The IndoDairy Smallholder Household Survey From Farm-to-Fact

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Osborne Harrison
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The Centre for Glol Food nd Resources The IndoDiry Smllholder Household Survey From Frm-to-Fct Fctsheet 7: Diry Frming

IndoDiry Smllholder Household Survey (ISHS) Frm-to-Fct series y ssessing diryrelted costs, revenue nd profitility cross

In ddition, the 600 households re ctegorised into qurtiles sed on their profitility, which llows us to identify

Benchmrking The enchmrking tool ehind the ctegoristion nd clcultion of cost, revenue nd profit is sed on model used in the

Profitility is clculted using the following formul: Totl milk revenue - (Vrile costs + Overheds + Other usiness costs)

of lctting cows Where: Totl milk revenue: fresh milk sles (net milk delivery costs), processed milk sles (e.g. yoghurt) nd the vlue of milk consumed y household memers nd clves.

1 The Centre for Glol Food nd Resources The IndoDiry Smllholder Household Survey From Frm-to-Fct Fctsheet 7: Diry Frming Costs, Revenue nd Profitility Bckground This fctsheet uilds on the informtion summrised in Fctsheets 3 nd 4 of the IndoDiry Smllholder Household Survey (ISHS) Frm-to-Fct series y ssessing diryrelted costs, revenue nd profitility cross the four districts: Bogor, Cinjur, Bndung nd Grut. In ddition, the 600 households re ctegorised into qurtiles sed on their profitility, which llows us to identify chrcteristics of more versus less profitle diry frmers. Benchmrking The enchmrking tool ehind the ctegoristion nd clcultion of cost, revenue nd profit is sed on model used in the Austrlin diry industry, developed y the project collortor, Sutropicl Diry. Profitility is clculted using the following formul: Totl milk revenue - (Vrile costs + Overheds + Other usiness costs) Profit/cow/yer = No. of lctting cows Where: Totl milk revenue: fresh milk sles (net milk delivery costs), processed milk sles (e.g. yoghurt) nd the vlue of milk consumed y household memers nd clves. Vrile costs: Forge costs, concentrte nd supplement costs, feed delivery costs, helth products nd veterinry fees, rtificil insemintion costs nd wter costs. Overheds: Employed lour costs, txes, electricity costs, coopertive memership, recorder fees nd other memerships. Other usiness costs: Lnd rent nd interest on lons. Note: All revenue nd costs were clculted per nnum in IDR.

2 Cost (IDR/L) Finncil comprison y district Production costs One of the key ojectives of the ISHS is to improve the understnding of input costs nd overheds relted to diry production. In order to identify the level of current outly t which the frmers re operting we sked the frmers to identify opertionl expenses incurred on the frm for mngement of the diry frm opertion, mintining herd helth nd nutrition. In ddition, frmers were sked out rnge of frm mngement costs, including txes, interest on lons nd hired lour. The results re shown in Tle 2. Annul production costs The mjor vrile costs for the diry frmers relte to the purchse of forge, concentrtes nd supplements, feed delivery costs nd herd costs (e.g. veterinry nd herd helth, wter costs) relted with mintining the herd on the frm. On verge, cross the four districts, totl vrile costs re 34 million IDR (USD $2,351) per nnum nd totl frm cost is 38 million IDR (USD $2,628). Concentrtes nd supplements ccount for the lrgest shre of costs, mking up pproximtely 75% of totl costs. On verge, these costs sum to 29.4 million IDR, (pprox. USD $2,000) nnully. There is significnt vrition etween the districts, with households in Bogor spending more thn twice s much in concentrtes s compred to households in Grut. Multiple fctors could e ffecting this, such s frm size, which is higher in Bogor; nd rrngements in plce with the corresponding diry coopertives, which re mjor source of inputs for frmers. Other mjor costs relted to diry frming re hired lour (2.5 million IDR or USD $171 per nnum), feed delivery costs (2 million IDR or USD $138 per nnum), nd herd costs (1.5 million IDR or USD $104 per nnum). Production costs per litre of milk To help ccount for differences in fctors ffecting totl costs, such s frm size, we lso nlysed costs nd revenue per litre of milk produced. See Figure 1 (elow) nd Tle 3 for the rekdown of costs per litre of milk produced. 3,500 3,000 2,500 2,000 1,500 1, Forge costs Concentrtes nd supplements Feed delivery costs Herd costs Employed lour Other overheds Other usiness costs Figure 1. Milk production costs per litre of milk produced grouped y district. 2

3 Cost (IDR/L) Revenue (IDR/L) The overll high costs of concentrtes nd supplements (2,150 IDR/L, or USD $0.14/L) is lso reflected in these figures. While frmers in Bogor py the highest rte for concentrtes, we see in the sections elow, tht these frmers re lso receiving higher revenue from milk sles. The totl cost incurred y diry frmers for producing litre of milk is 2,750 IDR (USD $0.19/L). Fmily lour The time contriuted to diry-relted ctivities y fmily memers is significnt opportunity cost for the household nd is estimted to e n dditionl in-kind 20.6 million IDR (USD $1,425) per nnum (see Tle 2). Frmers in Bndung nd Cinjur hve the highest in-kind contriution in lour with 22.5 nd 22 million IDR (USD $1,556 nd $1,521) per nnum, respectively. The vlue of time contriuted y fmily memers to producing litre of milk is shown in Tle 3. On verge, fmily lour equtes to pproximtely to 2,160 IDR per litre (USD $0.15/L). When compred to totl csh costs, diry household memers contriute lmost the sme vlue s in-kind time. This is especilly true in Bndung (s seen in Figure 2). A lter fctsheet will look t specific detils regrding oth fmily nd hired lour; however, mjor ctivity is hrvesting nd collecting grsses. This lso explins the low csh cost of forges in Figure 1 (ove). Revenue from milk production Annul revenue The verge revenue derived from the fresh milk sles (minus cost of delivering the milk) is 63.9 million IDR (USD $4,419) per nnum (see Tle 2). The revenue derived from fresh milk sles is highest in Bogor district (90.90 million IDR or USD $6,287) s compred to the other districts. Frmers in the Grut district hve the lowest revenue on verge, with less thn hlf tht of Bogor frmers (42.0 million IDR or USD $2,905 per nnum). Other spects of diry opertions considered while clculting the totl frm revenue re the vlue of milk consumed nd fed to clves (2.61 million IDR or USD $181) nd sles from processed milk (1.34 million IDR or USD $93). Bogor district frmers lso hve the highest revenue from processed milk sles (9.90 million IDR), which is negligile for the other three districts. The verge totl revenue from milk production cross the four districts is million IDR (USD $4,695) per nnum. Revenue per litre of milk produced Figure 3 shows vlue per litre sed on the three ctegories of revenue cross the districts. On verge, the revenue derived from the sle 3,500 6,000 3,000 2,500 2,000 1,500 1, ,000 4,000 3,000 2,000 1, Fmily lour Totl costs Fresh milk Consumed milk Processed milk Figure 2. Cost of fmily lour, compred to totl csh costs, per litre of milk produced. Figure 3. Revenue per litre of milk produced. 3

4 Vlue (IDR/L) of one litre of fresh milk (minus delivery costs) is 4,390 IDR (USD $0.30), s shown in Tle 3. When including the vlue of processed milk sles nd consumed milk, the totl revenue from litre of milk produced is 4,760 IDR (USD $0.33). Profitility Figure 4 illustrtes the cost, revenue nd profit from production of litre of milk cross the four districts. Frmers in Bogor district hve significntly higher revenue (5,550 IDR or USD $0.38 per litre) nd costs (3,330 IDR or USD $0.23 per litre) compred to the other districts (p < 0.01). Frmers in Cinjur receive the lowest revenue cross the four districts with 4,480 IDR (USD $0.31) per litre t cost of 2,400 IDR (USD $0.17) per litre. Despite the significnt vrition in revenue nd costs, there re no significnt differences etween profit per litre of milk produced cross the districts. Comprison of profit qurtiles In order to identify chrcteristics tht improve profitility, frmers hve een ctegorised sed on the verge profit received per lctting cow mnged. Frmers were grouped into four equl groups (n = 150) sed on profit per cow per yer. The verge profit per cow per yer for ech qurtile is shown in Tle 1 elow. Tle 1. IndoDiry profitility qurtiles Qurtiles Averge profit per cow per yer IDR USD 1 Qurtile 1-258, Qurtile 2 8,831, Qurtile 3 13,800, Qurtile 4 23,900, Exchnge rte 1 USD = 14, Indonesin Rupih on 27 July 2018 Production costs A comprison of production costs sed on profit qurtiles is shown in Tle 4. Frmers with low profits (Qurtile 1) re operting with significntly higher costs of production compred to the frmers with high profits (Qurtile 4). A mjor difference etween the qurtiles is the costs ssocited with concentrtes nd 6,000 5,547 5,000 4,703 4,477 4,578 4,756 4,000 3,327 3,000 2,000 2,827 1,875 2,220 2,399 2,453 2,077 2,125 2,749 2,007 1,000 - Production Costs Revenue Profit mrgin Figure 4. Totl production costs, revenue nd profit per litre of milk y district. 4

5 Vlue (IDR/L) supplements with the Qurtile 1 (Q1) frmers (38.60 million IDR or USD $2,670 per nnum) spending, on verge, twice s much s frmers in Qurtile 4 (Q4) (19.20 million IDR or USD $1,328 per nnum). A similr pttern is oserved with other costs such s forges, employed lour, herd costs nd other usiness costs (e.g. interest on lons nd lnd rent) with frmers in Q1 spending more compred to frmers in Q4. This is lso reflected on the costs nd expenses incurred y frmers on the production of milk per litre s shown in Tle 5. Diry frmers in Q1 hve significntly higher costs per litre of milk; three times more thn Q4 frmers. Revenue The verge nnul revenue derived from diry production per nnum for ech of the profit qurtile is shown in Tle 4. The totl revenue derived from milk production y Q1 ws million IDR (USD $3,790) per nnum nd million IDR (USD $5,242) for Q4. This mens, on verge, Q4 generte 21 million IDR (USD $1,452) more thn Q1 per nnum, which is pproximtely 38% more. When this dt is oserved on per-litre-of-milk sis, s shown in Tle 5, totl revenue for Q1 is 4,740 IDR (USD $0.33) nd Q4 is 4,980 IDR (USD $0.34) per litre. Profit While frmers in Q4 hve significntly higher revenue compred to the other qurtiles, the mgnitude of difference is considerly smller compred to the difference in production costs etween qurtiles. To illustrte this point, production costs nd profit per litre of milk produced is presented y qurtiles in Figure 5 elow. The re represented y the drk lue in Figure 5 is profit received per litre of milk produced. The totl height of ech column represents totl revenue per litre of milk produced. Totl revenue received per litre of milk produced increses y IDR (USD $0.01) etween Q1 nd Q4, while production costs drsticlly drop y 3,121 IDR (USD $0.22). 6,000 5,000 4,000 3,000 2,000 1,000 - Qurtile 1 Qurtile 2 Qurtile 3 Qurtile 4 Forge costs Concentrtes nd supplements Feed delivery costs Herd costs Employed lour Other overheds Other usiness costs Profit Fmily lour Figure 5. Comprison etween profit qurtiles of production costs, profits nd fmily lour per litre of milk produced. The totl height of ech column represents totl milk revenue, while the drk lue section represents profits. The lck line represents the vlue of fmily lour. 5

6 Totl Grut 16% 32% 26% 26% Cinjur 30% 20% Bogor 38% 11% 18% 34% Bndung 26% 24% 27% 24% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Qurtile 1 Qurtile 2 Qurtile 3 Qurtile 4 Figure 6. Distriution of profit qurtiles y district. Fmily lour The contriution of fmily lour is lso represented in Figure 5 (shown y the lck line) s n estimted cost per litre of milk. Overll, Q4 re spending significntly less time nd still gining sustntilly higher returns for their efforts. Profit distriution y district A summry of districts y profit qurtile is shown in Figure 6 nd Tle 6. There is significnt differences etween proportions of frmers in ech qurtile cross the four districts. In Bogor, we see greter proportion of frmers in Q1 nd Q4, while fewer in Q2 nd Q3. This indictes tht more frmers re towrds the extreme ends of profitility, rther thn middle rnge. Grut hs fewer frmers in Q1 (lest profitle) nd slightly more in Q2. Cinjur hs slightly fewer frmers in Q4 (most profitle) nd more in Q2. Conclusions This fctsheet illustrtes tht profitility is lrgely determined y reducing overll costs, not higher revenues. Therefore, ctegorising the frmers in these profit qurtiles hve llowed us to identify set of frmers tht re le to chieve higher profits with efficient mngement nd control of costs. In order to determine other drivers of profitility within the IndoDiry Smllholder Household Survey (ISHS), the susequent fctsheets will ssess differences etween qurtiles of frming chrcteristics, including: socio-demogrphic, frm nd cttle chrcteristics, mngement prctices nd technology doption. 6

7 Appendix to Fctsheet 5 This ppendix lists detils milk production costs, revenue nd profits s n nnul nd per litre vlue. These re disggregted y districts (Tle 2-3) nd profit qurtiles (Tle 4-5). Sttisticl significnce etween districts nd profit qurtiles were determined using ANOVA (for inry nd continuous vriles) nd Person s Chi-squred test (for ctegoricl vriles). For ctegoricl vriles with smll oservtions (n < 5), Fisher s exct test ws used to confirm the Chi-squred test. ANOVA nd Chi-squred tests results re shown in the right-hnd column, under the Totl. Pirwise comprisons were performed for continuous nd inry vriles using Tukey tests when the ANOVA test ws trending towrds significnt (p < 0.10). Districts nd profit qurtiles with the sme letter re not significntly different t the 5% level (p > 0.05). 7

8 Tle 2. Totl nnul milk production costs nd revenue y district (n=600). Vriles Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vrile costs: Forge costs * Concentrtes nd supplements *** Feed delivery costs *** Herd costs *** (A) Totl vrile costs *** (B) Employed lour costs c c *** (C) Other overheds # *** (D) Other usiness costs! (E) Totl costs (A + B + C + D) *** Milk revenue: Fresh milk sles^ *** Vlue of consumed milk & *** Processed milk sles *** (F) Totl milk revenue *** (G1) Revenue over vrile costs (F A) *** (G2) Revenue over totl costs (F E) *** (H) Numer of lctting cows mnged *** (I) Profitility per cow per yer (G2 / H) Opportunity costs: Owner's lour? *** 1 Vlue = Indonesin Rupih (IDR) in millions; 2 SD = Stndrd Devition; 3 Sig = Significnce; * p < 0.10, ** p < 0.05 nd *** p < 0.01 indicte significnce t the 10%, 5% nd 1% levels, respectively. Pirwise comprisons were performed for continuous nd inry vriles using Tukey tests when the ANOVA test ws trending towrds significnt (p < 0.10). Districts with the sme letter re not significntly different t the 5% level (p > 0.05). + Herd costs include: Cttle helth products, veterinry fees, rtificil insemintion costs nd wter costs; # Other overheds include: txes, electricity costs, coopertive memership, recorder fees, other memership fees;! Other usiness costs: Lnd rent nd interest on lons; ^Fresh Milk Sles is revenue from milk sles t the KUD fter deducting milk delivery costs; & Vlue of milk consumed y household memers nd clves.? Owner s lour is the estimted vlue of household memers time towrds diry-relted ctivities, clculted y the mount of time spent multiplied y the hired lour rte. 8

9 Tle 3. Production costs nd revenue per litre of milk produced y district (n = 600). Vrile Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vrile costs: Forge costs Concentrtes nd supplements c c *** Feed delivery costs Herd costs *** Totl vrile costs c c *** Employed lour costs * Other overheds # *** Other usiness costs! Totl costs *** Milk revenue: Fresh milk sles^ *** Vlue of consumed milk & ** Processed milk sles *** Totl milk revenue *** Revenue over vrile costs * Revenue over totl costs Opportunity costs: Owner's lour? Vlue = Indonesin Rupih (IDR) in thousnds; 2 SD = Stndrd Devition; 3 Sig = Significnce; * p < 0.10, ** p < 0.05 nd *** p < 0.01 indicte significnce t the 10%, 5% nd 1% levels, respectively. Pirwise comprisons were performed for continuous nd inry vriles using Tukey tests when the ANOVA test ws trending towrds significnt (p < 0.10). Districts with the sme letter re not significntly different t the 5% level (p > 0.05). + Herd costs include: Cttle helth products, veterinry fees, rtificil insemintion costs nd wter costs; # Other overheds include: txes, electricity costs, coopertive memership, recorder fees, other memership fees;! Other usiness costs: Lnd rent nd interest on lons; ^Fresh Milk Sles is revenue from milk sles t the KUD fter deducting milk delivery costs; & Vlue of milk consumed y household memers nd clves.? Owner s lour is the estimted vlue of household memers time towrds diry-relted ctivities, clculted y the mount of time spent multiplied y the hired lour rte. 9

10 Tle 4. Totl nnul frm milk production costs nd revenue y profit qurtile, where frmers in the Qurtile 1 re the lest profitle per cow per yer nd frmers in Qurtile 4 re the most profitle (n = 600). Qurtile 1 Qurtile 2 Qurtile 3 Qurtile 4 Totl Vriles Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vrile costs: Forge costs Concentrtes nd supplements *** Feed delivery costs *** Herd costs (A) Totl vrile costs c c *** (B) Employed lour costs *** (C) Other overheds # ** (D) Other usiness costs! ** (E) Totl costs (A + B + C + D) *** Milk revenue: Fresh milk sles^ ** Vlue of consumed milk & Processed milk sles (F) Totl milk revenue ** (G1) Revenue over vrile costs (F A) *** (G2) Revenue over totl costs (F E) *** (H) Numer of lctting cows mnged *** (I) Profitility per cow per yer (G2 / H) *** Opportunity costs: Owner's lour? Vlue = Indonesin Rupih (IDR) in millions; 2 SD = Stndrd Devition; 3 Sig = Significnce; * p < 0.10, ** p < 0.05 nd *** p < 0.01 indicte significnce t the 10%, 5% nd 1% levels, respectively. Pirwise comprisons were performed for continuous nd inry vriles using Tukey tests when the ANOVA test ws trending towrds significnt (p < 0.10). Qurtiles with the sme letter re not significntly different t the 5% level (p > 0.05). + Herd costs include: Cttle helth products, veterinry fees, rtificil insemintion costs nd wter costs; # Other overheds include: txes, electricity costs, coopertive memership, recorder fees, other memership fees;! Other usiness costs: Lnd rent nd interest on lons; ^Fresh Milk Sles is revenue from milk sles t the KUD fter deducting milk delivery costs; & Vlue of milk consumed y household memers nd clves.? Owner s lour is the estimted vlue of household memers time towrds diry-relted ctivities, clculted y the mount of time spent multiplied y the hired lour rte. 10

11 Tle 5. Production costs nd revenue per litre of milk produced sed on profit qurtiles, where frmers in the first qurtile re the lest profitle per cow per yer nd frmers in the fourth qurtile re the most profitle (n = 600). Qurtile 1 Qurtile 2 Qurtile 3 Qurtile 4 Totl Vrile Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vlue 1 SD 2 Sig 3 Vrile costs: Forge costs *** Concentrtes nd *** supplements Feed delivery costs *** Herd costs ** Totl vrile costs *** Employed lour costs *** Other overheds # *** Other usiness costs! *** Totl costs *** Milk revenue: Fresh milk sles^ *** Vlue of consumed milk & *** Processed milk sles Totl milk revenue ** Revenue over vrile costs *** Revenue over totl costs *** Opportunity costs: Owner's lour? *** 1 Vlue = Indonesin Rupih (IDR) in thousnds; 2 SD = Stndrd Devition; 3 Sig = Significnce; * p < 0.10, ** p < 0.05 nd *** p < 0.01 indicte significnce t the 10%, 5% nd 1% levels, respectively. Pirwise comprisons were performed for continuous nd inry vriles using Tukey tests when the ANOVA test ws trending towrds significnt (p < 0.10). Qurtiles with the sme letter re not significntly different t the 5% level (p > 0.05). + Herd costs include: Cttle helth products, veterinry fees, rtificil insemintion costs nd wter costs; # Other overheds include: txes, electricity costs, coopertive memership, recorder fees, other memership fees;! Other usiness costs: Lnd rent nd interest on lons; ^Fresh Milk Sles is revenue from milk sles t the KUD fter deducting milk delivery costs; & Vlue of milk consumed y household memers nd clves.? Owner s lour is the estimted vlue of household memers time towrds diry-relted ctivities, clculted y the mount of time spent multiplied y the hired lour rte. Tle 6. Distriution of profit qurtiles y district (n = 600). Vrile Qurtile 1 Qurtile 2 Qurtile 3 Qurtile 4 Totl Sig 1 District: Bndung 25.7% 24.0% 26.7% 23.7% 100% *** Bogor 37.5% 11.3% 17.5% 33.8% 100% *** Cinjur 25.0% 30.0% 25.0% 20.0% 100% *** Grut 16.4% 32.1% 25.7% 25.7% 100% *** Totl 25.0% 25.0% 25.0% 25.0% 100% 1 Vlue is percentge; 2 Sig = Significnce; * p < 0.10, ** p < 0.05 nd *** p < 0.01 indicte significnce t the 10%, 5% nd 1% levels, respectively. 11

THE FINAL PROOF SUPPORTING THE TURNOVER FORMULA.

THE FINAL PROOF SUPPORTING THE TURNOVER FORMULA. I would like to thnk Aris for his mthemticl contriutions nd his swet which hs enled deeper understnding of the turnover formul to emerge. His contriution