Pakistan’s dairy sector: Business growth over revenue maximisation

By Ali Salman|

Published in The Express Tribune, May 30th, 2016|

It is a widely quoted fact that Pakistan is now the third largest producer of milk in the world. The country produces 40 billion litres of milk annually and the dairy sector contributes about 11% to the national GDP.

Now consider this related fact: the value of the world’s largest company of dairy products is also almost equal to 11% of Pakistan’s GDP, considering the world of only its dairy sector.

New Zealand exports almost 95% of the milk it produces and in 2014, it fetched around $11 billion in export income.

Production-centric approach vs value-centric model

In Pakistan, we have been highlighting the production numbers of milk, which hardly speaks of value addition. In the production approach, the quantity is highlighted, whereas in the value approach, the productivity and resultant economic gains are more important.

Most dairy farms are in the informal sector, thus they limit the possibility of investment in productivity and innovation that demands economies of scale.

One of the largest packaged milk industry claims to have 4,000 cows. In smaller countries such as Vietnam, the herd count on modern dairy farms has gone up to 30,000 heads.

The biggest dairy farm in the world, to no one’s surprise, will be in China with 100,000 cows.

Larger herd size, that may comprise even 50 heads, can bring a lot of certainty in the business contracts a farmer may enter. Our average herd size, on the other hand, is hardly 10 cows.

In an informality driven market, there is no incentive to innovate, grow and scale-up. Pakistan’s milk market is essentially informal – where the packaged milk industry accounts for only 6% of total milk consumption in the country.

Given the budget season, how can we leverage the fiscal policy to make, for example, this sector more organised?

A fundamental feature of a good tax policy is its ability to encourage more business, growth and jobs creation. A bad tax policy, on the other hand, can force business firms to remain small, fragmented or even out of the tax net, i.e. remain informal.

According to some news sources, the government is considering moving away from zero-rating of sales tax on the packaged milk. If this becomes part of the budget, it would increase the cost of milk for end-consumer, especially young children.

This will also problematic because the dairy industry will not be allowed to adjust against any input claims, hence increase in the price of milk by Rs6/8 per litre.

The government, instead, should take concrete measures to refund the stuck billions in input-output adjustment.

According to the industry sources, around $800 million of foreign and local investment has taken place in dairy farms and the dairy processing sector over the last five years in Pakistan

However, the potential is enormous. A good example is Friesland Campania which will be acquiring management stake of a large local dairy company by investing $450 million.

Turkey has transformed its dairy sector in the last decade or so where the processed/packaged milk industry now comprises 70% of the market, up dramatically from 30% just a few years ago.

Pakistan’s industry can catch up in huge leaps by going from the baseline of 6% to at least 25% by 2025.

I am not arguing that the government should necessarily offer direct subsidies to the firms but the imposition of new taxes, which is also against the PML-N manifesto, must be avoided.

Direct government assistance is usually misused by firms, therefore, the government and industry should rather envision consolidation, economies of scale and the resultant rise in productivity.

About 10 years ago, a White Paper by the government declared that “the white revolution is at hand”. It projected that by 2015 the formal market of milk products would reach to 40%, wherein today, we are at 6%.

While its projection of achieving 40 billion litres per annum – from a base of 33 billion litres – was realised, one can argue that this growth was bound to occur on the basis of population growth itself. The so called white revolution is still years, if not decades away.

Whether it is the dairy or any other sectors, the finance minister should change his goal posts in his forthcoming budget from revenue maximisation to business growth.

It is not the growth in government revenue, but growth in businesses which can generate much-needed jobs, prosperity and economic security. A finance minister just embroiled in revenue collection would not be able to see the growth opportunities at the level of a firm.

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