B03: Economic efficiency of dairy production and marketing: A comprehensive value chain approach

The central aim of this project is to study economic efficiency at various stages of the dairy value chain in the rural-urban interface in Bangalore, and to explore concepts and methods for merging the findings for the efficiency at the single stages toward a comprehensive value chain perspective. The eminent role of milk in India, both in production and consumption, makes the dairy value chain a natural candidate for this exercise. At the farm level the proposed research is focused on the measurement of technical efficiency and differences in technology along the rural-urban interface, which requires a spatially explicit modelling approach in order to analyse the interdependencies between neighbouring farms. At the processor stage, we will analyse allocative, technical, and scale efficiency of dairy processing units in order to gain insight into the economic efficiency of the emerging milk processing sector. Economies of scale and scope will be of particular interest because both are often found to be of great importance in dairy production. Furthermore, at the marketing stage, survey based information will be used describe and analyse the institutional setting of milk and dairy products exchange in Bangalore.

Combining the results from the single stages of the value chain will allow us to take on a system-oriented perspective, where the complete dairy value chain is in the focus. In the rural-urban interface in Bangalore, the rapid changes in economic, social, and ecological dimensions suggests that effects of the transition on non-market goods are important for predicting future scenarios, too. We will thus go beyond a mere economic perspective by extending the concept of value chain efficiency to include non-marketed goods or bads, which usually take the form of externalities either in the environmental or social dimensions. The focus will be on local value chains, and will cover the chain from fodder production to milk production, processing, and marketing. The output vector will contain not only the economically relevant inputs and outputs, but also incorporate environmental and social goods and services. Among the environmentally relevant dimensions, the impacts of fodder and milk production on biodiversity as well as the use of water, nutrients, and manure will be considered. Regarding the social dimension, services from cooperatives in feed supply and in milk processing could be a useful starting point.

This augmented concept is particularly useful in the rapidly shifting rural-urban interface of Bangalore, where a focus on economic inputs and outputs alone would fail to provide a suitable basis for forecasting future developments. This approach has two novel aspects. Firstly, the economic focus will be broadened to include a comprehensive assessment of ecological and social dimensions. Second, the drivers of productivity differences at the various stages of the chain will be analysed by employing productivity and efficiency decomposition techniques in a multi-output setting where environmental and social goods, bads and services are taken into account. This approach will help to elucidate the role of value-chain efficiency in the evolution of a SES.

Indian partner project:
Dairy supply chains at different stages of urbanisation
G.N. Nagaraja & B.V.C. Reddy, University of Agricultural Sciences, Bangalore