ECONOMIES OF SCALE IN BUFFALO MILK PRODUCTION IN DISTRICT DI KHAN

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2011 Institute of Interdisciplinary Business Research 548

APRIL 2011

VOL 2, N O 12

ECONOMIES OF SCALE IN BUFFALO MILK PRODUCTION

IN DISTRICT DI KHAN

Muhammad Sajjad

PhD student in Deptt: of Agricultural Economics Khyber PakhtunkhwA Agricultural University,

Peshawar, Pakistan.

Dr. Munir Khan

Dean Faculty of Rural Social Sciences, Khyber Pakhtunkhwa Agricultural University, Peshawar

Pakistan.

Nasir Ahmad

PhD scholar (Education) at Foundation University Islamabad

Abstract

The study was conducted during Febrauary 2009 in DI Khan district of Khyber Pakhtunkhwa

province of Pakistan with the objectives to find out cost and net revenue from buffaloes milk

production and to estimate return to scale in milk production. The results of Cobb-Douglas

production function suggest that buffaloe milk yield is more sensitive to change in herd Size i.e

one percent increase in herd size creates approximately 0.65 percent increase in milk yield, other

things being constant. While the labor, feed insignificantly contribute in milk yield. The results

of the model also suggest increasing return to scale. This indicates that increase in milk is higher

than the increase in inputs. It is concluded that buffaloe farming in the study area is a profitable

enterprise

Key words: Cobb-Douglas function, costs and revenue, Buffalo, returns to scale, milk

1. INTRODUCTION

The importance of dairy industry in the world can not be over emphasized since it contributes

significantly towards the economies of many countries. Dairy industry is a dynamic sub-sector

and is a major source of livelihood for million of households all over the world particularly in

developing countries. The total world milk production increased from 526.5 (Metric Tones) in

1991 to 655 (Metric Tones) in 2007. Thus, in last fifteen years increase in total milk production

was significant whereas the average annual increase was 2.5%. Out of total 35% of total world

milk is produced in Asia followed by Europe which contributes 33.47% towards total milk

supply. The strongest growth was in Asia, notably in China and India (FAO, 2007).

Agriculture is the largest sector of the Pakistan s economy, contributing 20.9 percent towards

gross domestic product (GDP) and employ 43.4 percent of total labour force. About 66 percent of

country s population is living in rural areas that depends directly or indirectly on agriculture to

earn their livelihood. Agriculture in Pakistan has mainly the crops and livestock sectors. Wheat,

cotton, rice, sugarcane and maize are the major crops of Pakistan whereas oilseed, masoor, mung

mash, onion and chilies are the minor ones. As far the contribution of Agriculture and its sub

sectors are concerned, the livestock sector has been growing constantly over the last decade or so.

Livestock sector provides livelihood to large number of poor people particularly in developing

counties. For example, Egypt, Kenya, Bangla- Desh and India are the countries where 50, 43, 55

and 65 percent of people depend respectively on the livestock sector for their livelihood. The case

of Pakistan is not much different from the aforementioned developing countries. For example,

according to a latest report approximately 30 - 35 million households in Pakistan depend on

livestock sector for their livelihood. The livestock sector of Pakistan is growing at a relatively

higher rate compared to crop sector since the contribution of livestock sector towards GDP

increased from 25.3% in 1995 to 49% in 2007. Within the livestock sector, milk, eggs and beef

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account for 72%, 20%, and 2.7% of the value of output respectively whereas, the remaining 5.3%

goes to other products (GOP, 2007).

Dairy industry in Pakistan has similar characteristics, like other developing Asian nations, which

include small herd, poor genetic potential of animals for milk, low quality of feeds, high risks of

epidemics, improper marketing channels, lack of commercial rations, limited access to credit,

weak mechanism of price regulation to check wide variation of prices at producers and consumer

levels and limited animal health coverage etc. Despite all the above problems, dairy animals,

mainly buffalo and cattle are producing 39.38 million tones of milk in Pakistan. Per capita

availability of milk in Pakistan is 85.49 kg annually which is increasing at the rate of 2.44%

annually. This quantity of milk provides more than half of the 17.4 g of animal protein available

for each Pakistani per day. But Pakistan still is to import dry milk and other milk products e.g.

butter, cheese, yogurt, cream, whey etc. every year to fulfill the ever increasing demands for milk

and milk products. During 2007-08 Pakistan milk and other dairy products worth 1267.185

million rupees.

The national herd consists of 29.6 million cattle, 27.3 million buffalos, 26.5 million sheep, 53.8

million goats and 0.9 million camel. In addition to these there is a vibrant poultry sector in the

country with more than 530 million birds produced annually.

The distribution of milch animals is not even among different provinces. Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan provinces host 60.8, 31.8, 6.3 and 1.1% buffalo population respectively. Province-wise distribution of cattle is relatively less skewed than buffalo as Punjab, Sind, Khyber Pakhtunkhwa and Balochistan has 43.2%, 28.9%, 21.5% and 6.4% of the national cattle population respectively. Balochistan is famous for sheep production as this province alone has 44.2% of the sheep population of the country. Similarly the share of Punjab, Sind, Khyber Pakhtunkhwa and Balochistan in goat population is 37.1%, 23.8%, 17.5% and 21.6% in the same

order (GoP, 2007).

Milk, beef, mutton, poultry and eggs are the major livestock products. The total milk production

in Pakistan during 2007-08 was 42.199 million tons, making Pakistan fourth largest producer in

the world. In addition Pakistan produced 1.115 million tons of beef, 0.740 million tons of mutton,

0.040 million tons of wool, 0.023 million tons of hair and 45.5 million numbers of skins during

2007-08.

Within the livestock sector, milk is the largest and the single most important commodity. Milk

provides relatively quick returns for small-scale livestock keepers. It is a balanced nutritious food

and is a key element in household food security. Milk is mainly produced by rural households

who keep either cattle, buffalo, goats and sheep or a few of each in combination. The largest

proportion of milk (i.e. 80%) in Pakistan is produced by small farmers, majority of whom are

landless. The primary objective of these producers is to produce sufficient quantities of milk for

their own use and to sell the surplus to augment household income. In terms of total milk

production Buffalos and cows contributed 66.1% and 31.4% of milk by volume respectively

during 2007-08 (GoP, 2007-08).

Buffalo is the largest milk producing animal followed by cow as these two species produced

62.3% and 34.28% milk during 2007-08 respectively. Although the major part of milk is

produced by buffalo and cattle, however goat and sheep contribute towards total milk supply in

the country.

Although Pakistan is the 4th largest milk producing country in the world, however in terms of

yield per animal it is among the lowest. Comparison of average milk yield per animal in the

major milk producing animals shows that one New Zealand dairy animal produces as much milk

as three dairy animals in Pakistan; while one American cow produces as much as seven Pakistani

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cows (Garcia et al 2003). This difference in productivity is attributed to several factors such as

(genetics, management practices and technology etc.)

livestock in Khyber Pakhtunkhwa contributes 57.5% towards provincial GNP. This shows that

livestock is significant part of the Khyber Pakhtunkhwa economy. In Khyber Pakhtunkhwa total

milk production during the year 2007-08 was 5.044 million tones while per capita availability

was 141 kg per annum which is higher as compared to national level. khyber pakhtunkhwa is

milk deficit province and relies on milk from Punjab. Like other farm products, the milk

production has not been researched adequately in Pakistan.

2. Justification of Study

In Pakistan several studies carried out previously on livestock profitability are limited in their

scope and analysis since most of them simply describe some aspect of the institutional

arrangements. Thus, the existing literature on milk production is inadequate. Moreover, the

information that is available is outdated and not presented in a way, which is helpful to policy

makers. Most of the research studies (e.g. Ahmad, 1962; Anjum, 1978; Pirzada, 1981; Khan and

Schinzel, 1982; Wells and Ehsan, 1986; Abid, 1987; Haq, 1989; Ahmad, 1993 Ali and Chaudry

(1990), Shah et al (1995), Shafiq and Rehman (2000), Bashir et al (1994), Ahmad and Qureshi

(1999), Ahmad and Shami (1999) and Battese et al (1986)) undertaken so far are confined to

other provinces in country. The situation in North West Frontier Province (Khyber Pakhtunkhwa)

is even worse. Very a few studies pertaining to milk have been carried out ( Bhatti, 1975; Alam,

1992; Khan, 1999, Jamal 2003). Similar concern about the paucity of research studies about the

dairy sector has also been raised by other researchers (Ishaq, et al).

This study is therefore initiated to fill the gap in literature and also to be used by all stakeholders

having the following objectives:

i. To estimate the cost and net revenue from buffaloes milk production in district DI Khan.

ii. Determining return to scale in milk production.

3. MATERIALS AND METHODS

This section discusses the mechanics of the research study. It explains the universe of the study,

sampling technique, data source and analytical techniques.

3.1 Description of the Universe

For this study DI Khan district is purposively selected since its major milk producing districts in

Khyber Pakhtunkhwa (GoP, 2006). Also DI Khan host 205634 and 411432 Buffalos and cows

respectively. Majority of the farmers of this district keep livestock for agricultural purposes as

well as to supplement their income. DI Khan, have population of 1247000 with an annual growth

rate of 3.26%. The urban ratio is 14.7% and the literacy rate is 31.2%. The district of DI Khan is

a beautiful area with a historically strategic location and has traditionally been a crossroads for

many cultures and trading routes.

3.2 Data Collection Procedure and Sample Size

This research was based on primary as well as secondary data. The primary data was collected

through interview schedule, while the secondary data was amassed from various published and

unpublished sources.

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3.3 Sampling Technique

Data pertaining to dairy sector was collected from this districts by use of multistage stratified

random sampling technique. In first stage from said district two villages was randomly selected.

In second stage from these two villages 50 respondents from each village was included in the

sample.

3.4 Data Analysis

To find the economies of scale in milk production, the Cobb-Douglas production function was

used as follow (Parvez et al., 1985, Sadiq et al., 2003 and Sugiyanto, 1983).

Y= A (FS)1(GF)

2(DF)

3 (Conc)

4(L)

5 (H)

6 (B)

7(U)

8

(1)

Where, A measures the efficiency of the production function or the scale of production -

how much output is possible to create, if one unit of each input is used. Parameters s measure

how the amount of output responds to the changes in inputs (Varian 1993).

A depend on the measurement of FS, GF, DF, Conc, L , H, B and U, FS is farm size, GF

is Green Fodder cost, DF is dry fodder, Conc is concentrate cost, L is No. of labor, H is health

cost, B is building cost and U is utensil cost.

The relationship between output and input variables in Cobb-Douglas (1928) production

function (1) is nonlinear. However, if it is log-transformed, the following linear function is

obtained.

LnY = Ln A + 1ln FS+ 2ln GF+ 3ln DF+ 4ln Conc + 5ln L+ 6ln H+ 7ln B+ 8ln U (2)

This equation will be estimated by using Ordinary Least Square method. These collectively

measure return to scale. Thus if 1+ 2+ 3+ 4 + 5+ 6 + 7+ 8< 1 the result will be decreasing

return to scale, if 1+ 2+ 3+ 4 + 5+ 6 + 7+ 8> 1 reflect increasing return to scale and 1+

2+ 3+ 4 + 5+ 6 + 7+ 8 = 1 the result will be constant return to scale.

5. RESULTS AND DISCUSSION

5.1 Distribution of Livestock Population in the Study Area

Table I explains distribution of livestock population in the study area. Data shows that farmers

kept livestock in varying numbers. Buffaloes, cattle, goats, sheep and asses were raised in the

study area. In study area cattle were 44.26% followed by buffalo (31.19%), goats (16.83%),

sheep (6.14%), asses (0.89%) and (0.69%).

Table I Distribution of livestock population in the study area

Herd Size (Species Type) No Percentage

Buffalo 315 31.19

Cattle 447 44.26

Goat 170 16.83

Sheep 62 6.14

Asses 9 0.89

Camel 7 0.69

Total 1010 100.00

Source: Field Survey

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5.2 Costs and Revenue of Milk Production

Livestock in the study area were mainly kept for milk production and production of young. Table

shows that the average per buffalo cost of milk production in district DI Khan reveals that total

cost per buffalo has been Rs. 14015.20. The major cost items are dry fodder (Rs 3532.6), green

fodder (2897.2), concentrate/oilseed cake (Rs 5809.4), hired labor (308.9), permanent labor (Rs

222.5), Medicine and vaccination (Rs 637.7) fees by VOA/SA (Rs 347.9) and other cost ( Rs.

259). Table II Cost per Buffalo

Variables Unit Quantity Price/Unit Amount

Dry fodder Kg 712.7 3.6 3532.6

Green fodder Kg 918.2 2.3 2897.2

Con/oil seed cake Kg 285.4 15.6 5809.4

Hired Labor No 2.1 150.0 308.9

Permanent Labor No 1.5 150.0 222.5

Med and Vacc Rs. -- -- 637.7

Fee by VOA/SA Rs. -- -- 347.9

Other Rs. -- -- 259

Total Rs. -- -- 14015.20

5.3 Average Revenue from milk per buffalo

The farmers of the area received average revenues of Rs. 9089.70 from milk production per buffaloe per year.

Table III Average Revenue from milk per buffalo

Variables Unit Value

Quantity of milk Kg 575.32

Price/Kg Rs. 40.13

Value of Milk Rs. 23105.44

Average Revenue Rs. 9089.70

5.4 Results of Cobb-Douglas production Function and Economies of Scale

The results of Cobb-Douglas production function (Table IV) suggests that buffalo milk yield is

more sensitive to change in herd size, one percent increase in herd size creates approximately

0.65 percent increase in milk yield, other things being constant. labor, Concentrate significantly

contribute in milk yield while, Green fodder, dry foder, health, building and utensil contributes

but insignificantly. This indicates that increase in milk is higher than the increase in inputs. The

sum of the elasticity 1.84 indicates that farmers in the study area were operating in the increasing

return to scale regions. It is concluded that buffalos farming in the study area is a profitable

enterprise. Table IV Results of Cobb-Douglas Production function

A HS GF DF Conc L H B U Scale

Milk yield 0.657 -0.452 0.307 0.22 0.553 0.323 0.215 0.017 1.84

t- value 5.621 4.694 1.015 0.937 2.035 2.577 0.822 1.431 .349

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5. CONCLUSION AND RECOMMENDATIONS

In Khyber Pakhtunkhwa the farmers subsist on livestock farming, including Buffaloe, cattle,

sheep, goats, camel and horses. Cow and buffalo are traditionally utilized for milk, mutton, skin

and wool production. Buffaloe was fed on number of fodder and feed resources to meet the

nutritional requirements. Buffaloe in the study area were mainly kept for milk production. On the

cost side, labour and fodder were the main cost constituents. It is concluded that buffalo farming

in the study area is a profitable enterprise.

It is suggested on the basis of above finding that only few farmers were keeping crossbred

animals. The availability of improved breeds should be enhanced in the relevancy of the area and

awareness campaign should be launched regarding the artificial insemination approach. There is a

need for establishing modern milk processing and packaging facilities based on advanced

technology to convert abundantly available raw milk ( surplus in winter specially) into high value

added dairy products.

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ECONOMIES OF SCALE IN BUFFALO MILK PRODUCTION IN DISTRICT DI KHAN