higher economic efficiency of any enterprise, like dairy sector. Management of marketing activities like procurement of quality raw milk from milk producers, milk processing and delivering safe & healthy milk on affordable prices to consumers in a cost minimization manners create an economic efficient marketing system. The milk marketing provides a stimulus for more milk production and assists to enhance overall milk supply. An efficient milk marketing ensure to provide higher proportion of profit from consumers' paid price which encourage milk producers to invest more resources in dairy farming. In compliance of milk consumers' preferences; the milk producers, researchers, investors, planners, trading corporations and policymakers of dairy enterprise are paying significant attention on marketing component of dairy products.
In Pakistan, the figures of national survey 2014-15 revealed that livestock share in agriculture value addition is approximately 55.1% and its overall contribution towards national GDP is 11.6%. Livestock is rearing by 35-40 million rural populations. Approximately 8.5 million small and landless rural household are dependent on this occupation. Farmer can generate a regular flow of income around the year through milk production. Tanvir, (2007) concluded that the worth of dairy sector in Pakistan is more than 60% higher as compare to the combined value of two cash crops cotton and wheat. Dairy farming and milk marketing is recognized as an imperative activity for value addition and employment generation for small, marginal and landless farmers in Pakistan, s economy.
Overview of Milk Production and Milk Supply Systems in Punjab. In Pakistan, milk is primarily produced by two major dairy animal i.e cow and buffalo. The share of milk contribution by buffalo and cow in total milk production is 61% and 34.9 % respectively. In year 2014-15, Pakistan total milk production was recorded as 52.632 million tons and it ranked 5th in world milk producers (GOP, 2015). Milk supply chain is the performance of all business activities involved in the flow of milk and its products from milk producers to consumers. Milk supply chain exhibits various marketing agents/intermediaries which perform a specific function at each marketing node. According to FAO (2011), a marketing node is defined as any point in the marketing chain where an exchange or transformation of dairy product takes place. In Pakistan's milk supply chain, following major key players/stakeholders are involved:
a) Milk Producers: small, medium and large scale dairy farmers in rural and pre-urban areas
b) Milk Collectors: Traditional milk collector locally called as Dodhi, village milk collection centers (MCCs), milk contractors etc.
c) Milk Processors: UHT milk processing plants, local traditional dairy processors, confectioners which convert milk to different food products like desi ghee, khoya, cream etc.
d) Milk shops/ Retailers: Milk shops, retail shops, traditional milk made beverages etc.
e) Milk Consumers: Consumers of fresh milk provided by informal milk marketing, consumers of pasteurized, UHT and tetra pack or other milk made products in rural and urban areas.
The milk producers can decide to sell their milk produce according to price and service provided by existing available marketing channels. Milk supply chain in Pakistan can be classified into two major marketing systems i.e. informal milk marketing and formal milk marketing system.
Informal Milk Marketing System. This can be defined; milk marketing system which deals with the collection and distribution of milk or milk products without any legal license issued from a regulatory agency. Usually this marketing system procures the raw milk from local milk producers and market it as fresh or sour-milk. Milk marketing in Pakistan is dominated by informal private sectors which comprised of various marketing agents/middlemen as milk producers, milk collectors (Dodhi), de-creamers, retailers/milk shops and consumers. Zia, (2007) estimated that informal milk marketing system is handling over 90 percent of total milk being produced in Pakistan. Traditional milk collectors (Dodhi) is the primary interlink between milk producers and consumers as he visit individual dairy farm, collect milk and sell to retailers or consumers directly. The number of market middlemen and different combination among them can create various possible inks or channels in milk marketing system of Pakistan. Among them three prevalent milk marketing channels are represented in Figure 1.
Formal Milk Marketing System. A milk marketing system which undertakes collection, processing and distribution of milk under license issued from government department is termed as formal marketing system. Thus formal system worked under some dairy and food regulatory department to ensure the enforcement of food safety regulations. The mechanism of formal milk marketing system is to collect raw milk from producers, milk contractors and processing it into various dairy products like UHT milk, yoghurt, powder skimmed milk, butter, cheese, ghee, cream etc. These dairy products are distributed through distributors,
wholesalers and retailers to consumers in urban as well as in remote areas. To ensure the purchase of good quality raw milk from rural areas and to facilitate milk collection phase, the dairy plants have established a network of milk collection centers (MCC) in milk producing areas. These MCCs serve to interlink milk producers and milk processing plants. MCCs purchase milk after testing and chemical analysis according to the prescribed quality standards. Although the network of MCCs and milk plants are growing but still the market share of formal milk marketing system in Pakistan is not more than 6 percent. Three prevalent milk marketing channels under formal milk marketing system are illustrated in Figure 2.
Marketing Channel 1
Figure 1 - Informal Milk Marketing System
Marketing Channel 4
Figure 2 - Formal Milk Marketing System
The current situation analysis of milk marketing illustrates that majority of milk producers sell milk through informal system but they are not restricted for it. They can choose either milk marketing system but their choice is influenced by socio-economic determinants.
Marketing Performance and Profit Efficiency Estimation in the Literature. Mendoza (1991) argued that a market research study is initiated with the knowledge of the origin of product and then follow the production process, transformation, value creation and distribution to final destination. Once the origin and destination of product was identified, we move towards the marketing channels and margins of the supply chain in the region of study. Pomeroy and Trinidad (1995) referred market performance as, the impact of organization and its conduct on output prices, transaction costs and volume of sale. The supply chain profitability measure illustrated the performance of marketing efficiency (Chopra, et.al. 2001).Two approaches used for measuring marketing performance; (i) marketing margin and (ii) estimation of market channel efficiency (Jema, 2008). Several studies were conducted by Anand (1979), Xaba & Masuku (2012) and Birachi (2006) to examine marketing performance of different agriculture commodities. They concluded that under perfect competition, the marginal marketing costs might be attributable by variation in margin over time. However the variations in margins are also influenced by some other additional factors like seasonality, technological changes and sales of output.
Ramakumar (2001) illustrated that marketing performance has two important components: (i) effectiveness of marketing services with which it would be delivered and (ii) the impact on transaction costs performing on production and consumption. Rangasamy et.al (2008) found that different parameters like economic costs, marketing margins and marketing efficiency are influenced by the structure and conduct of milk, milk products and marketing activities. Marketing performance put emphasis on relationships among stakeholders of milk supply chain, integration of all marketing activities from producers to consumers while adding value, getting maximum profit efficiency and customer satisfaction (Sayuti, 2011). Marketing performance measurement necessitate for a ample understanding of each decision driver factors which affect milk supply chain integration, production facilities, collaborative relationships, sourcing & location decisions, distribution and pricing (Ambe, 2012).
Abbott and Makeham (1981) defined marketing efficiency as the movement of goods from its production to consumption at the lowest cost and to comply with the provision of the service desired by consumers at affordable prices. Thus marketing efficiency is the ratio of output of marketing system to the input of marketing system. Out pout of marketing is to create value addition by adding some utility in supply chain and is evaluated by the difference between consumers' paid price and producer, received price. The transaction costs incurred at each economic exchange in marketing channels of goods are considered referred as inputs used in marketing system.
Abebe (2009) suggested that estimation of transactions costs and margin in a marketing chain of a particular commodity explain the profit efficiency of marketing to a great extent. To minimize burden of unwanted transaction costs in the sale of milk and dairy products, an analysis of marketing costs and margins of dairy sector is of prime importance (Rangasamay & Dhaka, 2008).
Ghorbani (2008) confirmed that marketing costs and margins are significant indices for profit efficiency measurement of milk supply chain. Abbott & Makeham (1981) argued that price spread is a commonly used measure for the marketing performance. Kindeya (2010) concluded that generally overall marketing margin is the dispersion of price between farm and the retail level. Usually dairy marketing channel involves a series of various market middlemen through which dairy products move from milk producers to final consumers. It can be a useful statistics which explain the distribution of consumers' price among various market middlemen. High prices to consumers and low prices to producers indicate that a large margin exist in the marketing chain. Margin analysis is important to find out the producer's share in consumer's price and to assess the share of other market intermediaries (wolday, 1994).
Teka (2009) argued that marketing costs and margins are the simultaneous comparison of both producer and consumer prices along supply chain and are expressed in percentage. Smith, 1992; Kindeya, (2010) used the values of consumer price and cost price to calculate the milk producer share, mark-up percentage and overall margin percentage along the entire marketing chain. Due to existence of abnormal profits, a higher marketing margin is expected within an imperfect market rather in a competitive market. The largest profit efficiency was obtained through direct sale to consumers. This producer-consumer direct dealing enable the milk producers to obtain more attractive prices and a huge share of consumer price in comparison to other marketing channels where a long chain of market middlemen resulted in lowest producer's share (Abebe,2009; Xaba & Masuku, 2012).
Marketing of milk or milk products are contributing a vital role in the economic uplift of dairy enterprise but a limited research has been carried out on quantifying transaction costs and profit margins. The information about spread of costs incurred and profit received by different market middlemen along the chain is lacking, so little is known on" who gets what" among the supply chain actors. To ascertain the marketing performance of milk marketing system, it is very necessary to understand the role of each marketing agents and estimate their profit margins. This study attempts such a detailed investigation to economically analyze the current marketing practices towards sustainable development of dairy industry in Punjab province of Pakistan.
The specific objectives of the study were:
i. To characterize the market structure, conduct and performance of both informal and formal milk marketing system in south region of Punjab province of Pakistan.
ii. To conduct an economic estimation and comparative analysis of transaction costs, marketing margin, marketing efficiency and profit efficiency of various marketing agents/ middlemen along both milk marketing systems working in study area.
MATERIALS AND METHODS
Description of Study Area. Milk is produced in all geographical regions of Pakistan. This study was purposively conducted in south region of Punjab province as this part offer a rich population of livestock and milk producers' community as compared to others areas of Pakistan. Punjab share in total milk production of Pakistan is more than 74 percent (Govt. of Pakistan, 2015). Four districts i.e. Vehari, Lodhran, Bahawalpur and Muzaffargarh located in south region of Punjab province were selected for this study. The small, medium and large dairy farmers constitute the milk producer community. Small scale milk producers hold 1-4 dairy animals (mostly buffalo and cow), medium scale milk producers have 5-8 dairy animals and large scale milk producers have 10-100 dairy animals (Zia, 2007).
Research Design. A descriptive quantitative research design was applied for this study to analyze the both milk marketing systems. Keeping in view the possible interlinks of various marketing agents/middlemen, each marketing system was further sub-divided into three marketing channels (MV) as MV1, MV2, MV3, MV4, MV5 and MV6 as shown in Figure-1& 2. Both the primary as well as secondary data was gathered. Secondary data was collected from Punjab government department of livestock and dairy development, Economic survey of
Figure 3 - Geographical map of study area
Pakistan, agriculture and livestock statistics census etc. Primary data was collected through a wide scale field surveys from four districts of Punjab province of Pakistan. The field survey excursion was carried out in January and February 2016.
Target Population and Sampling Technique. Milk producers and various marketing agents/ middlemen as discussed earlier were the specific target population for this study. To make a comparative study of two milk marketing systems, an equal number of milk producers were selected from each district under investigation. Stratified random sampling techniques were applied. The proportion of sample size is illustrated in Table 1.
Tablel- Proportion of household sample for field survey
District Informal Milk Marketing system Formal Milk Marketing System
Milk Producers Milk collectors / Dodhi Milk shop / Retailers Milk Producers Milk Collection centers Milk Processin g Plants Packed Milk Distributors / Retailers
Vehari 30 10 5 30 3 1 3
Lodhran 30 10 5 30 3 - 3
Bahawalpur 30 10 5 30 3 1 3
Muzzafar-garh 30 10 5 30 3 1 3
Total 120 40 20 120 12 3 12
Sub-total 180 147
Gross Total 327
Thus a total sample size of 240 milk producers was chosen, 120 were from informal and 120 from formal milk marketing system. In addition to milk producers, 87 milk marketing agents/middlemen who played significant role in the flow of milk from producers to consumers either in the form of raw milk purchasing, processing, distributing or retailing. Out of these 87 market middlemen, 60 were from informal milk marketing system and 27 were formal milk marketing system. Among 60 market middlemen of informal system, 10 traditional milk collectors/dodhi and 5 milk shops/retailers were randomly selected from each four districts. So a sample of 180 respondents from informal milk marketing system was surveyed. On the other hand, 27 market middlemen/respondents were interviewed from formal milk marketing system. Three milk collection centers (MCCs) of dairy processing plants, 1 processing unit if established in district and 3 milk distributors or retailers who sell UHT/tetra pack milk from each district were interviewed.
Data Collection. Primary data was collected through personal interviews at village level from each district. Different set of structured questionnaires were prepared, pre-tested and modified for each category of stakeholders within marketing channels. The questions included in questionnaires were focusing on identifying the transaction costs involved in production and marketing. The questionnaires were also reviewed by experts of Agriculture Economics and Management department to establish the content validity. The marketing margin and efficiency were established by price differential comparison found in various channels of marketing, which is the basis of the analysis (Mendoza, 1997). Thus following aspects were taken into account while implementing the final survey for each marketing channels of both milk supply systems:
a. Marketing agents who purchase the milk, what was purchase price and place in chain.
b. Per liter price and volume of quantity, production, marketing or processing capacity.
c. Economic agent who sells milk, what is sale price and place of sale.
d. Physical function that was applied for utility or value addition.
e. Time of storage, distribution in next link of channel, distance travelled to add place utility.
Economic Analysis and Analytical Estimation Procedure. After collecting the desired primary and secondary data, it was tabulated using excel spreadsheet according to the characterization of marketing channels. Accounting method was applied to quantify marketing agents' transaction costs while market model of the Structure-Conduct-Performance (S-C-P) was utilized to descriptively analyze the milk marketing performance.
Quantitative analysis entail estimation of gross margins for major marketing agents (milk producers, milk collectors, processors, distributors, retailers and consumers) at their specific node along the entire milk marketing systems. Following accounting and quantitative measures were applied in data analysis:
1. Marketing gross profit margin analysis:
According to Cramers & Jensen (1982) marketing gross profit margin was calculated by subtracting the estimated total costs including variable and fixed costs of production, processing, distribution and retailing of the product/service from total revenues earned. In other words, it is the difference between consumer price and farm-gate price. The gross profit margin was calculated at each marketing node by the formula:
GPMi = TRi-(TVCi + TFCi) (1),
where:
GPMi= Profit margin of producer/milk collectors/processor/retailers; TRi= Total revenue of producer/milk collectors/processor/retailers; TVCi= Total variable cost of producer/milk collectors/processor/retailers; TFCi= Total fixed cost of producer/milk collectors/processor/retailers; i= 1-nth producer/milk collectors/processor/retailers.
The percent marketing margin was estimated using the following formula.
MM = — X 100 (2),
SP v '
where:
MM = Marketing Margin Ps = Price spread Sp= Sale price
Price spread = Sale price - Purchase price
2. Direct participation producer (DPP):
The share of producers corresponding to final price of the product was estimated. Direct Participation Producer (DPP) is portion of priced received by producer from final price paid by consumer (Mendoza, 1997).
___ Consumer Price-Marketinq Gross Marqin
DPP =---— X 100 (3)
Consumer Price
3. Net marketing margin (NMM) is the percentage of the final price received by each middlemen as net income after subtracting deducting marketing costs (Mendoza, 1997).
,,„„,,„ MGM—Marketing Cost
NMM = ---X 100 (4)
Consumer Price
4. Measure of marketing efficiency (MME):
MME is measure for estimating the consumer maximum satisfaction at lowest possible cost during the flow of goods from producer to final consumer. Marketing efficiency of milk marketing agents is estimated by quantifying the marketing efficiency (MME) indicator (Acharya, 2004) as
MME = ——— (5)
NMM+MC v '
where:
FP means price received by milk producers;
(NMM+MC) is net marketing margin and cost incurred by the middlemen.
The higher value of MME, higher the efficiency and vice versa.
5. Profit efficiency measurement of Milk Market Middlemen:
The profit efficiency of different marketing agents is estimated through the application of Data Envelopment Analysis. DEA Model was introduced by Charnes, Cooper and Rhodes (CCR) (1978) and further extended to non-constant returns technologies by Banker, Charness and Cooper (BCC) (1984) provides a way to construct the production possibility set from an observed data set of input-output bundles.
Suppose that (Xj ,Yj ) is the input-output bundle observed for firm j 0=1,2,.......,N).
Clearly, these input-output bundles are all feasible. Then the smallest production possibility set satisfying the assumption of convexity and free disposability that includes these observed bundles is
N N N
S = {(X,Y) : X>I IjXj ;Y<I IjYj ;£lj = 1; lj>0; ( j= 1,2,.......N)}............(6)
j=1 j=1 j=1
The set S is also known as the free disposal convex hull of the observed input/output bundles. One can obtain various measures of efficiency of a channel using the set S as the reference technology.
For an each marketing channel, both inputs and outputs will be choice variables. The constraint will be only for input-output bundle chosen feasibility. The criterion of efficiency is profit maximization for each marketing channel. At input and output prices w and p, respectively, the actual profit of marketing channel receiving the output bundle Y° from the input bundle X° is n° = p/ Y° - w/ X°. The maximum profit feasible for the channel is:
n(w,p) = max p/ Y - w/ X : (X,Y) ÍT (7)
In any empirical application, the maximum profit may be obtained as n* = max p/ Y - w/ X s.t. (8)
N N N
I IjYj>Y ;I IjXj<X;IIj = 1; lj>0; ( j= 1,2,.......N)} (9)
j=1j=1j=1
The profit efficiency of a marketing channel is measured as d = n°/ n* This measure is bounded between 0 and 1, except in the case where the actual profit is negative, while the maximum profit is positive. In that case d is less than 0. If the maximum profit is negative as well, d exceeds unity (Das et al, 2005).
RESULTS AND DISCUSSION
This study concentrates on those marketing agents/middlemen which are associated to milk producers in the study area. From four district we purposely choose six marketing channels, the three were from formal milk marketing system and three were from formal milk marketing system as shown in Figure-1& 2. It was found that the three milk marketing channels; MV1, MV2 and MV3 developed within informal milk marketing system were purchasing 86% of raw milk from our sample of 120 milk producers. Similarly the other formal milk marketing channels MV4, MV5 and MV6 purchase 88% of raw liquid milk from sampled 120 milk producers.
We have estimated the average price spread, marketing margin, profit efficiency of different marketing intermediaries and also the producers' share in consumer price from four districts local informal marketing system (channel 1, 2 and 3) and formal marketing system
(channel 4,5 and 6). The empirical results derived from data analysis of field survey information under informal milk marketing system are presented in Table 2; depict.
Table 2- Estimation of transaction cost, marketing margin & efficiency within informal milk
marketing system
Marketing Cost & Marketing Margin Names of Districts Mean Value *(PKR)
Vehari Lodhran Bahawal pur Muzaffargarh
1. Milk Producers' Level
a) Cost of Production (Fixed & Variable) 35 38 34 36 35.75
b) Profit Added 10 10 9 11 10
c)Dairy Farmer milk Selling Price (a+b) 45 48 43 47 45.75
2. Milk collector (Dhodi) Level
a) Cost of Marketing (i+ii+iii) 5 6.3 5.3 5.6 5.55
i) Labour 2 2.5 2 2.3 2.2
ii) Transport 1.5 2 1.8 1.7 1.75
iii) Storage 0.5 0.8 0.7 0.6 0.65
iv) Marketing tax or others 1 1 0.8 1 0.95
b) Profit Added 10 9 10 8 9.25
c) Milkman milk Selling Price (a+b) 60 63.3 63.6 60.6 61.87
3. Retail's Level
a) Cost of Marketing (i+ii+iii) 5 5.3 5.3 5.4 5.25
i) Labour 2 2 1.8 1.8 1.9
ii) Transport 0.5 1 0.8 0.6 0.72
iii) Storage 1.5 1.5 1.7 2 1.67
iv) Marketing tax or others 1 0.8 1 1 .0.95
b) Profit Added 5 5 6 5.5 5.37
c) Retailers milk Selling Price (a+b) 70 73.6 74.9 71.5 72.5
4. Price Paid by Consumers 70 73.6 74.9 71.5 72.5
5. Total Marketing cost (2a+3a) 10 11.6 10.6 11 10.8
6. Total Marketing Margin (TMM) of all middlemen (2b+3b) 15 14 16 13.5 14.62
7. Price Spread(5+6)** 25 (100) 25.6 (100) 26.6 (100) 24.5 (100) 25.42 (100)
8. Percentage of Profit Margin of Milk Collector's in Price Spread** 40% 35.15% 37.59% 32.65% 36.38%
9. Percentage of Profit Margin of Retailer's in Price Spread** 20% 19.53% 22.55% 22.44% 21.12%
10. DPP in final Consumers' price 64% 65% 57% 66% 63%
11. MM in Consumer Price*** 21.42% 19.00% 21.36% 18.89% 20.16%
12. Marketing Efficiency (MME)*** 1.8 1.87 1.61 1.91 1.8
Source: Authors field survey data results. *Figures are in Pakistan's Currency Rupee (PKR).
** Percentages are estimated {profit of a middlemen/ (5+6)}. *** MM is estimated {Total MM/ Consumer Price}
The significant results derived from data analysis is that among different components of marketing costs, the labor cost is the major cost followed by the transport cost at traditional milk collector (Dodhi) level and the storage cost at retailer level within informal marketing system (Table 2). So the study results declared that within informal milk marketing channels, the major cost of milk marketing is the labor cost.
The results in Table-2 explained that out of the total price spread of marketing chain (marketing margin of all middlemen plus all marketing cost), the milk collector (Dodhi) profit margin occupies the highest profit margin in the informal milk marketing system (Average Rs.9.25 per liter). The second highest profit (Average profit Rs.5.37per liter) was of retailer or milk shops which sold loose raw milk to consumers (Table-2). The traditional milk collector's percentage profit margin in total price spread of four district markets i.e. Vehari, Lodhran, Bahawalpur and Muzaffargarh, varies between 40%, 35.15%, 37.59% and 32.65% respectively and the overall percentage profit margin in total price spread is 36.38 %. The retailer's average percentage profit margin in total price spread is 21.12%. Thus the milk collector's percentage profit is 15.26% higher than retailer's profit margin, Table 2.
Direct Participation Producer (DPP) i.e. the milk producer's share in final price was estimated and the results showed that, the mean value of DPP is 63% and it varies between
64%, 65%, 57% and 66% among districts. The other significant results are that, the mean marketing margin value for all intermediaries in entire marketing chain was about 20.16%, Table 2. The measure of marketing efficiency (MME) of informal milk marketing system estimated among districts varies between 1.8, 1.87, 1.61 and 1.91 while the mean value of MME is approximately 1.8, Table 2.
The data collected from formal milk marketing system was processed analyzed by applying the estimation parameters and the results are shown in Table 3 below.
Table 3- Estimation of transaction cost, marketing margin & efficiency within formal milk
marketing system
Marketing Cost & Marketing Margin Name of Districts Mean Value* (PKR)
Vehari Lodhran Bahawalpur Muzaffar-garh
1. Milk Producer, Level
a) Cost of Production(Fixed and Variable) 34 33 34 35 34
b) Profits added 9 9 8.5 8.5 9
c) Milk Producer's selling Milk Price (a+b) 43 43 42.5 43.5 43
2. Dairy Milk Collection Center Level
a) Cost of milk collection (Fixed +Variable) 3.45 3.58 3.52 3.75 3.57
Fixed Cost (i+ii) 2.33 2.4 2.35 2.4 2.37
i) Interest +Depreciation 1 1 1.1 1.05 1.03
ii) Salary of Employees 1.33 1.4 1.25 1.35 1.33
Variable Cost (i+ii+ii) 1.12 1.18 1.17 1.07 1.13
i) Milk Quality Testing Chemicals 0.36 0.32 0.35 0.31 0.33
ii) Diesel oil charges 0.64 0.7 0.68 0.65 0.66
iii) Marketing tax & Others 0.12 0.16 0.14 0.11 0.13
b) Commission added 0.12 0.10 0.08 0.10 0.1
c) Milk Price Received (a+b) 46.57 46.68 46.1 47.35 46.67
3 Milk Plant Level
a) Cost of Marketing (Fixed +Variable) 38 .5 37 .5 42 39 39. 25
Fixed Cost (i+ii) 18 16 20 18 18
i) Processing cost +Depreciation of assets 14.3 12.64 15.5 14.2 14.16
ii) Staff salaries 3.7 3.2 3.5 3.8 3.55
Variable Cost (i+ii+iii+iv+v) 20.5 21.5 22 21 21.5
i) Transportation Charges 3 3.01 3.1 3 3.02
ii) Milk Testing & Chilling Charges 1 0.86 0.88 0.84 0.89
iv) Packaging Charges 14 15.05 15.52 14.75 14.83
v) Marketing tax & Misc. 2.5 2.58 2.5 2.5 2.52
b) Profits added 5 6 5.5 6 5.6
c) Ex-Factory Milk Factory 90.07 90.18 93.6 92.35 91.52
4 Distributor/Retailers'/Shop Level
a) Cost of Marketing (i+ii+iii+iv) 4. 5 4. 1 4 4. 1 4.16
i) Labour Cost 1.5 1.3 1.2 1.25 1.3
ii) Transport Cost 1 0.9 1 1 0.95
iii) Storage Cost 1 1 0.8 0.85 0.91
iv) Sale tax & Misc. cost 1 1 1 1 1
b) Profits added 2 2.5 2.5 2.3 2.32
Price Received to Retailers 96.57 96.78 100.1 98.75 98
5. Price Paid by Consumers 96.57 96.78 100.1 98.75 98
6. Total Marketing cost (2a+3a) 46.45 45.18 49.52 46.85 46.94
7. Total middlemen Marketing Margin (2b+3b) 7.12 8.6 8.08 8.4 8.02
8. Price Spread(5+6) 53.57 (100) 53.78 (100) 57.60 (100) 55.25 (100) 54.96 (100)
9. Percentage of Profit Margin MCCs in Price Spread 2.12% 1.85% 1.38% 1.80% 1.81%
10. Percentage of Profit Margin of Dairy Processor in Price Spread 9.33% 11.15% 9.54% 10.8% 10.18%
11. Percentage of Profit Margin of Distributor/Retailer's in Price Spread** 3.73% 4.64% 4.34% 4.16% 4.22%
12. DPP in final consumer's Rupee 44% 44% 42% 44% 43%
13. MM in consumer Price*** 7.37% 8.86% 8.07% 8.50% 8.18%
14. Marketing Efficiency (MME) 0.8 0.79 0.73 0.78 0.77
Source: Authors field data results, 2016. * Figures are in Pakistan's Currency Rupee (PKR).
** Percentages are estimated {profit of a middlemen/ (5+6)}. *** MM is estimated {Total MM/ Consumer Price}
The results in Table-3 indicate that, the major cost component within formal milk marketing system at dairy milk collection center (MCCs) is labor/salary cost (average labor cost 1.33/L). The dairy processing companies paid salaries to their MCCs managers on monthly basis which is in the range of Rs. 12,000/- to 14,000/. The second major cost of MCCs was the depreciation cost (mean cost is Rs.1/L) of milk chillers installed at MCCs. Due to electricity shortage in rural areas, electric generators are also installed along with milk chillers for cooling the collected milk at MCCs. So the cost of diesel oil was assumed to be third major cost component at MCCs for chilling the raw milk at temperature below 10 0C.
The results in Table-3 revealed that within formal milk marketing systems, the huge cost is incurred on the milk plant installation, processing and packaging charges. It is elaborated as:
a) An extensive investment is required to install a dairy processing plant to run at optimal capacity according to milk supply. Among fixed cost; the processing cost and depreciation cost of dairy plant for ten years was estimated to be approximately Rs.14.16/L. It is worth mentioning that staff salaries are also the like labor cost, although such labor usually employed on a much more long-term basis in dairy processing plants compared to in the informal milk marketing system.
b) Among variable cost of milk processing plant, the highest cost was of packaging material (average cost Rs. 14.83/L). This huge cost was due to the costly packaging materials used for UHT milk packets which is manufactured very expensively or imported from developed countries.
c) After packaging stage, the milk processing plants delivered the milk to their warehouses or distributors in different distant cities across the Pakistan. Transport cost ( average cost Rs.3.02/L) is the third major cost in the supply of formal packed milk to consumers whereas labor cost and storage cost are the third major cost components, (Table-3).
d) The total marketing cost (fixed and variable cost) estimated at milk processing plant was approximately Rs.39.25 which seems to be very high due to the reason elaborated above. The profit charged by milk processing plants varies between 5 and 6 rupees per liter.
The transaction costs estimated at distributor/ wholesaler and retailer's level who sold packed UHT milk to consumers are given in Table-3. The results showed that at this level, the labor cost (average cost Rs 1.3/L) is a major cost while other costs such as transportation, storage and sale tax are equally contributed as Rs.1. The net average profit of retailer's varies between Rs.2 to 2.32 per liter.
The distribution of percentage profit margin across the total price spread among whole chain of dairy processing plant, distributors/wholesaler/retailer's and MCCs was 10.18%, 4.22% , 1.81% respectively, Table 3. The estimated DPP value revealed that milk producers share in final consumer price of four district markets varies from 42% to 44%. The mean value of MM of all middlemen share in consumer's price was approximately 8.18%. The most significant result derived from data analysis was that, the measure of marketing efficiency (MME) for four district milk markets were estimated as; Vehari=0.8, Lodhran=0.79, Bahawalpur=0.73, Muzaffargarh= 0.78 and mean MME vale was 0.77.
By doing comparative analysis of results shown in Table-2 and Table 3, it was observed that profit spread for formal milk marketing system (MM value 8.18%) was lower as compared to informal milk marketing system (MM value 20.16%). Despite this low profit per unit of liquid milk, the consumer price in formal milk marketing system was still Rs 25.5 higher as compared to informal milk marketing system. The DPP value for informal milk marketing system is 63% while for formal system was 43%. These results suggested that although a much lower profit percent was absorbed by formal marketing middlemen but neither the milk producer nor the consumer were fetching economic benefits from formal milk marketing system. This was justified due to the fact that all the marketing agents found in formal milk marketing channel except the retailer have to bear a fixed costs including the interest, depreciation, staff salaries in form of permanent labor cost, these costs constituted the highest proportion of the marketing cost for formal milk marketing channels; whereas
such a fixed cost does not exists in the informal milk marketing channel (Table 2). Thus formal milk marketing channels is deficient to provide much economic benefit to the principal stakeholders i.e. milk producers and milk consumers due to heavy burden of fixed cost per unit of liquid.
The MME value for formal milk marketing system can be enhanced if the fixed cost per unit of liquid milk reduced substantially by providing subsidy or rebate or low cost technology. Moreover, the efforts for preparing good quality packaging material at less manufacturing cost within Pakistan can also reduce the price spread of packed UHT milk price. In this way hygienic, safe and quality liquid milk can be supplied at lowest possible cost to milk consumers.
We now examine the extent of profit efficiency of different marketing middlemen engaged in two milk marketing system; estimated results are in presented Table 4.
Table 4 - Measurement of Profit Efficiency of Milk Marketing Agents
Category Marketing Channels Profit Efficiency of District Milk Markets Mean Efficiency
Vehari Lodhran Bahawalpur Muzaffargarh
Informal Milk Marketing Channels Marketing channel 1 0.78 0.79 0.68 0.70 0.73
Marketing channel 2 0.65 0.61 0.67 0.66 0.64
Marketing channel 3 0.72 0.70 0.69 0.68 0.69
Formal milk Marketing channels Marketing channel 4 0.42 0.38 0.44 0.39 0.40
Marketing channel 5 0.24 0.28 0.25 0.29 0.26
Marketing channel 6 0.31 0.33 0.28 0.26 0.29
Source: Authors field survey data results, 2016.
The profit efficiency for each milk marketing channel under consideration was estimated through field survey information and outcomes are presented in Table-4. According to results shown in Table-5, it is concluded that the level of profit efficiency was much higher for all types of market middlemen for informal marketing channels (between 0.61 and 0.79) in relation to the formal marketing channels (between 0.24 and 0.44). The outcomes significantly declared that all marketing middlemen present within informal marketing channels absorb more per liter profit as compared to formal milk marketing channels.
CONCLUSION
Based on S-C-P analysis results, the findings of this study lend credence to significant outcomes in keeping with the underlying objectives of this study. The foremost significant result derived from this study was that, the consumer milk price per liter, in informal milk marketing system was lower as compared to formal milk marketing system (Table-2&3). This phenomenon supported the statistics that informal milk marketing system has a dominant market share (more than 94%) in total milk market of Pakistan. The second outcome was that in two milk supply chains studied, there was no homogeny in milk prices for milk producers and consumers. There was large price variation in both milk marketing systems. The third most important conclusion derived from this study was that, all types of market middlemen in the informal marketing channel receive higher per liter profits for milk and their profit efficiency was also higher as compared to the formal marketing channels. The fourth conclusion was that the marketing cost per unit of milk was higher within formal milk marketing system than to informal marketing system. The Table-2 & 3 outcomes revealed that; the mean for marketing efficiency (MME) for informal milk marketing system was 1.8 while the MME value for formal milk marketing system is 0.77. This low marketing efficiency was due to huge processing and marketing cost (fixed and variable cost) involved in formal marketing system. The final conclusion drawn from estimated results was that, the milk producer's share in consumer's price for informal marketing system was 20% more than formal marketing system.
RECOMMENDATIONS
1. Under formal milk marketing channel, the fixed cost per unit of liquid milk needs to be reduced substantially either providing subsidy/rebate or by expanding other business along with liquid milk under the same market middlemen business, or by a combination of both, in order to reduce fixed cost per unit, and thereby total cost per unit of milk.
2. Mini and small assembling canters can also be established under the formal marketing system which can help to save on the cost of transportation, storage, distribution and retail.
3. Efficient market information system should be established in providing reliable and timely information about price.
4. The study recommends liberalized marketing system in price setting strategy and milk producers' training on production techniques that will improve their productivity.
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