WORLD BANK

Case Study

The Semi-Intensive Dairy Sector in Mongolia

Scanagri CPRSweden Mongolia

November 2003

East Asia and Pacific Region, 1818 H Street NW, Washington DC 20433

This report was prepared for the World Bank. A Joint Report for studies related to the semi-intensivedairy sector in Mongolia.

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TABLE OF CONTENT

Preface 1

Summary & Conclusions 2

1. Introduction 6

2. Diary Sector Background 7

3. The Dairy Farm Survey 9

3.1 Principal Conclusions from the Financial Survey and Focus

Group Discussions 9

3.2 Farm Development Prospects 16

4. Milk Processing and Marketing 19

5. The “White Revolution” 24

6. Long Term Impact of the Danida Support for the Dairy Sector 25

7. Relevance of the sector experience to Government Policy on

Regional, Rural and Agricultural Development 29

Appendix 1: Survey Questionnaire 34

Appendix 2: The Survey Results 38

Appendix 3: The Financial Survey Questionnaire 39

Appendix 4: The Results of Financial Analysis 42

Appendix 5: Stakeholder workshop 43

Appendix 6: Information on the dairy processors 65

Appendix 7: Some policy recommendations in the light of the

implementation of the Government’s key policy directions 90

Map of dairy farms covered by study 96

Preface

This report combines the results of two contracts for studies related to the semi-intensive dairy sector. The work was undertaken in response to a request from Ministry of Food and Agriculture (MoFA) for support, as part of the preparations forthe Donor meeting in Tokyo, and extends the analyses undertaken during the production of the draft of the Rural Development Strategy. A single report is presented because both contracts involved discussions with MoFA and other organizations concerned with the sub sector and this final document incorporates theresults of all those discussions.

The foci of the two contracts were different. The international consultancy by Dr McNeill, for Scanagri Sweden and financed by Swedish trust funds, concentrated on the preparation of the case study, drawing conclusions from the experience of the Danida project support for the sub-sector. The Mongolian consultancy, Center for Policy Research (CPR) financed by Danish trust funds, concentrated on farm surveys. The organization of a stakeholder participative workshop was led by CPR and separately financed by the World Bank. The workshop was followed by a period of consultation with MoFA. This was undertaken primarily by CPR, with support fromthe international consultant. The approach of maximizing the Mongolian input and stakeholder participation follows the procedures adopted in the preparation of the Rural Development Strategy and this report is part of the continuing process of assisting Government in developing its rural and regional development strategy. The drafting of the report has been a collaborative process but, in essence, the case studywas written originally in English while the other material is a translation from the Mongolian original.

The authors would like to thank the participating farmers and all others whosupported the work and provided information. Particular thanks are due to the Dairy Farmers Association and the Dairy Processors Association, which were established with support from the Danida project, and to the specialist staff of MoFA.

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Summary and Conclusions

Government has proposed an ambitious programme for promoting intensive livestockproduction as part of its rural and regional development policy. Ensuring funding and building adequate capacities are key issues to be resolved for the successful implementation of such a programme: in Mongolia, both are in relatively short supply. This case study has highlighted “bottom-up” development initiatives, which could provide a cost effective contribution to the achievement of Governmentobjectives.

The most recent Government agriculture and regional development policy documents,are the Resolution of the Ikh Hural, No 29, of the 15th June 2003 and the Resolution of the Government of Mongolia, No 160, of the 24th June 2003: these emphasize the “need to develop intensified livestock production, coordinated with the marketdemands”. In these documents, stress is placed on promoting greater integration of crop and livestock production.

The semi-intensive dairy sector, primarily concerned with the production of milk for the urban markets, is a good example of livestock production which relies upon supplementary feed and fodder and which has a potential for further development and intensification.

One other reason for choosing this sector was that the development of family dairyfarms, following the collapse of the large scale mechanized dairy farms, had beensupported by a Danida project and the study provided an opportunity to involve the Monitoring and Evaluation Unit of MoFA in drawing conclusions concerning the long term impact of the donor assistance. For both domestic and donor supported programmes, this is expected to be an increasingly important function for MoFA.

The preparation of the case study started with farmer surveys and focus groupdiscussions. In parallel, discussions were undertaken with a wide range of otherstakeholder representatives, including MoFA, local government, the processing sector and the Dairy Council. This was followed by a workshop, with extensive stakeholder participation, at which the initial findings were discussed and stakeholder comments and recommendations were prepared by working groups. The survey results and the proceedings of the workshop are included in this paper as reference documents. After the workshop and the initial translation of key elements of the case study into Mongolian, a series of discussions were held with MoFA and the Dairy Farmers’Association. These were undertaken almost entirely by CPR personnel and this final version of the case study incorporates the results of the discussions, as agreed with MoFA.

The methodology outlined above is the same as that used in the preparation of the Rural Development Strategy. By considering one agricultural sub-sector as a case study, it has been possible to continue the RDS process by highlighting practical applications of many of the RDS principles, which have already been initiated by Mongolian farmers. Thus, many of the findings and recommendations of the case study have far wider application than this specific sector. This is particularly relevant at a time when MoFA is engaged in preparing more detailed investment proposalsrelated to the policy documents cited above.

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As an example, the surveys have shown that there are profitable and innovative farmsin the sector and that their approaches are being followed by neighboring farms. Existing progressive farms should therefore be used as the basis for Governmentsupport for any model farm development programme in this sector. An importantpoint is that the farmers, on their own initiative, are starting to undertakedevelopments consistent with Government objectives and, as with the vegetableproduction development programme, such a trend increases the probability of asuccessful programme.

A Government objective is to reverse the trend of increasing imports of dairy products. The main increase in imports is of long life products to meet the shortageswhich occur, particularly in urban areas, during winter and spring. Practical solutions to this problem are:

Improve the quality control of raw milk to permit the local manufacture of UHT products and

Increase winter milk production by improving the winter feeding and by controlling the calving season.

The trend towards the use of artificial insemination, in order both to control the calving season and to upgrade the genetic potential, should be supported by MoFA.Within the sub-sector which has been studied, it is a cost effective way of meeting theobjective of starting to upgrade the national herd. Some farmers have expressed concern at the lack of reasonable quality bulls: expansion of the AI service could be a rapid method of reducing the number of bulls necessary. Support for the developmentof the AI system, as far as possible on a commercial basis, should be a priority. Initial emphasis should be on serving those farms and districts where there is a demonstrateddesire for the service and an ability to pay.

These farmers are interested in improving the feeding standards of their cows. This will become even more important with increased winter milk production from cows ofhigher genetic potential. It is likely, therefore, that these farmers will co-operate infeeding trials and in the production of fodder crops, which is another importantGovernment objective.

Fodder crop production and improved facilities for cattle with higher potential will require increased capital investment. The financial survey has indicated that the returns from peri-urban dairy production can be high by Mongolian farmingstandards. Banks and finance institutions are seeking viable farm lending opportunities but may not be aware of the potential of this sub sector. Reportedly, some banks are concerned at the high risk of cow mortality, due to dzud, but the survey indications are that, because of the relatively good cattle feeding and housing, mortality is in fact low. In effect, many of these farmers are already applying, with success, the sort of risk mitigation measures recommended in the RDS. The need forcattle insurance was also an issue raised by farmers and this links directly to the workbeing undertaken by the World Bank, related to the Sustainable Livelihoods Programme. A programme of informing the banks and assisting farmers in preparing loan applications should be undertaken.

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The workshop and the farmer surveys showed that the farmers’ principal concern waswith land issues – for the winter housing and cattle yards, for access to land for hayand other possible fodder crops and for control of the use of summer pastures. Resolution of these issues is important for all livestock production in Mongolia. Appendix 7 of this report contains a number of specific suggestions relating to the land laws. For example, in article 52.5 the inclusion of “fencing” as a condition of pasture possession is considered too restrictive for this type of farming. Making amendments to the land law is a complicated and time consuming process. Empowering farmers and local administrations to apply effectively the existing law,through improving their understanding, is, however, a good short term measure. Formal proposals should be prepared by MoFA, both for changes in the laws and for application of existing laws by local authorities. This will be a vital element in achieving the Government objective of “ensuring a favorable legal environment, for entities and citizens engaged in intensive and semi-intensive meat and milk producing farmsto possess pastureland and hayfields and to invest in improving them”.

Many of the farmers have learnt, through experience, the benefits of co-operation. This applies to hay making, marketing and to the maintenance of water supplies.Significant benefits have been achieved through informal arrangements and this hasdemonstrated that the primary requirements are the development of trust and good management practices, which do not necessarily require a formal legal structure. It istherefore recommended that in policy documents the emphasis should be changed from “supporting co-operatives” to “supporting co-operation”. These successfulexperiences of co-operation, including co-operation with processors and in the collection and transport systems, should be publicized in other sectors, with Government support.

There is increasing concern over the deterioration of the water supply situation at the summer pastures. Sustainable management of livestock water supply facilities is a major problem in Mongolia but at least one village, the Nariin am, has developed an effective system for managing and maintaining a well, originally provided by theDanida project. Improving livestock water supply is a Government priority. Existing Government and Donor programme managers should be informed of the case study and survey conclusions. Application of the experience of these farmers may be usefulfor existing water supply projects and may highlight additional areas where water wellprovision could produce good economic benefits, with an effective well managementsystem as a model for other areas.

Successful approaches, developed initially for the main urban markets, should be applied to urban markets across the country. This was demonstrated by the successful extension of the Danida support from the environs of Ulaanbaatar to the western aimags. This approach is consistent with Government regional development policy.

The survey has shown that the farmers are hungry for information. Some of the information, such as on winter cattle housing design and construction, is readily available within the Dairy Farmers Association. This association has a developmentpotential but has severe financial constraints, which limit its activities. With carefullytargeted support, it could become more of a specialized extension service, working with MoFA and the Agricultural University, providing a business “benchmarking”

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service to identify farm weaknesses and to assist in raising performance towards thatof the best farms.

Major weaknesses of the current urban milk supply system are the fragmentation of the dairy processing sector and the lack of milk testing facilities. A strengthening ofthe testing facilities, with Government support, should be justifiable on the grounds of public health. Government should also support co-operative developments to strengthen the milk marketing, transportation and storage systems, with improvementsin the infrastructure and the involvement of both farmers and processors.

The problems of the dairy processing sector are exacerbated by the operation of the VAT (value added tax) system, which disadvantages processors using local milkcompared with importers of finished products or of milk powder for recombination.For the sector, this is an important policy issue, which requires further representationsto Ministry of Finance and Economy (MoFE). This could be a good example of thewider role that MoFA can play in promoting tax policies which stimulate agriculturalsector development.

Most of the measures proposed as a result of the case study do not require substantialcapital investment by Government. Most of the capital requirements should beprovided by the private sector and bank lending but Government has a key role to play, particularly in improving the relevant legal environment and in supporting trials,demonstrations and information transfer.

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1. Introduction

MoFA had requested assistance from the World Bank in producing material, relating to the livestock sector, as part of the MoFA preparations for the donor meeting in Tokyo. This took place in November 2003.

The most recent Government agriculture policy documents lay emphasis on the intensification of parts of the livestock sector and on promoting greater integration of crop and livestock production. The semi-intensive dairy sector, primarily concerned with the production of milk for the urban markets, is a good example of livestock production which relies upon supplementary feed and fodder and which has a potential for further intensification. An analysis of the sub-sector therefore providesan opportunity to assess both the economics of integration/intensification and, by interviews and survey, to assess the likely response of farmers towards such development.

Such information would provide MoFA with a basis for reviewing existing programmes, such as the “white revolution”, in order to provide donors with a clearer understanding of the resources, policies and economic/market conditions necessary to improve their effectiveness. This is an important function of Ministries of Agriculture in developed social democracies: an enhanced capacity for systematic project andprogramme review would make a significant contribution to the institutionaldevelopment of MoFA. One objective of the case study was, therefore, to involve the Monitoring and Evaluation unit as much as possible, within the resource constraints of the Unit.

The preparation of the case study started with farmer surveys and focus groupdiscussions. This was followed by a workshop, with extensive stakeholderparticipation, at which the initial findings were discussed and stakeholder comments and recommendations were prepared by working groups. This was followed by a series of discussions with MoFA, undertaken almost entirely by CPR personnel and following the preparation of an initial Mongolian translation which concentrated on the elements of this note which are highlighted in bold type. This final version of the case study incorporates the results of the discussions as agreed with MoFA.

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2. Dairy Sector Background

The dairy sector was, and remains, a key economic sector. The majority of cattle are within the extensive livestock sector and the milk produced from grazing the summerpastures is a major component of the Mongolian diet. Particularly in the rural areas, the milk is both consumed directly and is converted to a wide range of traditionalproducts. Many of these have a long life and are stored for consumption in the winter and spring.

Particularly during the command economy period, large scale intensive mechanizeddairy units were established with the principal objective of providing the urban populations with dairy products and an emphasis on milk production in the winter and spring. In those seasons, the milk production from the extensive herd falls sharply. These farms were stocked primarily with “black and white” dairy cattle bred fromeither Russian or former East German stock. Breeding on these farms was by artificial insemination and one objective was to control the breeding season in order to ensuresupplies of winter milk. Fodder crops were grown for feeding these cattle and silagemaking was practiced.

One of the conclusions of the 1992/93 Danida study of the livestock sector was that these large scale units were suffering from severe management and financialproblems, which made it likely that most would collapse within a few years. Danida therefore agreed with MoFA a programme to support a development model of smallerscale, semi-intensive family dairy farms. The model emphasized co-operation between farms and between farmers and the processing sector. At that time, the processing sector in Ulaanbaatar was dominated by the Suu company and one of theobjectives was to stimulate competition in the dairy products market.

Despite the efforts of MoFA to support the intensive dairy sector, the farms proved to be non sustainable and the dairy cattle were distributed to other farms and to individuals. The recipients were unable or unwilling to maintain the breedingprogramme and there appears to have been a decline in the genetic potential, at leastof this section of the national herd.

Primarily as a result of the fall in milk production during the winter and spring, there has been an increase in the import of dairy products for the consumption during the lean season. The clearest example of rapid growth is in the import of UHT packaged milk, primarily from Russia. Imports of milk powder have also increased but the trend is less clear because the volumes are influenced by the domestic production of powder and by the amount of recombination undertaken by dairy processors. Statistics on imports of milk and dairy products are given in Table 2.1 below.

Table 2.1 Imports of Dairy Products

2000 2001 2002Producttonnes USD ‘000 tonnes USD ‘000 tonnes USD ‘000

Milk* 2322.6 541.7 4420.4 1280.3 5769.5 2021.5

Condensed Milk 707.7 567.6 1875.4 2270.7 1876.9 1288.8

Milk Powder 345.6 1385.1 1385.1 1958.0 835.2 772.5

Yogurt 130.3 110.8 293.4 311.1 467.4 526.7

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Butter 54.9 65.2 62.4 78.5 18.6 48.3

Cheese, quark 11.3 31.6 159.9 34.1 18.7 40.8

* Packaged UHT Source: Food security programme

Partially as a response to the increasing imports of dairy products, within the Special Programme for Food Security, the “white revolution” programme to “increase the supply of dairy foods in Mongolia by reducing post harvest losses and restocking” was launched by Government. Thus far, the resources applied by Government have been very limited and the impact has been small.

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3. The Dairy Farm Survey

A survey was undertaken of 100 semi intensive dairy farms, providing milk to Ulaanbaatar and to Darkhan. The survey included as many farms as possible, which had received support from the Danida project, in order to assess whether these were significantly different from other dairy farms. An English translation of thequestionnaire is shown in Appendix 1.

Before producing the final version, a draft questionnaire was tested in the Nariin am village. This village, close to the site of the now defunct intensive dairy farm ofJargalant soum, was one of the foci of the Danida support and is considered by theDairy Farmers Association to include some of the most progressive farmers. The results of the survey are in Appendix 2.

In addition to the socio-economic survey, a smaller number of farmers were asked to provide detailed information on the financial aspects of their dairy activities. The primary questions are given in Appendix 3, and the resulting financial analysis is given in Appendix 4. For reasons of confidentiality, the names of the participatingfarmers have been withheld.

The analysis of the survey responses was presented at the stakeholder workshop, held in the Agricultural University. The report on the workshop, which includes the stakeholder recommendations resulting from the working group discussions, is in Appendix 5. The following note concentrates, therefore, on the market, technical, andeconomic findings of the case study and their relevance to Government regional and agricultural development policy.

3.1 Principal Conclusions from the Financial Survey and Focus

Group Discussions

General

The farmers are responding rationally to the market and economic situation in which they operate. Their business is primarily to serve a, cash paying, urban market and the subsistence production element of their business, is relatively small.

A particular feature of the market is that the demand for milk in the winter and springexceeds the supply from the traditional cattle grazing system so that prices for “off season” milk rise sharply. It should also be noted that, by world standards, producer milk prices in areas readily accessible to UB are high. As a result, farmers are able to make profits even though the productivity per cow is low by international standards.

Primarily because of the profitability and cash generation, the farmers have beenprepared to make investments, using their own money, in order to increase the scale of their operations and to increase their margins. The more progressive of thesefarmers provide, therefore, a good demonstration of techniques and innovations, which can be taken up by other farmers. By Mongolian standards, their operations are relatively intensive and, by relatively good supplementary feeding of the cattle, by traditional Mongolian standards, they do link the crop and livestock sub-sectors. Astudy of the farm operations does, therefore, provide an indication of the likely rate of

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change in farming systems. Based on this limited survey, the indications are that therate of change of this sub sector will be progressive, but relatively slow unless thereare dramatic changes in either the market or the pasture carrying capacity.

Fodder

The only supplementary fodder provided for the cattle, of the farms in this survey, is natural hay. Hay making areas may be more than 100 km from the dairy farm and theresponses to the questionnaire indicate that the major cost of hay making is transport. From nearby (eg 5 km) hay making areas, the hay may be transported loose but from greater distances the practice is to prepare 25kg bales in order to reduce transport costs.

Initial survey result indicate substantial variations between farms in the cost of obtaining hay. Precise calculation is made difficult for a number of reasons:

The current hay making season is not yet complete so that full, up to date costs for this season are not yet available;

There is a well established practice of co-operation in hay making, including the use of machinery on a barter basis. The barter negotiations include a number of factors, including the amount of labor provided by each farm family. The cost of food consumed while farm family members are away haymaking is a significant item but it is not clear how much of thisincremental to the normal family food consumption.

There may be differences in the quality of hay obtained by different farms and hence in its feeding value;

Much of the machinery used is very old: its value and expected life aretherefore uncertain.

Because hay is a major cost element in dairy production, better information on the cost of hay, as a “benchmarking”, should be helpful in improving cost control.

As a check on the reliability of the survey data, the total supply of hay to a farm is compared with the estimated requirement, based on the claimed daily supplementaryrations. This check indicated some inconsistencies in the figures and some farmsappeared to obtain significantly less hay than is claimed to be required to feed the herd. This prompted a further check with the farmers on some of the survey figures, which were then amended. This demonstrates that the use of a simple computermodel, with internal checks, can improve the quality of survey data. The results could then be used for further analysis of the practical relationship between supplementaryfeeding and milk output in order to help individual farmers to improve output and farm profitability.

An important point from the financial survey is that the cost of access to the standingcrop of hay is a small part of the total cost. Dairy farmers, therefore, would require to be convinced by demonstration that paying a substantially higher price for purpose grown higher quality fodder or investing in their own fodder production would produce increased profits.

The Agricultural University and farmers in other areas have mentioned the possibility of silage production, including sunflowers, and also the possibilities of fodder crop

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production. Arrangements were being made for the survey team to visit one farm, which has been identified as using silage. It was found that this family farm had attempted silage production last year but had abandoned the experiment – reportedly because of a lack of suitable machinery. Only one large company farm is reported tobe using silage and it was not possible to visit this farm in the time available. At this time there is no indication that the farmers surveyed are aware of any demonstration,which clearly shows that fodder crop production would increase the profitability of dairy production.

At the start of the Danida project, us$ 25,000 was provided to grow fodder, close to the village of Nariin am, for the neighboring intensive dairy farm. No subsequent funding was available under the Danida project and the fodder growing was not repeated because, for financial reasons, the large scale intensive dairy farm collapsed and the cows were distributed to other farms.

Feed

The only reported supplementary feed is bran from the flour mills of UB. Concernover the apparently poor quality of the available bran has led one farmer to contract for the production of barley, as an alternative.

Approximately 50% of the bran from Altan Taria is still exported to China, mainly forpig feeding. This indicates that expansion of the domestic use of bran should not beinhibited by supply shortages. There is no indication that the demand for bran is increasing significantly, such as would be the case if herders were generally increasing the winter feed provision for their flocks. Animal feed production statisticsare given in Table 3.1 below.

Most of the dairy farmers do provide salt for the cattle but there is no indication of theuse of mineral licks and other supplements, which could improve the health of the herd. If these were used in some of these dairy farms the potential results of a successful trial could be:

Increased output and profit for the trial farms;

A rapid transfer of the technique to other dairy farms in the area;

Development of a market for enterprises producing such blocks

Practical demonstration of the benefits of such blocks, for introduction to the herding population. (Effectively, the dairy farmers already practice recommended dzud mitigation techniques since their animals have access togood winter housing, reliable water supply and relatively good supplies of supplementary feed for winter and spring)

Table 3.1 Bran & Animal Feed Production

Bran (tonnes)

Mill 1997 1998 1999 2000 2001 2002

Altan Taria 6497 6625 8880 6541 3789 4691

UB 677 5459

Total 15947 17904 17293 9915 7391 15059

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Feed (tonnes)

1997 1998 1999 2000 2001 2002

Palletized 4794 1262 206 1095 4021 947

Total 6652 1716 312 1095 4021 1188

The farmers are aware of the benefits of improved cattle feeding: the knowledge wasobtained from:

previous experience of working on the state dairy farm;

information provided by the Danida project, including study tours to Denmark;

information provided by the Dairy Farmers Association and by MoFA.

In practice, it appears likely that the winter and spring feeding is insufficient to maintain the weight and condition of lactating animals but the farmers’ experience is that the cows will regain condition during the summer grazing season. At least one farmer commented that she had experimented with increased winter feeding but that the increase in milk yield had not justified the extra cost.

Herd Development and Cattle Breeding

The information provided by farmers concerning the development of the number of animals in their herds is often questionable. One reason is that few farmers keep records of the number and classification of their stock. Without more reliable and detailed information, it is impossible to assess, for example, trend towards summer/autumn calving and the impact that this has on calving rates and total milkproduction.

In order to increase profitability, farmers have started to adopt the following strategies:

1. control of the calving season, with increased late summer to winter calving in order to increase milk production in the winter and spring. Milk prices are substantially higher at that time and the processors are unable to obtain sufficient raw milk to meet the market demand.

2. the use of artificial insemination, using semen from animals with a muchhigher percentage of the blood of internationally recognized dairy breeds, particularly Holstein Friesian (“black and white”) or Simmental. This crossbreeding results in cows with higher genetic potential but which are still relatively hardy and able to survive Mongolian conditions.

3. keeping their cows for as many lactations as possible: figures of nine or ten lactations have been quoted but there are no record books to confirm this. This maximizes the rate of growth of the dairy herd and the common practice is for the farmer to breed replacement stock rather than buying in replacement stock. The male cattle are usually sold or eaten at between one and two years of age.

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Financially, this is realistic since good quality young cows may be sold at prices of up to Tg 330,000, while a two year old animal normally commands a price of Tg 20,000 to Tg 40,000. The direct cost to a farmer of rearing and feeding and feeding female cattle, until the first calving at the age of 3 to 4years, is significantly less than the market price. There is some market forhigher producing dairy cows but it seems to be limited. One reason is thedifficulty of obtaining bank loans and the high interest charges, normally at 3% per month.

It may be also that the older cows have a higher genetic potential than their offspring but this would require further investigation.

Despite the high number of lactations per cow and the rather primitive supplementaryfeeding, the reported mortality rates, with the exception of one farmer in the financial survey, are not exceptionally high. Because of the relatively high milk prices and thelow meat prices, together with the declining genetic standards, the high age of cullcows is probably a realistic response to the market situation.

There is some indication from discussions that, primarily for management and financial reasons, farms with 5 to 10 cows will increase their herd sizes while largerfarms will start to stabilize numbers at around 30 cows.

It should be noted that, if beef cattle and heifers graze the same pastures as the cows,this is unlikely to be the most effective use of the more accessible pastures. With a system of completely open access to summer pastures, there is no incentive for established dairy farmers to control their own use of the pastures.

The genetic quality of the dairy herd is declining. When the large scale intensive mechanized dairy farms were broken up, their cattle were distributed to a variety of owners and the breeding system largely collapsed because there was no profitable market for higher productivity stock. These intensive farms were designed primarilyto provide milk for the urban populations so that, in economic terms, the problem is concentrated in limited areas rather than being a national problem of significance to herders using more remote summer pastures.

A positive development, supported by the Farmers Association, has been theextension during the past year of the provision of AI services to Jargalant soum. Thetotal number of inseminations to date, in that soum, is only approximately 40 but interest is growing. The AI service provides both a means of gradually upgrading the cattle quality and a means of controlling the time of breeding, in order to increase the “off season” milk production.

The AI service is provided by the Veterinary Institute using their stocks of frozensemen, which are now approximately 8 years old. The regular charge for the AIservice is Tg 10,000 but the Dairy Farmers Association has negotiated a special fee for members of Tg 5,000 with a repeat service fee of Tg 2,5000 if pregnancy is not achieved as a result of the first insemination.

The need for expansion of the AI service is recognized by a number of farmersparticipating in the survey, who have complained that the service is not available in

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their area. In the case of one dairy farm, outside the survey area, which had been managed by an American as a model farm, the American had reportedly returned for a visit, bringing frozen semen to upgrade the genetic quality of that herd. Theindications are that there is a demand for a commercial AI service serving this particular sub-sector.

Other Direct Costs

Compared with the supplementary feeding costs, these are relatively small. The majoritem is for veterinary services, which include both the statutory vaccinations and callsfor any necessary treatment for sick animals.

In discussions, the farmers were generally satisfied with the veterinary services provision and reported few problems with mastitis and few pregnancy problems. A more comprehensive survey, by a technical specialist, would be necessary to determine the actual incidence of such problems. The reported mortality is also relatively low – particularly considering the high number of lactations per cow. Sincethe survey was undertaken towards the end of the summer grazing season, when thecattle would be expected to be in peak condition, it would be advisable to follow up any study of cattle health in spring, when any problems should be more readily apparent.

Veterinary services in Jargalant soum are provided by three qualified staff employedby the soum company. There is no stock of medicines and, for each case, purchasesare made in UB – on a sale or return basis. In summary, the service is designed to support a relatively hardy cattle population and would require upgrading if the genetic potential of the herd were to increase rapidly.

There are few reports of the use of straw for winter bedding. The normal practice is to use dried manure on the earthen floors of the cattle houses.

Depending on the family size and competing activities, hired labor may be used for haymaking, for milking, for cattle tending and for maintenance work.

Financial Returns

The financial survey results show that this type of farming activity has a high potential income, particularly when compared with the standards of other livestockfarming activities in Mongolia. In the best case, the survey indicated a net income in excess of TG 13 million. The main reason is the relatively high price of raw milk,particularly in winter and spring. The principal fodder is still the summer pastures, which is the cheapest farm of feeding.

The income figures from the survey should be fairly realistic because at least some of the farmers continue to maintain the milk sales record books, which were introduced by the Danida project. . What are not shown are the full costs, the technical andfinancial picture of cattle breeding and rearing and the returns from beef production.

Despite the high returns, dairy farming is recognized as hard work and at least one farmer in the survey (a retired army officer) had recently sold most of his cattle in order to generate cash to finance a trading business.

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This survey concentrated on determining the financial returns per cow in herd, ratherthan on attempting to evaluate the standard of living of the farm families. Previoussurvey work in this sector has been undertaken by the Agricultural University. This concentrated more on assessing the standards of living of the farmers, taking into account personal expenditure patterns, and those results were presented at the workshop. For the future development planning, a data base of surveys undertaken by different projects and organizations would help in the assessment of developmenttrends. One step towards this was made by the collection of papers undertaken as part of the work for the preparation of the draft Rural Development Strategy.

Credit Worthiness

The survey has shown that only a few of the dairy farmers have succeeded in obtaining bank loans. Discussions with farmers have indicated that, apart from their difficulties in completing the necessary documentation, there is a reluctance of banks to lend to the sub sector for reasons including:

The risk of cow mortality is considered too high, unless there is insuranceand

The size of the cow herds, when converted to sheep unit equivalents do not meet the minimum required for herder loans.

The survey data indicates that the risk of mortality due to dzud is low. This seems realistic because the owners have already adopted major recommended dzudmitigation measures, recommended for herders – such as good winter housing,adequate stocks of feed and fodder and preparedness to use, and pay for, the available veterinary services. The size of the dairy units may be low but the profitability percow is very much higher than that from herding. The business also provides a regular cash flow without the need to sell assets.

The calculated return on capital investment for established herds is more than sufficient to afford loans, even at current interest rates. Even if the cows were valued at current market prices for young cows, rather than the depreciated price for olderanimals used in the calculations, the net revenues should more than cover loan repayments.

If further intensification is contemplated, with fencing and the growing of fodder crops, access to capital loans could become much more important for the sector. It is therefore important that the banks should be made more aware of the sector profitability and that the farmers should have sources of assistance for completing the administrative procedures of loan applications.

Farmer Co-operation

Government policy is to encourage greater co-operative activity among farmers and herders in order to improve, particularly for small farmers, their access to market and their standards of living. This was also an objective of the Danida support for the dairy sector.

Initially in the Danida project there was some lack of trust between farmers and no clear realization of the benefits of co-operation. However, as the farms have

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developed, the benefits of co-operation have become more apparent to the farmers.Positive developments have included:

Building on the tradition of co-operation during hay making. Farmers share equipment so that they no not each require to invest in a full set and they also share leases of hay making areas. Labor is also pooled and included in the negotiations of how the crop should be shared.

Many farmers have established contracts or good working relationships with processors. Specialist enterprises have been established for the transport of milk, in churns, to the smaller processors. These transporters carry the milkfrom several farms and the practice is for one of the farmers, in rotation, to accompany the milk in order to check that no adulteration takes place duringtransport and to collect the payment. It may be noted that this marketing co-operation is facilitated by village kinship ties.

A noteworthy development is the system for operating and maintaining the pump, originally supplied by the Danida project, in the Nariin am village. The water payment system was established independently by the dairy farmers of the village. Although the circumstances are special because of the crucial importance of a reliable water supply, this might serve as a model for other well rehabilitation programmes.

3.2 Farm Development Prospects

At first sight, there appears to be a possible contradiction between the very high profitability per cow, reported in the financial survey, and the relatively slow growthin the dairy sector. In practice, there are a number of practical constraints to dairy development, some of which have been noted in the preceding sections and may be summarized:

1. Dairy Farming is hard work

One interviewee, a retired colonel, had recently sold his four dairy cows (plusfollowers). His explanation was that, although the cows had permitted him to make some money, the cash he had obtained from selling the cattle had enabled him to establish a small trading business. His view was that tradingcould provide a similar income than dairying – with far less effort.

2. A market is needed for all the milk

There is a surplus of milk during the summer grazing season. Most processorsare particularly interested in winter and spring milk and would be expected to buy milk only from year round suppliers. In UB, only the Suu company can convert summer milk to powder. This company has had severe managementand financial problems, which have limited its milk purchases.

New entrants to the dairy business, therefore, need to establish credibility withprocessors and this takes time.

3. The milk collection system is undeveloped

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There has to be a sufficient number of milking cows in a particular accessiblearea to justify the cost of establishing and operating a collection system.Collecting the milk from a herd of one or two cows is unlikely to be economicwith current systems. Co-operation between small farmers is a way of overcoming such problems but this is not easy to organize in Mongolia.

4. There is a shortage of reasonable quality dairy cows

Few of the farmers in the survey have sold dairy cows: the heifers have mainlybeen kept to increase the herd. The relatively high prices quoted for reasonablequality dairy cows indicate that there is a shortage of such stock, which would slow the establishment of new herds.

5. Dairy Farming is a long term business

It takes at least three years for a calf to become a milking cow. During that time there are only costs and no revenues. The only alternative is to buy older cattle but, unless one can obtain milking cows, which are in short supply, purchase of heifers will still result in a significant delay before revenues are generated. Also, banks are reluctant to lend for cattle purchase and the interest rates are high.

6. Economies of scale

Although the reported financial returns per cow are high, a significant number of cows is necessary to provide an adequate family income. The system ofdairy farming, relying heavily on the grazing of summer pastures to minimizefeeding costs, is not easy to combine with, for example, vegetable production. Developing a herd from 3 or 4 cows to a viable number is, therefore, not easy.

7. Management

Control of the calving season, organization of marketing, supplementary fodder and provision of facilities such as housing and veterinary services require a relatively high standard of management – particularly when compared with that of the average herder. Management skills, both technicaland business, are still lacking and the emphasis on the need for better information, highlighted in the survey, indicates that farmers already involved in the sector are well aware of the needs. Most, however, have not taken steps to seek out information which already exists in UB and among the mostsuccessful farmers. Successful farming, as with any other business doesdepend upon the participants having a strong motivation to solve their own problems rather than relying upon government.

The opportunity for profit is a necessary but not sufficient condition for thedevelopment of a sector. The indications are that the number of dairy farms is growing but the rate of expansion of “off season” milk production is limited by theconstraints highlighted above. It is also probable that, until this financial survey was undertaken, there was no clear indication of just how financially attractive could be well managed medium scale off season milk production.

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The financial survey was undertaken in possibly the most progressive dairy village. The sample size was small and included some of the best farmers. The results should, therefore, be considered not as typical of the sub-sector but as being achievable with good management.

Based on the above analysis, it seems reasonable to expect that there will be a steady development, following existing trends, rather than some dramatic changes in practices. The greatest risks are judged to be:

A deterioration of the pastures as a result of unrestricted access of increasing numbers of animals:

Deterioration of the water supply situation in some of the summerpastures, such as near the Nariin am village. This could reportedly be solved by investment in wells – if appropriate security of tenure were arranged; and

A decrease in the milk price, particularly in winter and spring, as a resultof increased milk production or the introduction by processors of wider and more effective collection systems.

Most of the farmers surveyed were specialized in dairy production and did not undertake crop production, such as vegetables. The reason generally given was that the summer pastures, where the family would move to tend and milk the cows, did nothave access to irrigation water. It is also possible that, because of the daily marketcontact and the cash generated from milk sales, it is more convenient to obtain vegetables from the market.

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4. Milk Processing and Marketing

4.1 The Dairy Products Market

There are no recent comprehensive market surveys of dairy products in Ulaanbaatar and the unit of municipal government responsible for dairy sector planning is stillreliant on the demand estimates from the start of the economic transition.

All the indications are that there has been a substantial fall in demand since the 1980s. The main reasons are believed to be higher prices and a reduction of the tendency of the younger members of the population to consume dairy products. This is related to the general change in the food consumption of the young, with a greater tendency to consume vegetables and a lower preference for animal products.

The raw milk supply has a far greater seasonality than the demand. There appears to be little recent information on the seasonality of total demand and even the pattern of supply is not clearly documented.

The purpose of this note is not to present market estimates but “back of the envelope” calculations indicate that, even if per capita demand had halved from that in the command economy period, the average daily milk and milk products consumptionwould still exceed 140 tonnes. This far exceeds the daily sales by the processors of Mongolian milk. For example, by far the largest of these processors was only able to achieve sales of 8 tonnes per day during the past summer, despite having a milk intake of some 35 tonnes.

The only reasonable conclusion is that, even in Ulaanbaatar, sales of unprocessed milk dominate the market, particularly in the summer.

The direct sale of unprocessed milk in the street is illegal. However, it is clear from discussions with consumers that, particularly in the areas relatively far from the city center or in those close to major transport routes, such as near the main railwaystation, such sales are a major component of the supply. There also appears to be a significant subsistence supply of milk to urban residents by relatives owning cows and living fairly close to the city. Processed and packaged dairy products are relatively expensive and are unlikely to be bought, unless no alternative is available, by the poorer sections of the community.

There is a rapidly growing import of long life (UHT) dairy products from Russia. The most recent national statistics show imports of some 5600 tonnes, with a more than doubling over a three year period. The market for processed milk and dairy productsin UB is highly seasonal. The main demand is in the winter and spring, when production from most farms is lowest. Using the not unreasonable assumption that at least 60% of the imported UHT milk is consumed in Ulaanbaatar during the fivemonths of winter and spring would produce a daily sales estimate of a little more than 20 tonnes. To this sale of imported product must be added the sales of milk and dairy products, reconstituted from imported milk powder. From this, it must be concluded that imported products take a large share of the market during winter and spring, when raw milk is in short supply.

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There clearly is a functioning market for raw milk throughout the year because of theseasonal price changes, which are freely negotiated between producing farms and processors. The price, delivered to processor, ranges from some Tg 220/litre, or less, during the summer milk production peak, rising by Tg 50 steps to as much as Tg 500 during late winter and spring. This clearly provides a marketing opportunity for localfarmers, both because of the preference by many consumers for “fresh” milk andbecause of the relatively high costs of packaging and taxation of processed milk.

4.2 Milk Processing

The dairy processing sub sector is not well developed. The principal, long established company is the Suu company, whose equipment and operations are derived from theformer milk combinant. Operations and equipment have been greatly scaled down so that only a small part of the original site and buildings are used. The UB municipality still has a 51% shareholding and, because of substantial losses and unrepaid loans from the mid 1990s, the company is unable to obtain new bank loans either for working capital or for re-equipment. Under new management, the situation isimproving but overdue loans are still approximately Tg 1 billion (recently reduced from Tg 1.4 billion). This company has four collection centers and is by far the majorpurchaser of raw milk from farmers. At the summer peak, the daily raw milk intake is some 35 tonnes, which is small for a city of this size and very small by internationalstandards.

All other processors of Mongolian milk are much smaller with daily throughputs ranging from around a hundred kg to a few tonnes. Most operate in rented premises,which makes it difficult for them to meet the hygiene standards.

Information on the dairy processors is given in Appendix 6.

One company, GUM, which was originally established with Danida support, has invested in a new building but has insufficient capital to upgrade and expand the processing line. The company is negotiating with international finance organizationsfor investment funding.

The only significant modern processing plant is that of the newly established NZ Foods. This has a UHT plant which, because of the unreliable quality of raw milkreaching Ulaanbaatar, recombines imported New Zealand powder. In order toimprove the plant utilization, the line is also used to package fruit juice from importedconcentrate.

Working with Mercy Corps, NZ Foods is investigating the feasibility of establishingnew farms, with 500 cows on a single block of leased pasture land. The concept is that the cattle would be owned by selected Mongolian families but the grazing control andoverall management would be under the control of the processing works through a resident (expatriate) manager. The purpose is to ensure control of the quality of the milk reaching the plant. Intensification would be limited and all milk productionwould be based on the summer pastures. This proposal should benefit Mongolian farmers but it should be noted that the future of the processing works does not depend

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on the implementation of such a project since the plant can continue to operate with imported raw material.

None of the dairy processors have more than relatively primitive testing facilities.Reportedly, there is, for example, no equipment in Mongolia for testing the protein content of the milk and dairy products. The small operating scale of most of the processing companies would make it very difficult to justify the investment desirablein testing facilities. The small scale also makes it difficult to obtain, at reasonable prices, the types of packaging which would be attractive to more affluent consumers,who are accustomed to purchasing imported products.

4.3 Processing Policy Issues

VAT

An important policy issue is that, because farmers are not registered for VAT, the VAT paid by the processors of local milk is effectively a tax on turnover rather than on value added. As a result, processors of local milk are at a disadvantage comparedwith importers of finished products or with enterprises recombining imported milkpowder.

Another effect of the VAT anomaly is to make the selling price of packaged pasteurized milk more expensive for the consumers. This increases the financialincentive for consumers to buy unprocessed milk. As a result, consumers are at increased health risk and development of the processing sector is inhibited.

This issue has been raised a number of times by the processors and through the Dairy Council but the response from the Ministry of Finance and Economics has been negative. Although farmers already supplying milk to Ulaanbaatar are probably not suffering now as a result of this VAT problem, milk collection systems able to reachmore distant farmers will be slower to develop and this may damage MoFA plans forlivestock intensification and integration in the main crop growing areas.

Promotion of small scale processing enterprises

As has been noted above, the processing sector in Ulaanbaatar is already fragmented.The plants generally work only a very few hours per day and this is an inefficient use of capital resources. In order to justify the investment, the international norm is forplants to operate for up to 20 hours per day.

MoFA has a policy of promoting small scale agricultural product processingenterprises. Because it is such a perishable product, small dairy processing operationsintroduce relatively high consumer health risks and further fragmentation of the processing sector within UB is considered to be undesirable.

In the view of the consultant, any special support for small scale dairy processing should be contingent upon there being a local market for the products. The concept of processing at soum level, with the intention, for example, of transporting and selling the finished products in the capital city, is likely to weaken the development of thedairy system and to increase the risks to consumers.

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Working capital

Because the seasonality of milk production is much greater than the seasonality of the demand, the domestic operators require significant seasonal working capital in order to balance the seasonality. Possible approaches to balancing the seasonality are:

1. Farmers invest in more supplementary feed and fodder as part of a package ofmeasures, including changing the calving season, in order to increase winter and spring milk production. As long as the winter milk prices remain high, the financial survey indicates that this is financially viable and is starting tohappen.

2. Surplus summer milk is converted to milk powder, which is recombined in winter. This is the approach adopted by the Suu company. As a result, the seasonal working capital requirement is substantial and the company is oftenunable to pay farmers on the due date.

3. Summer milk is converted into long life UHT products, which are stored forsale in winter and spring. Currently this is not feasible because of the inadequate quality controls on raw milk quality and transport. If this approachbecomes technically feasible, the finance costs of stockholding, at current domestic interest rates, would be substantial.

In summary, the high domestic real rates of interest act against seasonal storage ofdairy products and favor the import of finished products during winter and spring, for immediate sale.

4.3 Milk Testing

None of the processors have fully equipped milk testing facilities and nearly all of the factories are of too small a scale to justify international standard testing equipment.The quality of the raw milk is generally considered to be of too low a quality to permit its use in UHT plants.

Testing is undertaken either at the collection centers of the Suu company or on reception at the processing plants. Pricing is, apparently, not dependent on the fat content of the milk but milk would be rejected if the fat content were below 3.2%.With this pricing and testing system, there is no financial incentive for producers to provide milk of more than the minimum standards. This shows some parallel with theearlier grading arrangements for cashmere purchases from producers. Unless this situation is changed, the quality of milk reaching Mongolian processors and urban consumers will not meet international standards.

With this testing system, the potential for adulteration and spoilage is high.

4.4 Transport and Collection

With some of the smaller processors, farms have supply contracts. Delivery is normally in 40 liter churns. Farmers may deliver directly to the plants or they may use

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a transporter with a small truck to collect and carry the milk of several farmers. Cost per churn is normally Tg 10,000, irrespective of the quantity of milk. The milk of each farmer is kept separately until it reaches the processing works, where it is tested.

The largest purchaser, the Suu company, has four collection centers and transports milk from these centers by tanker. Staff from the company accompany the tankers andtest the milk before it is accepted.

Milk is only transported once per day, or sometimes every other day in winter, and evening milk has to be stored overnight on farm or at the Suu company collection centers. Farm storage is usually by the traditional method of placing churns in wells.

To minimize raw milk quality deterioration during collection and transport, someemphasis is being placed on increasing the refrigerated storage capacity in rural areas.Use of an additive has also been proposed although there are differences of opinion among Mongolian specialists concerning the desirability of this.

An alternative, which might be investigated, is to consider the approach used by Operation Flood in India. There, the strategy was to minimize the time between milking and delivery to the processing works by tight control of the collection times,by a rapid testing system and by strict control of the timing of collection and delivery by the transport contractors. A detailed analysis would be necessary to determinewhether this approach would be feasible in particular areas of Mongolia.

4.5 Powder Production

It has been noted above that the powder production facilities of the Suu company areold and inefficient. Unconfirmed reports are that there is only one other powder plant, in Selenge, which is experiencing difficulties. If the Suu plant were to ceaseoperating, an important market for milk from more distant summer pastures would be lost. This could damage the prospects for successful implementation of governmentpolicies for more integrated crop and livestock farming in the main crop growing areas.

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5. The “White Revolution”

The Ministry programme for dairy sector development, “the White Revolution” has had only very limited success to date. One possible reason is that the marketinformation is very limited and the programme does not have a clear emphasis on identifying local market opportunities which could provide a stimulus to production in specific areas. The UB peri-urban dairy survey shows clearly that producers will respond to such opportunities. It is also clear that the greater the profit makingopportunities the more rapid the likely response.

The dairy farmer survey has shown that, although Darkhan is a much smaller marketthat UB, it also has severe seasonal shortages and that the peak prices for raw milk are similar to those in UB. Hence, this should be another area of potential for dairy system development.

An FAO project, which is expected to start soon, will provide support to the dairy sector. The main focus will be on investment support for the milk collection andtransport system and for the processing sector.

Using the information provided in this case study, and taking into account the FAO proposals, this could be an appropriate time to review the “white revolution” proposals and objectives, using a systems approach to highlight specific activities where Government or donor support could bring short term economic and social benefits.

In terms of upgrading the quality of cattle and the provision of services, such as AI and veterinary care for cattle, it would be more cost effective to concentrate initialsupport on areas of greatest demand and then to expand the coverage rather than trying to establish a more thinly spread national coverage from the outset.

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6. Long Term Impact of the Danida Support for the Dairy Sector

The reasons and primary objectives for the Danida support for the semi-intensivedairy sector were given in the section describing the background.

In total, support was provided for 99 farms in 7 villages. Of these farms, 60 are reported to be still operating in the dairy sector. In view of the problems that theagriculture sector has experienced in the past nine years, this outcome must be considered creditable.

The main elements of the support were the provision of:

10 dairy cows for each farm

cattle housing and fencing

hay making equipment

milk churns

collective facilities, such as village well rehabilitation

technical advice and support, including study tours to Denmark

Danida support was also given for the establishment/development of ten dairy enterprises. Only one of those enterprises (GUM Company) is still in operation. Theimportant principle of linking farmers and processors has been maintained, both with GUM and other processors. The relatively high processor failure rate reflects the moredifficult market and financial situation of the processors and problems with the selection of the entrepreneurs who received the loans.

In both sub-sectors, the generally held view is that the major reasons for enterprisefailure were in the selection of candidates for the model enterprises. This appliedparticularly to the processing sector, where some of the loan money was said to have been misapplied to finance general trading, rather than concentrating on the dairysector. For the farms, the problems were more related to a lack of motivation and preparedness to devote the time and effort necessary to run a successful farmingbusiness.

In addition to the direct enterprise support, two representative organizations were established (NGOs) – The Dairy Farmers Association and the Dairy Processors Association. Representatives of each associations are members of the Dairy Council. The Council also has two representatives of MoFA, one of whom is chairman. The prime responsibility of the Council is to act as a channel of information from stakeholders and to advise MoFA on issues affecting the dairy sector.

The Processors Association now has only one member. None of the other processingenterprises have joined the Association, or seem likely so to do. Although the General Director of GUM is very active, this severely weakens the credibility of theAssociation as a representative body.

In contrast, the Dairy Farmers Association has continued to expand its membership,which has now reached 1000 farmers.

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6.1 The Dairy Council

The Council provides advice to MoFA and Government concerning dairy policy and development. The Council originally included stakeholder representatives, through the Dairy Farmers Association (4 members) and the Dairy Processors Association (2 members) in addition to the 2 members from MoFA.

The Council is not a particularly active body, with only two meetings being held last year. Since the Dairy Processors Association has now only one member, an additional processing representative, from the Suu Company, sits on the Council. As a “pressuregroup” the Council is not effective. The processors have an obvious problem with the VAT regulations but the major processor of raw milk, the Suu Company, is 51% owned by the Municipality and still has substantial outstanding debts. Compared withother groups, such as the flour millers and cashmere processors, the dairy processorsare operating on too small a scale for protests to MoFA to carry much weight.

The MoFA representatives on the Council are the head of the Foreign Relations Department and a senior official from the Extension Service. This is reasonable in that one of the MoFA roles is to attract donor interest in support for the sector and, with limited resources, The Farmers Association is involved in the provision of advice to dairy farmers.

The Council made some input into the preparation of the “White Revolution” programme but that programme is the responsibility of another MoFA department.

6.2 The Dairy Farmers Association

Originally established as part of the Danida project support, the membership has expanded substantially to include many farmers who were not involved with Danida. The Association is supported by MoFA in that their office, in the MoFA building, has a subsidized rent of Tg 78,000 per month. The Association is also a major recognized source of information and expertise concerning developments in the sector.

Although membership of the Association has expanded substantially to approximately1000 members, there is an increasing problem in collecting the annual membershipfee of Tg 12,000. Currently, the number of fully paid subscriptions for 2003 is only 8. This is not a sustainable situation. A major difficulty is that the membership is spread over a wide area and direct contact with headquarters is limited by the cost of transport. Without new sources of income, and greater activity, the Association islikely to decline in importance.

The Dairy Farmers Association has introduced valuable initiatives, such as the introduction of artificial insemination in Jargalant soum, where the Association financed the training of the inseminators. Within its limited resources, it has organizedfarmer training and demonstrations. As a general principle, dairy farmers appear to value information and training and to be prepared to contribute to the cost: they do not yet appear to be prepared to pay the full cost.

The Association has the potential to become a specialized service provider to the Extension Service of MoFA. It already possesses information commonly requested by

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less experienced farmers, such as the design and costs of cattle housing. By co-operating with, for example, the Agriculture University it could regular informationon technical developments and on business aspects of dairy farming – which would be useful both to participating farmers and to MoFA. In the short term, however, it seemsunlikely that the Association can survive as an active body without some external support.

6.3 The Reasons for Success of Elements of the Danida Support

Starting in 1994 with ten cows and relatively intensive support from Danida, the mostprogressive of the farms have developed into successful family units with incomeswhich, by Mongolian farm standards, are relatively high.

Elements in the success of the programme are considered to be:

concentration of the support on a specific sector;

addressing the complete system, from producer, through processors to the market;

a strong market demand for the product, with attractive producer prices;

use of farming systems which had already been tested in Mongolia;

technically simple, but effective, techniques;

relatively long term technical support to a limited number of units;

investments which are affordable from the resources of family farms;

a recognition, developing over time, of the benefits of co-operation;

The promotion of the Dairy Farmers Association, as an NGO, tomaintain and disseminate information on the sector and individualfarmer initiatives.

As a result, the best of these farms have acted as an effective demonstration where other farmers can see and copy, with confidence, a model which can provide a good income.

The western aimags component of the project was started more than one year after the start of the central region project. It was only started once there were clear indicationsthat the farm model was effective.

Implementation of the work in the western aimags was largely the responsibility of the aimag authorities and the Mongolian staff of the PMU. The western aimag component also had a clear market, replacing milk supplies from the failing intensivemechanized farms. The fact that as high a percentage of the project farms in the west as in the central region are still operating indicates that the transfer of the farm model,to other areas with clearly defined market opportunities, was successful on a longterm basis. This was achieved with a much less foreign technical assistance.

6.4 Monitoring and Evaluation

This case study has drawn upon the experience gained as a result of the experience of the earlier Danida support for the semi-intensive dairy sector. In no sense was this a

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formal evaluation of the project but it has demonstrated the benefits of longer term impact assessment in development planning.

The Monitoring and Evaluation unit of MoFA has, potentially, an important role to play in strengthening the Ministry’s planning functions. Longer term impactassessment is particularly important because, although a large number of trials has been supported by various donors, evaluation has generally been soon after trialscompletion. This is often too early to provide reliable information on sustainability.

Within the resources available, the M&E Unit has been involved as much as possiblein the case study. However, at the time of the study the resources of the Unit werealmost fully engaged in the monitoring of current projects and programmes. If this is typical of the work load, it seems clear that there is a need to strengthen the resourcesof the Unit, in order to permit it to undertake the full range of functions normallyundertaken by a Monitoring and Evaluation Department.

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7. Relevance of the sector experience to Government Policy on

Regional, Rural and Agricultural Development

The most recent agriculture policy documents emphasize the desirability of an intensification of livestock production and of a greater integration of crop and livestock production. As part of the regional development policy, the programmeenvisages the establishment of demonstration farms in specified areas.

A major objective is to “ensure a favorable legal environment for entities and citizensengaged in intensive and semi-intensive meat and milk producing farms” including the possession of pasture lands and hay lands and encouragement for investment in improving them.

The following notes highlight elements of the approved documents and give comments, based on the information derived from this case study. The English translation of the Government Resolutions are given in italics and the consultant’s notes follow in normal text. Before and during the discussions with MoFA, CPR hasmade more detailed suggestions for consideration of changes to legislation, particularly the land law. These are given in Appendix 7.

7.1 Resolution of Government of Mongolia, 160, 24th

June 2003

Intensified Livestock Development Programme

Below are quoted selected elements of the resolution, considered particularly relevant to the dairy sector serving urban markets:

Background: “There is a need to develop intensified livestock production coordinated with the market demands” The semi-intensive dairy sector is relevant because it isresponding effectively to market demands

Objectives: 3.2.1. improve the economic & legal environment3.2.2. support regional development & establishment of model farms3.2.3. support capacity building

The experience of the Danida support for model farms provides valuable informationfor programme design.

Actions re objective 3.2.1:5.1.1. Amend the Land Act From the survey and the workshop, this is a vital concern for the dairy farmers,particularly for the winter quarters and for the summer grazing areas.

5.1.2. Reduce pasture rent for entities engaged in intensified livestock production The financial survey shows that pasture rent is not a major cost element and rentreductions might send the wrong economic signals concerning the value of easily accessible pastures

It should be noted that the keeping of significant numbers of male cattle and young female stock is not the most effective use of dairy pastures accessible to UB. In the

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medium to longer term, if further measures to control the use and access to these pastures are introduced, beef and dairy rearing units would be expected to develop in less accessible areas.

5.1.3 Clarify legal framework for farmsThe workshop discussions did not indicate that this was a priority for the participating farmers

5.1.4 Study the feasibility of exemption from VAT and import duties on high

productivity livestock, semen, equipment & tools for breeding and related services At least in the short term, non-project imports are likely to be limited and the financial survey indicates that such items are not major elements of the total milk production cost.

5.1.5 Study the feasibility of income tax exemption for the first 3 years Currently, income tax on dairy farmers does not appear to be a major issue. For newlyestablished farms, profit in the first three years would be limited if the capital investment were financed by bank loans at current rates of interest.

5.1.6 Clarify the zones of development of intensified livestock production and

establish control of those zones This may be particularly related to the control of accessible pastures for dairy cowgrazing

Actions re objective 3.2.2

Conduct policy re forms of intensified farms

5.3.1 Organize training, demonstrations and education Consider a role and possible support for the Dairy Farmers Association.

5.3.2 (a) support work in artificial insemination The case study indicates that this is important for the development of the sector

(e) research and experiments to increase fodder productionFarmers have shown a clear interest in improved fodder production. The involvementof progressive farmers in trials and experiments would speed the adoption of trials which show clear financial benefits.

5.3.3 create conditions for the supply of quality fodder, tenure of land necessary for

production

(f) support fencing and protection of agricultural lands

Fodder production trials should include a financial evaluation, which includes the costs of protection, including fencing, and the returns on capital investment.Experience has shown that the trials and the evaluation must be undertaken for several years on the same farms.

5.3.4 support co-operation of intensive livestock farmers

(c) co-operative pasture tending, fodder preparation, irrigated fodder

production and expansion of sales

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Some of the farms in the survey have shown clearly the benefits of co-operation. They should be encouraged, and supported, in publicizing the benefits that they have experienced. The Dairy Farmers Association and the Extension Service of MoFA could play an important role in this.

7.2 Resolution of Ikh Hural, 29, 15 June 2003

Implementation stages

Initial (2003-2008)

Legal framework and economic conditions for sustainable growth of livestock

will be created

Preparations for the improvement of livestock breeds and health will be

undertaken

There will be the beginnings of rehabilitation of intensified livestock

production

Model farms will be establishedAs a first step, the analysis has shown that it would be more cost effective to develop and use some of the existing, progressive farms as models. In practice, they are already fulfilling this role on an unofficial and unsupported basis.

Food production policy

Establish in rural areas milk reception, primary processing and storage facilities for further processing in towns, in addition to production of traditional dairy products. Milk reception facilities are a necessity but experience in other countries has shown that, without very strict management and control, two stage processing can result in major quality control problems.

Improve the food quality and hygiene safety control system and elevate laboratoryinspections to international standard. The brief review of the market and processing systems has shown that the testing

function is weak and requires strengthening. A practical problem of raising the quality, to the highest international standards, of all milk sold is that packaged milkand dairy products are expensive and difficult to afford for the poorer sections of the community.

Establishment of Model Farms

The experience of establishing model farms in the semi-intensive dairy sector hashighlighted a number of factors critical to the likely success of this developmentapproach.

The most important is that there must be an accessible remunerative market for theproducts.

Demonstrations often have two main purposes:

Demonstration of technical innovations, such as the promotion of fodder crops and silage and

Demonstration in more remote area of a proven successful business model, after checking carefully that the market conditions are favorable.

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In the first case, it is normally more effective to use as a pilot an established,successful farm, where the farmer is accustomed to maintaining records and is prepared to co-operate in the necessary financial evaluation. Such farms exist in thesemi-intensive dairy sector.

Fodder Crops

Government policy is to “provide support to intensive and semi-intensive dairy and meat farms in increasing outputs through increase production and use of supplementary feed and fodder, including concentrates, silage and mineralsupplements”.

For fodder crop production, a main thrust has been the inclusion of fodder crops in therotation of cereal farms. The location of such farms is generally not ideal for the establishment of dairy enterprises and it is likely that much of the fodder crop will have to be sold to herders and other livestock owners. The analysis of hay production costs has shown that the major component is the cost of transport and that the value of the standing crop, represented by the land fee, is relatively small. An unanswered question is “what premium will livestock owners be prepared to pay for higher qualityfodder? Quality is a consideration in price negotiations but a herder education and demonstration programme is likely to be required to achieve price premia sufficient tojustify the costs of fodder production.1

This suggests that two initial sets of trials would be useful for the dairy sector. One could be based near an established dairy farm in the peri-urban area, with theinclusion of a limited fodder crop area, specifically for the farm livestock. The other could be based on a cereal farm in the main crop growing area and would follow up trials which have been undertaken on crop farming systems and cultivation practices, such as minimum tillage.

Replication of the models to other areas should follow when a careful evaluation hasshown that the models have good prospects of long term financial viability. At thistime there are few, if any, clearly successful units integrating livestock and fodder crop production on a significant scale. The widespread introduction of units to demonstrate a financially untried system runs the risk of damaging farmer confidenceand this risk should be taken into account in any programme design.

Dairy Cattle Breeding

The Government Support Programme lays stress on animal breeding to improve the genetic potential and productivity of the herd. The dairy farm survey indicates that themarket for higher quality dairy animals is developing - but relatively slowly. Many dairy farmers around UB have concentrated on expanding their herds by maintainingas many as possible of the cows in production. The indication is that the size of the

1 It should be noted that the dairy survey did not include any fattening of male animalsfor beef production. No comment can be made, therefore, on the fodder market for livestock fattening or on the economics of fattening.

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larger herds is beginning to stabilize, which will mean that higher quality cows will become available for sale.

An objective should be to progressively upgrade the herd potential, at a rate which is within the increasing management capability of the farmers and of the support system – particularly veterinary services and feed quality. Specifically for the dairy sector,this does not require special farms in the short term – providing that the AI service continues to function and expand.

For most of the specialized dairy units, it seems likely that the factor currentlylimiting output is the feeding rather than the genetic potential. The “fat cow” problem raised during the workshop does indicate, however, that genetic potential may be alimiting factor on some farms. Salt is commonly used in the supplementary feeding. The use of mineral nutrition blocks should also be beneficial. If these were used in some of these dairy farms the potential results of a successful trial could be:

Increased output and profit for the trial farms;

A rapid transfer of the technique to other dairy farms in the area;

Development of a market for enterprises producing such blocks

Practical demonstration of the benefits of such blocks, for introduction to the herding population. (Effectively, the dairy farmers already practice recommended dzud mitigation techniques since their animals have access togood winter housing, reliable water supply and relatively good supplies of supplementary feed for winter and spring)

The quoted national average milk production per cow is only 394.1 liters. The average production per cow in the herds of the farmers surveyed is already far greater than the national figure and, reportedly, is continuing to increase. If the national figure were to rise significantly, there would probably be marketing difficulties in the less accessibleareas unless the number of cattle milked were to fall significantly.

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Appendix 1: Survey Questionnaire

Did your farm receive direct support from Danida?If yes, what was provided?Cattle housing equipment (specify) other (specify)Do you still have these facilities?What changes/improvements have you made subsequently? ……….

Does your farming include non-dairy activities?Please specify ……………….. (eg sheep, beef cattle, crops such as vegetables, other)

Is there any family member separated from the family?

If Yes, How many animals were given?

Does separated member/family engage in non-dairy activities?Please specify ………………..

How important for your family income is the dairy business? ……..

Is income from the dairy enough for sustaining family’s livelihood?

In which year did you start the dairy business here?

Is this your traditional family area or has your family migrated?

If migration, from which aimag?

If migration, did you bring cattle with you?If yes, how many?

Dairy herd structure

Number of cows …………….Number of heifers …………….Number of female calves …………….Number of bulls ……………Number of other male cattle older than 6 months ………How many calves were born in the past year? Male …. Female……..Which is the main month for calving? ………………What do you do with the male calves? ………………

What dairy animals were bought in the past year?Cows …… Heifers ….. Other ……….

What animals were sold in the past year?Pro