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PRAN-RFL GROUP

Since-1981

Property Heights

12 R K Mission Road

Dhaka-1203

REPORT

ON

THE DEVELOPMENT OF DAIRY INDUSTRY IN BANGLADESH

DECEMBER 2007



THE DEVELOPMENT OF DAIRY INDUSTRY IN BANGLADESH

CONTENTS

I. Executive Summary…………………………………………………… 2-3

II. Current Industry Scenario……………………………………………. 4

The Nature of the Industry………………………….…………. 5

Milk Prices…………………………………………………..… 5

III. Government Assistance to the Industry…………………………….… 5

Direct Subsidies to Farmers………………………….………… 6

Indirect Subsidies Through BMPCUL………………………… 6

IV. Why is Reform Needed……………..………………………………… 6

V. Factors Restricting Development in the Industry……...……………… 7

1) Subsidies to Milk Vita……………………………………… 7

2) Extension and Training Services…...……………………… 7-8

3) Breed Management………………………………………… 8

4) Feed Management & Education...…………………………. 8

5) Public Awareness and Economics…….…………………… 8-9

VI. Recommendations……………………….…………………………… 9

1) Remove Subsidies for BMPCUL (Milk Vita)……………… 9

2) Target Subsidies That will Bring About Expansion.….…… 93) Improve Extension Services………………………………… 9

4) Genetic Improvements……………………………………… 10

5) Education Programs…………………………...…………… 10

6) Dairy Development Board…………………………….…… 10

VII. Conclusion………..……………………………………………... .…. 10

Appendices……..…………………………………………………… 11

Appendix 1: Bangladesh Milk Production……..……………… 11

Appendix 2: Prices of Local Cows Milk and Imported

Powdered Milk…...………………………………. 12

Appendix 3: Major Investments and Assistance to BMPCUL

by the Government and other Agencies………… 13

1



I. EXECUTIVE SUMMARY

“The cow is a domestic quadruped animal”.

That’s the first line of the first essay in all grammar textbooks in Bangladesh. The importance of a cow in the popular psyche cannot be overestimated. Even in matters of national policy the

cow’s importance is emphasized. However despite the intentions of the policy makers and the

business community, the dairy industry has not developed as rapidly as one would like.

The past decade was one of phenomenal growth for the agro industry. The poultry industry has

registered over fifty percent growth year over year for most of the decade. New agro products,

like mushrooms and baby corn, have been introduced in the market. Maize has taken oversignificant acreage as demand for compound animal feeds have increased. Flowers have become

a significant crop in the domestic and export markets. However compared to other agro

industries, the growth of the dairy industry has neither been substantial nor has it been consistent.

However, unlike poultry, and other sectors dairy has not shown significant growth. In fact per

capita consumption of milk which was showing an upswing in the 90’s has gone down in the lastdecade. While there has been some private sector investment in post harvest storage and

processing, the overall number of heads of cattle has not shown significant increases. The growth

of the cattle population as well as private sector investments has been concentrated in the

Baghabari, Sirajganj area.

Dairy industry is one of the best suited sectors for the generation of employment and thus

ameliorating poverty in rural areas of Bangladesh providing jobs to the whole family, ie men,women & children alike. It is a most profitable occupation too as no part of the bovine is wasted

live or dead. Support to the dairy industry lacks appropriate focus in our PRSP strategy primarilydue to aggressive lobbying by importers of subsidized milk powder on the one hand and skewedprice structure of locally marketed liquid milk by Bangladesh Milk Producers Cooperative Union

Limited (BMPCUL) Milk Vita holding a commanding market share due to undeserved financial

support from the Government. BMPCUL trade name is Milk Vita.

This study was undertaken to get an understanding of the slow growth or stagnation of the dairy

industry. In the course of the study we have identified several factors that may be contributing to

this scenario. We also propose some policy changes to boost the growth of the industry:

1) Incorrectly targeted subsidies: Subsidies to the dairy industry whether from the

government or NGO’s have targeted the processing side of the equation and that too to aparticular organization. The actual producers of milk received very little by way of

subsidies. Subsidies to BMPCUL (Milk Vita) have prevented other processors from

effectively competing in the market creating significant barrier to entry and preventinggrowth in other areas of the industry as well.

2) Single area focus: Baghabari area has traditionally produced milk and milk products.

With BMPCUL investing heavily in the area over time, productivity has improved

significantly. However the area is already saturated and for the industry to expand, new

2



areas will have to be targeted for development. With BMPCUL receiving large subsidies,it becomes cost prohibitive for private companies to take on dairy development work in

new areas.

3) Lack of research: While genetics have been improved by creating local/imported hybrids,

there is further potential to improve the genetics by setting up a breeding program to finetune the bovine characteristics to suit our climate and available feed.

4) Lack of credit: The lack of credit to farmers has also discouraged milk production.Investing in a cow is a major investment for most small farmers and without proper

access to credit farmers are not encouraged to invest.

------------------------------

3



II. CURRENT INDUSTRY SCENARIO

The importance of bovine livestock to our economy cannot be over stated. Even though the sub-

sector contributes only 3% to the GDP, it provides full and part time employment to about 20%of our rural population and accounts for 18% of our agricultural export earnings1. While the

focus of this paper is dairy, meat is also an important contributor to our protein needs.Furthermore the trade and export of leather products, bones and offal also have a significant

contribution to our economy. Draft power is still a significant source of power for cultivationsaving imported energy cost.

The consumption of milk and milk products in Bangladesh is very low even when compared to

neighboring countries2. The average daily consumption is 42ml per day/person against a

recommended allowance of 250ml/day. Bangladesh would currently need to import or producefive times its current production if it is to meet the WHO recommended daily requirement. Thus

there is a huge requirement.

Milk imports in Bangladesh has increased from 2.2 billion takas in 1996 to about 8 billion takastoday. The EU has gradually removed subsidies on its milk products. In addition the devaluation

of the taka has also negatively impacted our balance of payments for dairy products. In the retailmarket the price of powdered milk has more than doubled in the past decade.

All this should point to a strengthening of our local production base. In fact local production has

increased. However after a sudden jump in the early 90’s, milk production has registered a verygradual growth. The double digit growth between 1991 and 1996 has tapered off to an average

growth rate of 1.3% between 1996 and 2004.

The Nature of the Industry

Traditionally the industry has been dominated by the Ghosh community who collected milk

from farms and processed them into Ghee, curds, sweets and other products. Liquid milk only

had informal supply structure and in fact constituted a small portion of the total market. Howeverwith the development of the collective model of BMPCUL, the market for milk began to expand

and surplus milk made its way to the cities as a processed package product.

The average Bangladeshi dairy farm has 3.5 heads of cattle. Dairy is still considered a“secondary” profession even for farmers with 5-10 heads of cattle. Part of the reason may be that

most dairy farmers also have another source of income. Another reason for this may be that

milking and tending the cows has traditionally been the “womens job” and is therefore given less

importance than farming the fields even in households whose major source of income is dairy.

Baghabari area in present day Sirajganj district was a traditional milk producing area. A largecommunity of Ghosh’s collected the milk and supplied chaana, ghee, curds and sweets to sweet

sellers across the country. In 1965, the then East Pakistan government created the Eastern Milk

Producers Co-operative Union Limited (EMPCUL). This was renamed to Bangladesh Milk

1. 1 Source: Department of Livestock Services (DLS)2 See Appendix 1: Bangladesh milk production

4



Producers Cooperative Union Limited (BMPCUL). BMPCUL is popularly known as Milk Vitathe brand name of its product. Milk Vita organized farmers in the Baghabari area into

cooperatives and started collecting milk in the area. It set up a pasteurization plant. Among its

other products are butter and ghee. Milk Vita achieved significant success in increasing the milk production in Baghabari area by providing training and extension services. However its impact

and success outside the area has been limited.

In other areas farmers still operate on an individual basis selling milk mostly to sweet

manufacturers. Milk prices are also high in most other parts of the country limiting access to

common people. The high price of milk has relegated liquid milk to luxury food item status thus

reducing its demand. In addition there are no preservation and storage systems for milk in otherareas. Thus besides local demand, there isn’t a significant surplus that can be used to export milk

to urban areas.

Milk Vita enjoyed a virtual monopoly for two decades before new entrants such as BRAC dairy

and PRAN entered the market. All the private companies also focused their efforts in the

Baghabari area as milk production has not taken off in other areas. Milk Vita by far dominatesthe industry.

Milk Prices

Milk price in Bangladesh is the highest in the region. In addition the quality of the milk is also

poor. Farmgate prices are currently around 22 takas per litre3. Retail prices in Dhaka average

about Taka 35 per litre of milk. Until 2005 the price of imported powdered milk was

significantly lower than the price of local milk in Dhaka. Moreover the ability to preserve

imported milk has led to ever increasing imports. With the gradual withdrawal of milk subsidiesespecially by EU countries, the price of local milk has once again become competitive.

To keep the price competitive the industry has to grow to keep up with demand. As incomes riseconsumption of milk can be expected to rise. Without growth in the industry imports will

increase as will the price of local milk. Thus there is no alternative to increasing consumption

without increasing local production of milk.

III. GOVERNMENT ASSISTANCE TO THE INDUSTRY

The Bangladesh government has set up quite a few agencies to cater to the needs of the livestock industry. First there is the Ministry of Fisheries and Livestock which is responsible for the

overall direction of the industry. In addition there is the Department of Livestock Services(DLS). This department is responsible for providing extension services to farmers. A third body

is the Bangladesh Livestock Research Institute (BLRI) which is responsible for conductingresearch on genetics and feed.

3 See Appendix 2: Prices of milk

5



Direct Subsidies to Farmers

In 1993 a subsidy was introduced by the government to increase cattle population. A total of 5

crore per year was allocated and the subsidy amount was Taka 6000 per head of cattle for up to 5cows. In subsequent years the subsidy was reduced and finally eliminated in 1996. The subsidy

was again reinstated in 2002 though it was reduced to Taka 3000-5000 per head depending on

the number of cattle. The subsidy was discontinued soon after.

Indirect Subsidies Through BMPCUL

BMPCUL has also received subsidies from the government in the form of low interest loans,

grants, project funds coming out of the revenue budget. Over the years Milk Vita has receivedover 100 crores in direct and indirect subsidies from the government, and foreign governments

and donor agencies. In addition as a collective it is also subject to a more favorable tax structure

in its milk collection efforts. Most of the infrastructure investments in Milk Vita were madethrough special low interest loans or direct grants from the Government and Donor Agencies.Much of the government loans have also been converted to equity over the years.

IV. WHY IS REFORM NEEDED

It is obvious that there is a huge untapped market for dairy and dairy products. Only about 20%

of our dairy needs are being met. The only limitation for the expansion of the market is price.Milk is still considered a luxury good and the price is the single most limiting factor preventing

increased consumption. At today’s prices the daily requirement for each person can be met at a

cost of Taka 12. While this may not seem like a large sum of money, it is significant in a countrywith a per capita income of Taka 70 per day.

There is also very slow growth in the dairy industry thus limiting supply and keeping an upward

pressure on prices. The population of milching cows has not increased significantly outside

Sirajganj, Pabna belt. Small holder farms and farming cooperatives have been proven a

successful model both in the dairy belt of Bangladesh and in India. There is no reason that themodel cannot be replicated in other areas.

Employment in the rural areas is also declining, and there is limited scope for women’semployment in this conservative country. Small dairy farms can provide that much needed

employment for women and supplement the incomes of farmers with little land.

Cattle not only provide milk but can also provide meat, leather, bio-gas and organic fertilizer.

They also provide a higher value addition for rice husks, plants and other agricultural by

products that they consume. The alternative use for these by products is fuel.

6



7

V. FACTORS RESTRICTING DEVELOPMENT IN THE INDUSTRY

Through the course of this study we have interviewed farmers, small processors, largecorporations and officials of the government agencies charged with the development of the

industry. We are listing the factors that we feel are limiting the growth of the industry.

1) Subsidies to Milk Vita

BMPCUL (Milk Vita) must be credited with creating the modern dairy industry inBangladesh. In the Baghabari, Sirajganj area they have organized the cooperative with over

100,000 members. They have improved the livestock genetics in the area through their

breeding and extension services. They have also developed market for packaged pasteurized

milk.

To accomplish all this Milk Vita has been given a significant amount of grants, loans and

capital investments by the Bangladesh Government, donor agencies and NGO’s. It is becauseof these very subsidies that the dairy industry has stopped growing. Because of low interest

loans and grants, Milk Vita can afford to reduce their margins to a point where competition

becomes non viable.

Another effect of the subsidies that Milk Vita gets is that it makes large scale milk productioncheaper at Baghabari than anywhere else in the country. Thus all the private entrepreneurs

focus on that area for their supplies and dairy production in other regions remain limited to

meeting only local demand.

It is only due to inefficiency and corruption at Milk Vita that private entrepreneurs have been

able to enter and compete in the market. But unless the playing field is leveled new entrantswill be discouraged from investing in the industry.

2) Extension and Training Services

BMPCUL offers extension services such as Artificial Insemination, veterinary care and other

services to its members. However as they are subsidized, they can offer the services at much

cheaper cost than their competitors. Tying up the services with milk collection effectivelyblocks out new entrants to the business. Milk Vita’s services are also focused around

Baghabari area. Thus there is no new dairy development in other areas.

The DLS also offers extension services to farmers in a more neutral manner. However theDLS’s budget and manpower that in can dedicate to dairy is very limited. In fact the DLS ischronically understaffed and under budget. The DG of DLS stated that they have not had any

changes to their organogram since 1962. The DLS needs at least 11 people per Upazilla for

extension services if they are to be effective. DLS has a budget of 0.30 taka per cattlewhereas Milk Vita has a budget of Taka 3.0 per cattle.



8

Milk Vita’s extension services also only focus on improving the quality and quantity of Milk.

Services are also needed for Foot and Mouth Disease and other common bovine problems to

improve the overall quality of our animals.

3) Breed Management

Bangladesh has some of the least productive cows in the region producing on average206kgs/head/year of milk compared to almost 800kgs for India and 7000 kgs for the US

4.

The most common local cow, Bos Indicus, has very low productivity. Attempts have been

made to create various cross breeds to increase productivity. Common ones are Local and

Bos Taurus cross, Sahiwal-Pabna, Frissian-Pabna and Sahiwal-Frisian-Local cross. The

results have improved productivity significantly. However in addition to a cross breedingprogram a selective breeding program is needed to try to obtain the best possible lines for

milk production.

Artificial insemination services are provided by a number of organizations, including DLS,

Milk Vita and BRAC. However there is no breeding program to selectively breed a few

generations of acclimatized cows. The BLRI (Bangladesh Livestock Research Institute) istasked with developing the appropriate technologies and breeds that are suitable to our

environment. In addition they are charged with researching diseases and epidemiology of the

bovine population. However BLRI has also been hampered by a shortage of manpower andfinances. Since 2001 the BLRI’s budget mostly went to paying staff and scientists with only

6.5% on average left over for research related activities.

In addition to research on cows, other milk producing animals like goats and buffalos alsoneed to be researched. A selective breeding program to improve the efficiency of existing

breeds, and a cross breeding program to create new breeds is essential for the development of

the industry.

4) Feed Management and Education

Poor quality feed has been one of the major reasons for the low productivity of our cattle.

The low productivity of our cattle heads in turn has also prevented our farmers frominvesting more in feed. Most cows are still fed with crop residues and cereal byproducts.

Some cow farmers grow high yielding varieties of grass and supplement it with oilseed

meals, broken rice and other by-products. However in most cases this is done in anunscientific manner. Along with breed research optimum feed research should also be

conducted and the results used to educate and train our farmers.

5) Public Awareness and Economics

More than half the milk produced in Bangladesh is used to make desserts or ghee. The

culture of drinking milk has almost vanished from our society. This is partly due to the price

of milk. While milk products are a good source for essential nutrients like calcium andprotein, the high fat and sugar in further processed products is also harmful to ones health.

Public awareness must be created to promote a culture of drinking milk.

4 1997 figures.



9

VI. RECOMMENDATIONS

1) Remove subsidies for BMPCUL (Milk Vita)

As a matter of policy the government should absolve itself from any business responsibilities

and create opportunities for businessmen to grow the private sector. While Milk Vita playeda vital role in the creation of a dairy industry it now stands as an obstacle to further

development of the industry. Even though Milk Vita’s executives are now hired on the open

market, it still somewhat operates as a government entity and like all other governmentcompanies, the lack of oversight and accountability has plagued it. While Milk Vita is

currently marginally profitable, that profitability would also vanish if their cost of funds were

the same as commercial entities. Since Milk Vita is a business it should focus on profitabilityand competitiveness. If the government decides to provide subsidies to the dairy industry,

they should not be targeted to one company. Singling out one entity for subsidies will prevent

the development of other companies which have the motivation and the capability to grow

the industry further.

2) Target Subsidies That will Bring About Expansion

The Government should make a policy decision on how it wants to expand the dairy industry.The current “Dairy belt” is already nearing saturation. It will be impossible to increase dairy

production if the bulk of extension services, training, and subsidies are available to that belt.

The Government should encourage farmers in other areas to rear cows. This can be done

with extension services, training and subsidies directly to farmers. If the supply of milk can be ensured in an area, private entrepreneurs will automatically invest in chillers and other

processing facilities. Subsidies should not be targeted at large corporations but rather the

small farmer. We have seen the effect of the direct cash incentive between 1993 and 1996. In

fact that was the only period of significant growth in dairy production in the last two decades.Compared to the billion takas or so in subsidies and loans received by Milk Vita the 150

million takas spent on direct subsidies to farmers had a greater impact.

3) Improve Extension Services

Extension services are also best left to the private sector. Most companies already offer such

services to their suppliers. However the government should start offering extension services

in areas where they want to encourage dairy development but are still outside the reach of private companies. Moreover extension services should target overall well being of the

bovine population and not just aimed at improving dairy yields.

4) Genetic Improvements

The private sector in Bangladesh have not reached the technological sophistication or have

the financial power to conduct research on improving the genetic potentiality of the animals.Moreover the benefits of genetic improvements should not be limited to single corporations.

Thus the Government and universities should take the initiative to conduct research on

improving the quality of our livestock. A properly funded and monitored cross breedingprogram as well as a selective breeding program is essential to create climatized breeds that

will produce optimally in our environment.



10

5) Education Programs

A new breed, especially highly productive breeds, need very precise management for

optimum output. They also need a nutritionally complete food. Thus with the creation anddissemination of a new breed of bovine farmers also have to be educated on the care and

management of the animals. A private-public joint effort to educate farmers on nutrition andmanagement is essential to break out of the vicious cycle of poor feed and poor output.

6) Dairy Development Board

A Dairy Development Board should be formed to promote the production and consumption

of dairy. This should be an industry body that also passes recommendations to the

Government. In addition one of its primary responsibilities should be to market milk andincrease awareness of its benefits. It should also increase awareness about dairy farming. The

Dairy development board should not limit itself to cows milk but should promote goat and

buffalo milk as well.

VII. CONCLUSION

We stand on the threshold of a great opportunity and a great threat. With improvements in

breeds, private investments and interest in the processing sector, the right policy will take ourdairy production to a higher level. On the other hand if our policies discourage further

investment we will continue to relegate milk as a luxury food at the cost of the health of our

citizens, especially our children.

World milk powder prices have been increasing with the removal of subsidies. Prices will go

up further & at stake is the nutrition level of our new generation. Investment in the dairy

sector is beneficial all the way, creating jobs in the rural areas for the entire family, affluencethus reducing poverty & malnourishment. No other investment provides such rewards taking

all factor’s into consideration

As the first step we need removing subsidies to Milk Vita which tends to skew the price

structure in the market for milk & milk products thus inhibiting other entrants. No business

should subsist on subsidies indefinitely. Contrarily it is the dairy farmers who need help withfinancing & extension support urgently for ameliorating poverty & hunger through creation

of employment in rural areas where they live. Three cheers to Milk Vita for doing a fine job,

but now they should thrive on their own steam & not crowd out the market place.



11

APPENDICES

Appendix 1: Bangladesh Milk production

Availability of milk products

,000 metric tons

Local ImportedTotal annualconsumption

Annualper capita(kg)

Per capitaper day (g)

1991 774 184 958 8.5 23.28767

1992 790 152 942 8.3 0.02274

1993 924 75 999 8.5 0.023288

1994 1064 80 1144 9.5 0.026027

1995 1215 92 1307 10.7 0.029315

1996 1552 104 1656 13.3 0.036438

1997 1573 84 1657 13.1 0.03589

1998 1594 96 1690 13.2 0.0361641999 1615 136 1751 13.5 0.036986

2000 1636 124 1760 13.5 0.036986

2001 1658 97 1755 13.3 0.036438

2002 1680 97 1777 13.3 0.036386

2003 1702 64 1766 13.0 0.035661

Source: Bangladesh Statistical Yearbook 2005



12

Appendix 2: Prices of local cows milk and imported powdered milk

Cow milk / litres

Nationwideprice Price inDhaka Price of imported milk(litre equivalent)

1993 15.58 25.6

1994 16.98 24.96

1995 17.83 25.13

1996 17.17 27.32

1997 18.21 28.08

1998 18.35 28

1999 18.88 28.5

2000 20.01 30 18.125

2001 19.47 30.2 20.625

2002 18.77 29 21.875

2003 20.26 32 25.6252004 22.16 33.2 34.375

2005 22.01 35 37.5

Source: Bangladesh statistical handbook 2005

Prices of imported milk was obtained by examining the sales records of retail shops.

Prices of liquid milk in Dhaka after 1998 was obtained from sales records of retail shops



13

Appendix 3: Major investments and assistance to BMPCUL by the Government and other agencies

Major investments in BMPCUL

Cost ('000taka) (ownfunds)

Grants/Subsidies

(‘ooo)

1973-1978 Established 5 dairy plants with DANIDA assistance 129,0001973-1974

Australian government grants for powder milk and butterproject 4,312

1979-1982 Consolidation of dairy complex project 25,9301982-1983 Reserve fund made with an EEC donation of Skim milk 145,0481982-

1985

Balancing, Modernization, Rehabilitation and Expansion

project 108,640 155,0501993-1994

Loan interest writeoff by Bangladesh government. Debtconverted to a 50% government equity.

1994-1997

Set up 22 Chilling centers, a Milk powder plant, and icecream plant. Funds provided through the national budget 363,700

2003-2005 Set up condensed milk plant with its own funds 210,000

2003-2005 Set up candy plant 40,0002003-2004 Interest free government loan (revenue) 120,000

2003-2004 ADB loan through government at 8% interest 122,531

2004-2005 Government Cattle loan at 5% interest 5,0002004-2006

Set up Can making plant for condensed milk. Project wasfunded by the government 240,000

2005-2006 Set up UHT plant 100,000

Total 458,640 1,310,571

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