Value Chain Finance to Dairy Sector-A Case Study of Eastern Uttar Pradesh

A ‘value chain’ in agriculture identifies the set of actors and activities that bring a basic agricultural product from production in the field to final consumption, where at each stage value is added to the product (FAO, 2010). The flows of funds to and among the various links within a value chain comprise what is known as the value chain finance (Miller, 2011). It uses an understanding of production value added and marketing process to determine financial needs and how to best provide financing to those involved (Soundarrajan and Vivek, 2015). It can improve the quality and efficiency in financing agricultural chains by identifying the financing needed to strengthen the chain, tailoring financial products to suit the needs of the participants in the chain, reducing the financial transaction costs through the direct discounting of loan payments at the time of product sale and using the value chain linkages and knowledge of the chain to mitigate risks to the chain and its partners (Soundarrajan and Vivek, 2015). Since, value chain financing considers every component of the value chain as a unit of financing, hence it can play significant role in the structural changes of various sectors of the agriculture.
       
Dairy sector offers a unique opportunity to produce variety of speciality products hence, the Indian dairy industry holds tremendous potential for value-addition and is a very grave area for investment. The success of dairy industry revolves around a triangle, viz. procurement, processing and marketing of dairy Products (Babu and Verma, 2010). Dairy sector also contributes important role in the improvement of rural incomes, nutrition security and women empowerment. Despite of this, non-crop sectors like dairy sector are still facing credit crunch. The total agricultural credit has been rising steadily each year and it has crossed Rs. 9 lakh crores in the FY 2017-18.  The crop loan accounts for more than 90 per cent of the total agricultural credit though its contribution to total output is approx. 60 per cent which means that the allied sector gets only 10 per cent of total credit while contributing the remaining 40 per cent of the total output (RBI, 2019). So that there are significant scopes in other areas of the agricultural value chain for the lending institutions to finance and provide the necessary stimulus to non-crop sectors especially dairy sector. Value chain finance mechanisms could be correct this disparity of credit reach. 
       
Uttar Pradesh has vast resources of livestock, which play a vital role in improving the socio-economic conditions of rural masses. Further, Uttar Pradesh is the highest milk producing state in India, contributing around 18% to the total milk production. However, productivity level is very poor, needs a paradigm shift with a focus on production framework as well as consumer expectations / affordability. Many states including Uttar Pradesh are lacking of institutional infrastructure for conceptualizing and placing farmer centric value chain approaches (NABARD, 2018). Value chain financing approach provides opportunities to develop equitable business models that better link all actors in the value chain. Accordingly, this study was carried out to describes about the great variety of financial arrangements found and the actors involved in dairy value chain in the Eastern Uttar Pradesh. The study also brings about the relatively prominent components/actors of the dairy value chain that could be emphasised while financing dairy value chain.

Value addition = Selling price of the product minus Cost of the total inputs

Institutional Framework for Value Chain Finance
 
The vast network of financing institutions was prevailed in financing of agriculture value chains in the study area. It comprises of commercial banks, cooperatives institutions, regional rural banks and various Government schemes. Fig 1 provides a diagrammatic representation of existing institutional framework of finance to agriculture value chains in the study area. Apart of institutional finance, several informal mechanisms of value chain financing were also practiced in the study area. These informal agencies were in the forms of traders, input financers etc. The reasons for existence of informal agencies parallel to institutional finance were observed that inadequate and untimely credit provided by financing institutions. Similarly, credit delivery through financing institutions were invariably depends on ownership of land so that tenant farmers, sharecroppers and landless labourers who are not able to offer collateral security to avail institutional credit adversely affected because financing institutions don’t find them credit worthy. As a result, these farmers were found it convenient to borrow money from non-institutional sources due to easy accessibility.
 

 
Mapping the value chains for milk
 
Table 1 represents the value chain map of prevalent dairy sector in the study area. It shows that flow from input suppliers such as feed and fodder supplier, medicine, animal sellers to the dairy farmer who sells milk to the various intermediaries engaged in the value chain as value chain actors. These intermediaries include suppliers, assemblers, cooperatives, processors, distributers. Milk were mostly collected from small farmers of villages and is sold to the milk collection centres through a composite distribution chain. The processing functions were performed predominantly by private dairy processor. Dairy farmers were sold their milk to private processor (Kautiki Milk Plant) through value chain actors as indicated in the Table 1. However, the unorganized sector e.g., sweet, cheese and other dairy products makers, were also processed a large portion of the milk. Kautiki Milk Plant executed contracts with milk producers. They also provided milk coolers, milking machines, feed and veterinary services to their contract dairy farmers. To integrate small producers on their value chains, the said plant established village milk collection centres, which were managed by local dairy farmers on commission basis. Most farmers supply milk to the same buyers. Farmers who sold milk to dairy cooperatives were their members.  During the survey, it was found that special product-oriented value chain could not develop due to structural constraints, lack of access to technology and proper marketing system. It was also found that due to lack of organizational structure for the dairy farmers, the farmers were not in a position to bargain over the prices of milk.
 

 
Finance to milk value chain
 
The actors in the dairy value chain need finances to accomplish their respective activities. The input suppliers (raw inputs like fodder, concentrate, medicine, animal sellers) need finance to retain stock to run their business efficiently, while the primary producers need finance to buy milch animals, fodder, concentrate and other inputs for production. The demand for finance by the assemblers differs according to their scale of operation so as to able to buy the milk and the capital items like equipment and vehicles. The milk processors need huge amount of capital to install their processing plants and also to buy products from assemblers and/or other actors in the value chain. Financial institutions were lent one or more actors in the chain at a same time. Actors involved in the milk value chain were also practiced informal sources of finance to obtained the loan for preforming their respective activities. The value chain financial arrangement in the dairy milk value chain prevailed in the Eastern Uttar Pradesh is given below Table 2.
 

       
Dairy farmers in the study area were got credit from financing institutions and delivered the product to the assemblers/cooperative unions. The assemblers/cooperative unions paid their debt obligations to the financing institution on the behalf of the farmers and the rest amount paid to the farmers what called the triangular value chain finance. Inputs providers were financed through bank, cooperative union, large inputs suppliers and under MUDRA Scheme. Similarly, milk assemblers and transporters were facilitated through trade credit and investment credit by banks and milk unions. On the other hand, producers were lent through investment credit by bank and short-term credit for working capital under Kisan Credit Card Scheme and input suppliers. Table shows that actors involved at input arrangement, production and assembling stages of value chain were depend on informal sources of finance for seasonal requirements to performing their respective activities. It evident from the table that the “direct” value-chain finance practice was exercised in the study area for financing dairy value chain as assemblers advanced the credit to small producers; cooperative milk union provided inputs on credit to their members; milk-processors advanced credit to assemblers; input supply shops selling inputs on credit which established relationship between the value chain actors resulting in smooth service and lesser obstacles to credit provision. However, the demand for investment capital were depend on institutional source of finance.
 
Cost, return and value addition analysis
 
Costs, returns and value addition in value chain of milk were analysed and presented in Table 3.
 

       
It is evident that total cost of milk production was varied Rs 18.8 to Rs 38 per litre from producers’ level to distributers level. The highest cost was incurred at producers’ level (Rs 2.7/litre) followed by processors (Rs 2.6/litre), distributers level (Rs 2.1/litre). Table 3 also revealed that the processor was most valued added actor in the milk value chain accounted Rs 4.4/litre value addition, followed by producer Rs 3.3 and distributer Rs 2.7 per litre.

The key findings from the above analysis is that milk production in the study area is highly fragmented and unstructured resulting that the milk produced from the dairy farmers have passed through different value chains before it reaches to ultimate consumers. Accordingly, there are several value chain actors involved in the various activities. The actors engaged in the value chain in the study area acted as suppliers, assemblers, cooperatives, processors, distributers with varying degrees of formality and informality. The dairy farmers were experienced the vast framework of institutional finance. However, they have also barrowed the loan from the informal sectors of finance due to lack of credit worthiness and easy accessibility. Further, it has also observed that the value chain actors informally engaged in direct value chain finance for seasonal requirements as each actor provides the loan to his client actors. Government schemes like Kisan Credit Card and MUDRA scheme also supports dairy farmers to great extent. However, demand for investment capital need to be strengthened through the value chain finance approach of financing for the better growth of the dairy industry to serve the consumers so that economic multiplier effects of dairying are realized. The study has also inferred that among all the actors involved in milk value chains, the processor, producer and distributer have added greater value addition in comparison to other actors in the value chains. The Government should focus for credit expansion through value chain financing strategy for those components of value chain which have created greater value addition through its activities.