While specific dairy farms and their cooperatives will be included in this article eventually (it is a work in progress). For now, we will focus on analysis of a whitepaper from the UN Food and Agriculture:
- The Economics of Milk Production in Chiang Mai, Thailand, with particular Emphasis on Small-scale Producers
Basic Findings and Observations on Thai Dairy Farms
A few thoughts about this thought provoking research paper, that while it is from 2005, is still fairly valid in general.
- First, we see that small-scale dairy is a good business, that production is still quite small relative to demand (though fulfilled by milk powder importation), and that the economics are better than local labor profit rates.
- Second, we see that the Thai situation is fairly sophisticated in terms of cross-breed cattle, artificial reproduction, and protein supplements.
- Third, the profitability of a farm is much better at a small scale (which is something I had suspected). That is, large farms are not as profitable as smaller (medium-sized) farms.
- Fourth, while the price captured by farmers is fairly good relative to other countries, the percentage of profit is not.
- Fifth, the most profitable dairy farm also produces revenue from selling cow manure for fertilizer.
What the UN FAO Doesn't Say
Now onto what is present in the report (at least from an evidence perspective) but not articulated (or at least not clearly). There are several surprising elements in the report. We go from a descriptive approach into a normative assessment fairly quickly. That is, we go from what is to what should be based on a Social Costs analysis, which takes up issue of taxes.
So at the end of the day this report is seen as providing an argument for tax and tariff abolition. And why is that? Because the farmers' profit apparently comes at the expense of society, at least to some degree.
What Complete Nonsense. Here is Why:
- Social costs do not in any way include the value of actually providing milk (which is consumed as well as processed into butter, cheese, yogurt and ice cream). That is, social cost analysis treats any economic transaction as not having any further value beyond itself. What is the benefit of this milk source on society? Certainly not zero.
- The comparisons of various farms only superficially refers to intensive vs. extensive farming differences, and counts extensive farming as a cost. However, intensive farming is much more destructive to natural resources (land, water, air, etc.), and has an external consequence that is negative. How can extensive use of resources (which preserves them, therefore retaining their value) be considered a cost and intensive use of resources (which degrades the resource) be considered a positive?
- The very nature of economic activity in dairy farming generates the taxes that are not otherwise paid, which are used for other activities and resources, not to mention self-employment of the dairy farmers themselves.
- And finally, the quickly-passed-over fact that the so-called cooperatives, and further the government and private milk processors and distributors, extract a greater percentage of the profit than dairy farmers in other countries.
The most obvious conclusion from a marketing perspective is the need for vertical integration at a new cooperative level. That is, a small-scale milk cooperative and processor could provide more value to the farmer by focusing on those aspects of end-product production that is highly marketable. Creating a brand and integrating small farms can result in high-quality, distinctive products that could be directly marketed and sold to restaurants and through unique milk bars (that are common and have a history in Bangkok and other larger cities). By branding and marketing local, non-GMO, non-growth hormone, humanely treated cows who produce superior quality milk and resulting milk products, much greater profits could be realized.
More Background on Dairy in Thailand
A nice bit of the History of Dairy in Thailand shows various interesting factors, including marketing, government intervention, and more. Apparently Thai-Danish is Danish no more. However, at the same time the Thai Government is using this brand name (aka Danish red cow logo and sense of foreign milk product quality) to export into ASEAN with a 100% milk (no milk powder) product line.
While we are not talking about rocket science, milk processing is somewhat complex and quality control is needed. As from the previous report, there is little confidence of quality, safe milk and milk products from small farmers, unfortunately. This means only large government operations and big brand names are trusted and marketable.
The question arises as to whether the large scale milk production process can be scaled down to the level of a small farm, say about 5 cows and 10-20 liters per cow per day (50-100 liters). If such a system could be built and such a process could ensure quality without increasing cost beyond what a large collection and processing center extracts in terms of end-product profit, then indeed there would be viability.