Spatial differences in Peru's milk production

In 1999, more than 1 million tons of milk were produced in Peru, most of it (more than 95%) on the coast and in the highlands (Figure 1). Peru's milk production is concentrated in 3 main milksheds that host all major dairy enterprises (McBride 1997): Arequipa (including Tacna and Moquegua) in the south, Cajamarca in the north, and Lima in the center. These 3 regions produce half of Perumilk (Figure 2). As in other milk-producing regions, small-scale farming dominates milk production in these milksheds; in all 3 regions, at least 95% of all milk-producing farms have herds with fewer than 20 animals (Table 1).

Nonetheless, there are considerable differences between these milksheds. In Cajamarca, milk production commonly complements agricultural crop production. Under highland conditions as they exist in the area, available resources (eg, water, land, labor, manure, crop residues) are better used in mixed farming systems (Jodha 2000). In contrast with sales from crop production, which are very seasonal because of the pronounced rainy season (from November to May), sales of milk, cheese, and meat provide important income for small-scale farmers throughout the year (Wiegers et al 1999). Moreover, animals are important “living savings accounts” that help prevent liquidity shortfalls due to the common lack of access to bank loans (Ørskov 1993).

Differences in altitude and slope and access to water and land imply structural differences between different farm types. Valley bottoms (2800–3200 m) in general have much better access to water than slope areas (3200–3500 m) and upper hills (Jalca; >3500 m) (Bernet and Tapia 1999). Hence, milk production levels are higher in the valley bottoms where permanent pastures are cultivated. In the other 2 zones, feeding problems in the dry season call for rustic cattle types, also used for animal traction (Malpartida et al 1995). Jalca farmers have the advantage of accessing vast natural pastures at higher altitudes (Figure 3a). But in these remote areas, farmers face greater market access problems and thus receive lower milk prices (Mosley 1982).

In Arequipa, most milk is produced in the irrigation zones on the coast, where farmers produce both milk and agricultural crops (eg, onions, garlic, potatoes). Because of the particularly high price risk for agricultural crops, milk production—despite its lower profitability compared with agricultural crops—plays an important role in providing farmers with the necessary security and equity for crop production (Bernet et al 2001b). Milk production is primarily based on alfalfa, which is pastured, and corn, used fresh or ensiled (Figure 3b).

In Lima, milk production is based on stable feeding. Fresh corn and feed concentrates are the main sources of feed. Small farms have deficient fodder and herd management, primarily because they lack capital and know-how. Particularly large farms (up to 800 head) are run efficiently and professionally by contracted labor.

Current competitiveness of milk production

Results show that the competitiveness of milk production varies strongly between and within milksheds (Table 3). Varying profits between the different farm sizes within the same milkshed are determined by the relative magnitude of economies of size, expressed both on the income side (ie, better negotiation power for milk prices, improved management) and the cost side (ie, lower expenditure per cow). Economies of size are very pronounced in large agrobusiness farms near Lima. Contracted specialists and stable-feeding allow high milk productivity at low cost due to the increased negotiation power in the purchase of inputs, especially feed. The higher milk yields on large farms compared with medium farms explain one third of the difference in profit per cow; two thirds is explained by reduced costs in capital, feed, and labor. In Arequipa, larger farms are primarily competitive because they are in a position to negotiate higher milk prices with processors.

In Cajamarca, average milk production costs are reduced only on larger slope farms and Jalca farms. On larger slope farms, savings occur in providing feed for animal traction used for growing agricultural crops. On large Jalca farms, average pasturing costs are lower since 1 person takes care of a larger herd. In contrast, on valley and slope farms, the time required for pasturing increases in proportion to the increment in herd size, as animals are pastured by tethering (Bernet and Tapia 1999). In the valley, large farms are even less competitive than medium-size farms because they require additional, more expensive labor.

The relatively low profitability of milk production in slope areas reflects the strong fodder constraints for dairy cattle in this production zone. Limited access to water and land constrains both permanent fodder crops and natural pastures. Hence, milk production is primarily attractive for larger slope farms, where crop residues partly compensate for the lack of green fodder as farmers tend to shift away from labor- and capital-intensive crops (potatoes and oca) toward extensive ones (cereals, beans, and peas) when more land is available. In this context, animal sales, traction, and manure account for a high percentage of the adjusted milk price (Table 3).

At the national scale, it is important to note that the current import taxation scheme for dairy products protects domestic producers effectively from low international milk powder prices. When FOB prices are low, the application of a variable import tax (higher when world market prices are low) evens out the import price per liter of milk at around US$ 0.35 (see Figure 2). The minimum import price is higher than what processors pay for regionally collected milk (production and collection costs) ( in Figure 4).

Expected changes in competitiveness

Currently, milk prices in Lima appear to be too high since it is just as cheap to transport milk from Arequipa (Majes) to Lima as to buy it directly in Lima (Pa' in Figure 4). When the milk is condensed before transportation (in general, by a factor of 3 through evaporation), processors are in any case better off buying their milk in Arequipa or Cajamarca than in Lima (Pa” and Pc” in Figure 4), as is currently happening (Laive 2000). Milk prices in Lima are likely to be reduced by 15–20% as a consequence of reduced competition (eg, Friesland's processing plant was sold to Gloria SA in 2000) and of Lima City's market saturation with fresh and bulky dairy products, such as yogurt and pasteurized milk.

In contrast, milk prices are expected to rise slightly in Arequipa and Cajamarca as a consequence of increased competition among milk buyers, further growth of the coastal urban markets, and an expected rise in the price of milk powder (import price) in future (Konandreas 1999).

Such regional milk price changes will strongly affect farmers' competitiveness in milk production. Milk producers in Lima will be hurt most since their intensive production systems are highly susceptible to milk price changes. Profits on large farms are likely to decline by 50% if milk prices decline by 20% (Figure 5). Since such milk prices will threaten the survival of medium and small farms, the consolidation process of efficiently managed large farms in Lima will speed up, provoking further improvements in herd and fodder management to increase average milk yields and lower average production costs. Another strategy will be to build alliances among producers to raise negotiating power for purchasing high-quality feed at low cost (Bernet et al 2000).

In Arequipa, a price-induced increase in milk profits is likely to be compensated with higher labor costs driven by increased labor demand for agricultural (cash) crops. However, most relevant for the region's development is the fact that—independent of any increase in milk prices—farmers will shift away from milk production when price fluctuations of agricultural crops diminish (Bernet et al 2001b). This trend has already started in one area where a milk processing plant has been closed since most milk producers have shifted toward olive production subsequent to the establishment of an olive oil company (Laive 2000).

Cajamarca will benefit most from a future milk price increase (Figure 5). Given the current low income levels, higher profits considerably improve farmers' savings and investment capacity to further boost production and income. One likely consequence is the implementation of better fodder and herd management practices, through which these farms would become much more competitive—especially if fodder conservation is implemented (Figure 5). In valley farms, the combination of improved fodder and herd management could double agricultural income, as shown in a previous study (Bernet and Leon-Velarde 2000).