Evolution of Milk Production Systems in Tropical Latin America
 and its interrelationship with Markets:
An Analysis of the Colombian Case

Federico Holmann, Libardo Rivas, Juan Carulla, Bernardo Rivera,
Luis A Giraldo, Silvio Guzman, Manuel Martinez,
Anderson Medina and Andrew Farrow

International Center for Tropical Agriculture (CIAT) and
International Livestock Research Institute (ILRI)
F.Holmann@cgiar.org

Abstract

The objectives were to: (1) identify and quantify the effect of technological change on productivity, profitability, and competitiveness in different milk production systems and regions of the country; (2) analyze the relationship between productivity, technological change, profitability, and competitiveness; (3) analyze the evolution of milk production systems in Colombia; and (4) discuss the market concentration and its impact on the formation of milk price. Data came from a survey to 545 farms during the year 2000 in five regions: Caribbean and Piedmont in the lowlands, Coffee Growing, Antioquia, and the Cundiboyacense altiplanicie in the highlands. The survey was designed to quantify inputs and products in order to determine costs and prices at the farm level in order to calculate (a) variable costs for feed supplementation, labor, health, reproduction, fertilization, and irrigation; (b) gross income from the sale of milk and beef, and (c) to characterize farms according to productivity level and management practices. The statistical analysis of multiple correspondence and general linear models were used to explain the variability observed between productivity and profitability as a function of technological change.

Independent of the production system or the region where farms were located, the increase in competitiveness was in direct relationship with herd size. Thus, as herd size increased, production costs per unit of milk and beef decreased, net incomes per cow increased, and the return to capital investment improved. However, when this increase in competitiveness was associated with increases in productivity, this trend was not observed, which suggested that highly productive farms were not necessarily competitive. The dual-purpose system was the most profitable one in the Piedmont, Caribbean, and Coffee growing regions while in Antioquia and in the Cundiboyacense altiplanicie the most profitable was the specialized dairy system.

With regards to technological change, the adoption of improved pastures and the investment in pasture divisions for a more efficient rotation generated higher productivity and income in all regions and production systems, as well as increased competitiveness through a reduction in production costs per unit of milk and beef. The use of strategic feed supplementation to the basal diet of forage had mixed effects. The best economic response to this supplementation in lowland regions (i.e., Piedmont and Caribbean) was with low quantities (i.e., < 0.5 kg DM/cow/day) of feed supplements while in highland regions (i.e., Coffee Growing area, Antioquia and the Cundiboyacense altiplanicie) was with moderate quantities (i.e., between 0.5 and 2 kg DM/cow/day). The use of fertilization and irrigation increased productivity, but reduced net income and increased production costs, except in the Cundiboyacense altiplanicie. The practice of milking twice a day increased both productivity and profitability and reduced production costs, except in the Caribbeanregion. Farms that de-wormed milking cows with low frequency against internal and external parasites obtained higher incomes and lower production costs in comparison with farms that de-wormed cows with higher frequency although there were no differences in productivity. The amount of years of experience of farmers at producing milk was a key factor to increase profits, although not productivity. Farms located in sites where the commercial value of land was high (>US$6,000/ha) and near market centers had higher productivity that those with commercial value of land medium ($3,000 to $6,000/ha) and low (<$3,000/ha) but were less profitable in all regions.

Box 1: Recommendations to researchers and extensionists Identify profitable technologies. Technologies that increase productivity are not necessarily profitable, which suggest the need to determine appropriate ways to evaluate them economically. This was the case of fertilization and irrigation. It is necessary to determine the best economic response to various levels of N2 and H2O to different species of improved grasses under various soil types and conditions.

The most competitive and profitable breed group in the dual-purpose system was the crossbred with low (24% European-76% Zebu genes) and medium levels of dairy genes (55% European-45% Zebu genes) but had lower productivity than the purebred group (98% European genes). In the specialized dairy system, the purebred group was slightly more profitable, productive and competitive than the crossbred group with medium level of dairy genes, but this difference was not significant.

The Colombian dairy sector has become more productive and competitive, but less profitable. Comparing the evolution of dairy farms with studies 12 years ago, milk production per hectare increased by 44% in dual-purpose herds and 14% in specialized dairies. This increase in productivity reduced the milk production cost by 16% and 10% in dual-purpose and specialized dairies, respectively, due to an increase in stocking rate by 15% and 17% in dual-purpose and specialized dairies as well as to an increase in investment in infrastructure and equipment by 258% and 37% in dual-purpose and specialized dairies, respectively. However, the net income per hectare during this period decreased by 27% and 69% in dual-purpose and specialized dairies due to a reduction in the producer's price of milk and beef of 22% and 20% in dual-purpose systems, and of 41% and 27% in specialized dairies.

Nevertheless, this reduction in price to producers was never translated in lower prices to consumers, but remained in the hands of supermarkets and milk processing plants which expanded and modernized with long-life technology. Development agencies must internalize the fact that policies oriented to markets will be increasingly "oriented to supermarkets". If one adds that in Colombia exists 3 or 4 supermarket chains that control the food retail market, the conclusion is that sectoral policies will need to learn how to deal with a handful of giant companies. This in a huge challenge, and demands an urgent review of ideas and strategies.

Box 2: Recommendations to decision makers Regionalize research. Due to the fact that the most profitable production systems are region-specific, Colombia should have different strategies for research and technology transfer in order to exploit more efficiently the comparative advantages of each region and production system.   Promote collective action. It is necessary to promote cooperatives and associations to help small producers to adapt to new patterns with higher levels of competition. Otherwise, the new rules of the game could induce a massive exodus of producers in the short term and in a relatively brief period of time.

It is possible, in the short run, to adopt technologies that increase milk productivity and reduce production costs while profits are reduced as a result of falling real prices as occurred in Colombia during the 90's. However, in the long run, this situation is simply unsustainable.

The proposals and challenges presented in this case study have illustrated the problems and opportunities of the dairy sector in Colombia. However, these systems could represent similar situations in other countries of Latin America. Given the phenomenon of globalization and higher degree of efficiency that these systems are being exposed to, the issues of productivity, technological change, competitiveness, and markets, are critical and of enormous relevance for the performance and survival of the livestock sector in the next decades.

Box 3: Recommendations to producers Without research there is no future. Efficiency goes hand in hand with technology and this depends on research and technology transfer. However, public funds allocated to agricultural research are being reduced. The challenge consists that producers in Colombia take greater control of livestock research by building alliances with local, regional and international organizations leaders in forage and livestock research. For this it is necessary that producers define and fund their own research agenda. Production-to-consumption participation. In the coming years, producers cannot limit themselves to participate only in the primary phase of production, but to expand their scope of action to other phases of the market chain to have a higher participation in the formation of milk prices and to capture a greater piece of the final price.

Introduction

Cattle production has traditionally been one of the main activities of Latin America's agricultural sector. The region's extensive savannas and profuse forests make it most suitable for livestock production. Latin America and the Caribbean (LAC) currently have a total area of 602 million hectares under permanent pastures and a cattle inventory of 359 million heads, of which 40 million (11%) correspond to milk cows (FAO 2002).

The tropical belt of LAC harbors most of the forage and livestock resources - 72% of grazing land, 82% of total livestock and 88% of milk cows (FAO 2002). In 2001, livestock production in tropical LAC accounted for 13% of world livestock production and 35% of that of developing countries all together.

Despite the region's enormous provision of forage resources, livestock production in tropical LAC faces serious problems in terms of quantity, quality, and productivity of pastures, especially during prolonged dry periods. The problem is widespread, mainly because a high fraction of the available forage base is composed by native pastures that are adapted but present low productivity and by highly degraded introduced species. Multiple production systems coexist in tropical livestock production at different thermal floors, with different degrees of intensification, and located in highly diverse socioeconomic environments.

Furthermore, a great deal of internal discussion exists within LAC countries regarding the viability of these systems in an open economic environment, especially now that the entry into the Free Trade Area of the Americas (ALCA, its Spanish acronym) is being negotiated to compete openly with North America. This study attempts to analyze milk production systems, using Colombia as case study, and determine their importance, limitations, and economic and technical possibilities within the context of small livestock producers and the competitiveness of regional livestock production.

The Case of Colombia

Growth and milk production systems

The dairy activity in Colombia has been very dynamic over the past 30 years. In the 1970s, it grew at an annual rate of 4.7%, then presented an exceptional, sustained growth of 6.5% during the 1980s, and grew at an annual rate of 3.8% during the 1990s, producing approximately 5,877 million liters of fluid milk in 2001 (Balcázar 1992; FEDEGAN 2002).

Two types of milk production systems exist in Colombia: (1) specialized dairy and (2) dual-purpose. Of the estimated 25 million heads composing the national herd, the cattle population found in milk producing farms is estimated at some 6 million, of which 89% are in dual-purpose production systems that account for 55% of the country's milk production (CORPOICA 1998).

The specialized dairy system consists in milking the cow without the calf close by and the male calf is usually sold a few days after birth. Cows are usually purebred or with a high percentage of genes from European Bos taurus (i.e., Holstein) breeds and are supplemented with feed concentrates. As a result, milk productivity is high. On the other hand, the dual-purpose system consists in raising the male calf and selling it after weaning. The cow is milked with the calf close by. Furthermore, these cows have a high percentage of Bos indicus (i.e., Brahman) genes or are crossed with Bos taurus breeds. Their feeding is based on extensive pasture-based systems with low milk and beef productivity (Arias et al 1990).

Compared with specialized dairy production systems, several advantages of the dual-purpose system are: (1) reduced risk because of variations in milk and beef prices; (2) lower incidence of mastitis because of suckling of calves; (3) reduced need for capital investment; and (4) fewer requirements of technical support (Seré 1983).

Most specialized dairy systems are located in the tropical highlands, in regions with cool-to-cold climates located near urban centers. Dual-purpose systems, on the other hand, are usually located in lowland regions with high temperatures and further away from markets. Twelve years ago, Aldana (1990) reported that specialized dairy production systems were more profitable than dual-purpose milk production systems. He also reported that this profitability was directly associated with the level of technology used by the producers. That is, farms presenting higher productivity were more profitable regardless of the production system used.

Contribution of the livestock sector to the Colombian economy

Around 1994, milk and beef production accounted for 25.2% of Colombia's agricultural gross domestic product (GNP) (Lorente 1996), more than doubling the 12.2% attributable to coffee and higher than that of all semi-annual crops put together (24%). By year 2000, livestock production had increased its share to 29.9% of agricultural GNP (DANE 2002). Livestock production as generator of employment has gained importance within the agricultural sector and in the economy as a whole. In 1999, this sub-sector generated 1,400,000 permanent jobs, equivalent to 19.8% of the permanent work force in rural areas (Martínez et al 2002).

Livestock products (beef and milk) play a significant role in the economy's aggregate demand. According to national records, beef, milk, and their derivatives accounted for nearly 13% of total domestic consumption expenditures and for more than 45% of food expenditures in 1989 (Balcázar 1992). The rapid growth of the dairy sector allowed milk consumption by the population to increase from 57 liters per capita in 1970 to 136 liters in 2001, representing an increase of 138% in 30 years (Balcázar 1992; FEDEGAN 2002).

In terms of foreign trade, Colombia is practically self-sufficient in milk production. During the 1990s, the country imported an average of 2% of its production per year (FEDEGAN 2002). Although from time to time the country has been a net exporter of beef over the past 20 years, the relative importance of this activity has visibly diminished since the early 1990s. In 1991, 5% of domestic production was exported. From then on, exports have been decreasing and since 1996 the country exports less than 1% of its total beef production (FEDEGAN 2002).

Market concentration in hands of supermarkets

A trend recently observed, parallel to the concentration of the population in large urban centers, is the growing participation and concentration of supermarkets in the chain of food distribution and sale. In many countries, distribution is handled by a small number of commercial firms, which give them great negotiation power in terms of deciding which products are offered on the shelves as well as pricing and forms of operation (Castro et al 2001). Reardon and Berdegué (2002) reported that during 2000 supermarkets in Latin America billed 60% of retail food sales. In 1990, this percentage barely reached 20%. In the case of Colombia, by the year 2000, supermarkets billed 38% of retail food sales with a forecasted annual increase of 7% for the first decade of the millennium (Hernández 2000).

This structural change has modified the parameters underlying milk marketing. Nowadays, supermarkets have more negotiating power before the milk processing plants, not popular neighborhood stores as in the past. This change has directly influenced the mechanism of fixing the milk price received by producers.

Addressing the problem

Colombia has a proven capacity to increase milk production and pressing socioeconomic reasons to develop the sector. However, there is internal discussion regarding the most suitable technologies to achieve this development, and whether they alone will be sufficient to make livestock production competitive within and outside the region under a scheme of open, unsubsidized economies (Consejo Nacional Lácteo 1999).

Objectives

The objectives of this study were to: (1) identify and quantify the effect of technologies on the increase in milk production, profitability, and competitiveness in both specialized dairy production and dual-purpose systems in different regions of the country; (2) analyze the relationship between productivity, level of technology, profitability, and competitiveness; (3) analyze the evolution of milk production systems in Colombia; and (4) discuss market concentration and its impact on the formation of milk price received by producers.

Methodology

Data came from a survey of 545 farms carried out from February to November 2000. Farms were distributed in five regions as follows: (a) 145 farms in the savanna piedmont (departments of Arauca, Casanare, and Meta); (b) 116 in the Caribbean region (departments of Atlántico, Guajira, Magdalena, César, Bolivar, and Córdoba); (c) 105 in the coffee-growing region (Department of Quindío, northern Valle del Cauca, Caldas, and Risaralda), (d) 97 in Antioquia's altiplanicie, and (e) 82 farms in the altiplanicie of the departments of Cundinamarca and Boyacá. These five regions account for more than 80% of the nation's milk production (FEDEGAN 2002) and were accordingly chosen because they are Colombia's main dairy areas, together with the southern region (Department of Nariño), which was not covered due to lack of funds. The goal was to survey an average of 100 farms per region (for a total of 500 farms) to obtain the variability needed for statistical analyses.

The survey was designed to quantify inputs and products so that farm-level costs, prices and management practices could be determined. Data were then used to calculate not only the variable costs of supplementation, labor, animal health and reproduction, fertilization, and irrigation, but also the gross receipts from sale of milk and beef, as well as to characterize farms according to levels of productivity and technological change. The survey instrument can be found in Holmann et al (2003).

The variable costs of supplementation, labor, animal health and reproduction, as well as gross sales, net income, and milk and beef production costs were estimated using the methodology described by Holmann et al (1990). A total of 55 additional variables were created to consolidate and synthesize the information gathered in the surveys. These variables are described in Holmann et al (2003). In addition, all figures reported in this study were converted to US dollars at the existing average exchange rate for year 2000 (US$1 = Col$2,094).

For this study, competitiveness was defined as the capacity of the producer to remain in the dairy business and was measured by the unitary milk and/or beef production cost. Thus, the lower the production costs, the greater the competitiveness. Profitability was defined as the annual net income per cow or hectare as well as the farm annual net income divided by the total capital invested in the farm, represented by land, livestock, facilities, and equipment. Technological change was measured using the concept of productivity, which was expressed as milk and beef production per cow and per hectare.

Surveys were carried out under the coordination of the animal production faculties of the following universities: Universidad de los Llanos for the Piedmont region, the Fundación San Martín for the Caribbean region, the Universidad de Caldas for the Coffee-growing region, and the Universidad Nacional (Medellín and Bogotá campuses) for Antioquia and the Cundiboyacense altiplanicie. These academic centers contacted the main milk buyers in each of the regions. In the Coffee-growing region, Antioquia, and Cundiboyacense altiplanicie, buyers were mostly processing plants. In the Caribbean and Piedmont regions, milk buyers were intermediaries and/or owners of small-scale cheese factories and, to a lesser extent, processing plants. These milk buyers provided academic centers with a list of their routes with the names of the farms. Routes were chosen based on their accessibility and whether four-wheel drive vehicles could enter. Interviewers were mostly undergraduate students who visited farmers accompanied by those responsible for collecting milk. This ensured a level of trust that would warrant the success of the survey. The students were also trained to execute the survey and were permanently supervised by the co-authors of this study in their respective regions. Of survey respondents, 73% were farm owners.

During November 2002, two managers from the five largest supermarket chains of the country and two milk-processing plants in the city of Cali were interviewed to understand the marketing mechanisms of dairy products in supermarkets. In addition, a telephone poll was carried out in November 2002 to analyze the evolution of the installed capacity of 30 processing plants belonging to the 13 largest dairy companies in Colombia to relate their marketing strategy with the type of technology used to upgrade installed capacity during the 1990s. Information on the poll can be found in Holmann et al (2003).

Statistical analysis

Descriptive statistics were estimated by region and production system to characterize surveyed farms. The general linear model technique was used to prove several hypotheses about the effect that different technologies have on animal productivity. This technique allows the variability observed in different productivity indicators to be expressed as a function of the different technologies, regions, and production systems. No interactions occurred because of lack of data in the different combinations of technology categories. Therefore the model used only estimated the main effects of each technological change.

Furthermore, the averages of each indicator were estimated and compared for each combination of technology*region and/or technology*production system. A multivariate principal component analysis was performed to analyze milk production systems and also to group those farms with similar characteristics on the basis of component values. Ward's clustering methodology (1963) was also used. Multiple correspondence analysis was used to establish relationships between:

Productivity, defined as milk production per cow per day (Milk);

Profitability, defined as net income per cow per year (Income) and annual return to capital invested (Return); and

Technological change, defined by the following technologies or management practices:

• Proportion of pasture area with improved pastures (Impfor);
• Amount of feed supplements offered to milking cows (Asup), in kg DM per cow per day;
• Reproductive system used: artificial insemination (AI); natural service (NS); or both reproductive systems (Both);
• Specialized dairy production system (Spec) or dual-purpose (Dpurpse);
• Frequency of milking per day (Milking);
• Use of fertilizer on pastures (Ferpa);
• Use of irrigation on pastures (Irripa);
• Mature body weight (BW);
• Proportion of cows in milk (Mherd);
• Number of grazing paddocks used by milking cows (Paddock);
• Market value of land where farm is located (Land);
• Years of experience producing milk (Xprod);
• Herd size (Herd);
• Frequency of internal de-worming (Idew); and
• Frequency of external de-worming (Edew).

Results

Farm characteristics

Brief description of regions

The Piedmont and Caribbean regions are located in the lowland tropics of Colombia with an annual mean temperature ranging between 27 ºC and 30 ºC, whereas the Coffee-growing region, Antioquia and the Cundiboyacense altiplanicie are located in the colder highland tropics with mean temperatures that fluctuate between 14 ºC and 22 ºC (Table 1). In the Piedmont, the Coffee-growing region and Antioquia, the annual mean precipitation is higher (2,400 to 2,700 mm) and the rainy season lasts about 8 months, whereas in the Caribbean region and the Cundiboyacense altiplanicie, annual mean precipitation is lower (1,100 to 1,200 mm), with a rainy season that last around 6 months.

Similarly, the topography of the Piedmont and Caribbean regions and to a certain extent the Cundiboyacense altiplanicie is very flat, with few undulated areas, whereas the Coffee-growing region and Antioquia are located in mountainous areas where undulated and broken topography prevails (Table 1).

In addition, public infrastructure varied broadly among the regions - from fewer services in the Caribbean region, especially electricity, to better infrastructure in the Coffee-growing region and the Cundiboyacense altiplanicie. The dual-purpose production system was most used in the Piedmont (97% of farms surveyed), Caribbean (100%), and Coffee-growing regions (65%), whereas the specialized dairy system prevailed in Antioquia (77%) and Cundiboyacense altiplanicie (73%).

Land use and pasture management

The scale of operation differed broadly among production systems and regions. The dual-purpose farms, located mainly in the Piedmont, Caribbean, and Coffee-growing regions, were larger than specialized dairies located mainly in Antioquia and Cundiboyacense altiplanicie (Table 2). Around 80% of total farm area was sown to pastures in dual-purpose systems compared with more than 90% in specialized dairies. The area under forest was less than 10% of total farm area in all regions and in all production systems.

Both production systems also presented a similar proportion of grassland established with improved pastures (79%), although this proportion differed among regions, being greater in the Cundiboyacense altiplanicie and Piedmont and lower in the Caribbean region. Brachiaria species were more common in dual-purpose systems, whereas Penisetum clandestinum was more common in specialized dairy systems. For more information on grass species established on farms per region, please refer to Holmann et al (2003).

The stocking rate in specialized systems and in high-altitude regions was twice that reported in dual-purpose systems located mainly in the Caribbean and Piedmont regions. This was attributed to the fact that a greater proportion of specialized dairies not only fertilized and irrigated their pastures, but also applied a higher level of nitrogen more frequently and supplemented animal diets with greater amounts of feed concentrates than dual-purpose farms (Tables 2 and 4). In addition, specialized dairies had a higher number of grazing paddocks (Table 2), in smaller areas, thus allowing better use of the amount of forage biomass produced. This rotational management in specialized dairies, accompanied with pasture fertilization, could explain the lower frequency of weed control (2.2 times/year) compared with dual-purpose farms (3.5 times/year), which were managed more extensively.

Herd structure and genetic composition

Dual-purpose farms had larger herds composed mainly by crossbreds between Bos indicus (i.e., Brahman) and Bos taurus of European breeds (i.e., Holstein), whereas specialized dairies in high-altitude regions had smaller herds of either purebreds (ie., Holstein) or livestock with a very high proportion of European genes (Table 3).

Table 3.  Herd structure, genetic make-up, reproduction system utilized, mortality, parturition and culling rates, age and weight of breeding heifers, and mature body weight by milk production system and region of the country in 2000.
Parameter	Production system		Region
	Dual purpose (n=333)	Specialized (n=212)	Piedmont (n=145)	Caribbean (n=116)	Coffee (n=105)	Antioquia (n=97)	Cundi-boyacense (n=82)
Herd structure (#)