CREATING A NEW DAIRY

VALUE CHAIN IN INDIA:

RELIANCE AND BASIX

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Presentation Title 2/1/20XX 2
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Presentation Title 2/1/20XX 4
Presentation Title 2/1/20XX 5
 Dairying in Mahabubnagar
• Dairying is important in this dist. (Rs. 7,200/month)
• 40% of rural families depend on their buffaloes for milk to drink and to sell, 90% milk
produced from buffaloes and rest from cows.
• The government has built a lot of infrastructure to support the dairy industry in the district.
(Farmers groups produced - Pasteurized milk, yoghurt and other dairy products)
• Government system inefficient – Handled only 20% of surplus milk, farmers are paid ones a
month.
• Political interference in dairying. Govt schemes failed to reach poor farmer groups.
REASONS OF MILK PRODUCERS SELL MILK TO PRIVATE TRADERS.
• Traders offer better prices & pay every 15 days, sometimes in advances also.
• Traders buy surplus of 80% milk and supply to tea stalls, local retailers and to direct
consumers.
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PROBLEMS IN PRIVATE SYSTEM
• The milk is often diluted or adulterated, and there are no checks for health or
quality
Indian consumers concern.
• Rather than buying unlabeled milk from a tea stall in the open air, these Indian
consumers want to find a wide range of dairy products, nicely packaged and
presented, in coolers in their supermarket. They are willing to pay a higher
price for the milk in exchange for being assured of its quality and safety.
An inefficient milk value chain
 SPOTTING A B U SIN E SS OPPORTUNITY
• Reliance Fresh is a modern supermarket chain operating in this new market segment of urban
consumers with higher purchasing power.
• Reliance Dairy Foods Ltd. It supplies dairy products to the Reliance Fresh chain of
supermarkets, as well as to other urban retailers.
When setting up its supply chain,
• Reliance chose not to source milk from
1. Government-run dairies
2. Existing private traders
• (Reliance is concerned about the payment terms and the danger of political interference, &
quality and quantity)
So Reliance decided to build its own milk chain. It designed a supply chain consisting of
three tiers:
1. Village pooling points, where the farmers can bring their milk on a daily basis, even in
very small portions
2. Bulk milk cooling centers, where the milk from various village pooling points is
collected and cooled
3. Dairies, where the milk from various cooling centers is processed, packaged, and
distributed to the market outlets
Reliance intervention - Rather than controlling the full supply chain by itself, the best
way was to train selected local villagers and provide them with the necessary infrastructure
and technical support.
• Local villagers operate the
pooling points & cooling centers
as independent business people.
(Franchise model)
 Building an alliance
 Reliance started pilot operations in two areas: in Mahabubnagar, and in Punjab in
the north of the country
 But Reliance realized that it could not do the job alone
 It needed a strong partner to ensure that the village end of the chain functioned
well
 In January 2008 it signed an agreement with KBS Bank, a subsidiary of BASIX
 Reliance pays BASIX a service fee of Rs 0.40
 They appointed local people to run the village pooling points and cooling centres
They supported the farmers to elect one person in each village to act as a joint
account holder to receive and manage the milk payments on behalf of all the
farmers
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 The BASIX group
 which promotes livelihoods for the rural poor
 It provides microfinance to dairy farmers.
 It has been working in Mahabubnagar District since 1997.
 Reliance was interested in building on this experience, and BASIX wished to replicate its
successes.
 In 1999–2001, BASIX worked with a milk-chilling centre belonging to the government-run
Andhra Pradesh Dairy Development Cooperative Federation at Wanaparthy, a town in
Mahabubnagar District
 It loaned a total of Rs 6 million ($120,000) to 500 producers to buy 600 milking animals.
 Chilling center was procuring over 10,000 liters a day.
In 2001, responsibility for BASIX’s financial and technical assistance operations in
Mahabubnagar District was handed over to Krishna Bhima Samruddhi Local Area Bank
(KBS Bank)
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The Reliance/BASIX value chain
  Reliance provides each village pooling point with testing
equipment, a machine to remove air bubbles from the milk, an
Collecting milk: electronic scale, steel milk cans, and a data processing unit
The Reliance with dedicated software.

chain  The average investment per village pooling point is $1,480.

(103600)
 Reliance fixes the price the producers get.
 The price paid by Reliance depends on the fat and non-fat
solid content of the milk
 Reliance pays the money into joint Bank account for each
village, the village service provider and joint account holder
appointed by the village collects and then distributes it.
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Village-level
 This is where farmers bring their milk each morning and evening
pooling points
 The average farmer delivers 3 liters of milk per day to the village
point.
 Some deliver tiny amounts – as little as half a liter.
 Some 2,040 producers ,supply Reliance with milk at 40 village
pooling points.
 To be sustainable, each village pooling point must have at least 50
milk producers who supply a minimum of 150 litres of milk a day.
 The pooling point is run by a “village service provider” - Franchisee
 They must provide a room where the producers can bring their milk.
 The franchisee is paid a commission of 3.75% of the value of the
milk delivered each month.
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 Bulk milk cooling centre Dairies
 These are situated in the main village in a  Reliance has negotiated with defunct or underused
cluster settlements. It serves 10–12 village private dairies to give priority to processing its
pooling points within an average radius of milk, pays to transport the cooled milk to these
10–12 km. dairies, which also operate on a franchise model-
 Reliance pays for the milk to be brought to pays them depending on location and capacity
the cooling center by a three-wheeled auto-  The finished product is sent to wholesalers,
rickshaw. supermarkets and retailers, from where it reaches
 Reliance has set up four cooling centers in consumers. Up to 25% currently goes to Reliance
the region served by BASIX Fresh.
 Reliance
Management information system - The entire milk supply chain is managedorganizes the flow of
by a state-of-the-art products information
management in this
system with easy-to-use equipment, a foolproof backup and uninterruptible power supply
chain.
  BASIX works in 40 villages (with the same number of pooling
points) that supply four cooling centers.
 It promotes farmer producer groups in each village,
 Provides agribusiness development services, and extends
microfinance to the producer groups KBS Bank provides loans,
while BASIX provides agricultural and business development
services for KBS Bank customers.
BASIX’s services
Producers’ groups
 BASIX helps producers in each village form groups to improve their
productivity and management abilities
 Members of the producer groups are farmers who wished to expand and
improve their dairying activities.
 The average group has 15 members.

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 BASIX offers various business development services to members of the
producer
groups:
 Improving productivity Selecting stronger and more productive animals,
advising on feed and fodder management, and buying inputs in bulk.

Producer’s  Disease prevention Vaccinations against foot-and-mouth disease, regular

deworming, and periodic visits by veterinarians to check on the animals’
Group health.
 Market linkages Forming producer groups and providing institutional
development services to help farmers supply milk to the Reliance pooling
points.
 Capacity building Training on bookkeeping, accounting, management and
help with formalizing the group.
These services are provided by BASIX field staff who visit the producer
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Financial services  Once a producer group is formed, it opens a joint account with KBS
Bank and
 starts saving regularly (usually $1–2 per member each month).
 If it performs satisfactorily for at least 3 months, the bank will
consider providing investment loans to the individual member,
collateral is
 not required, but group members must all guarantee repayment of
the loan. The bank can disburse the loan within 15 days of the
application.
 The average loan is for the equivalent of $440 (33,232 rs) enough to
buy a buffalo.
 Borrowers are responsible for repaying their loans on a regular basis.
f the member falls behind with repayments, the group as a whole
must pay up, so peer pressure is an important and effective way of
ensuring repayment. 19
  B y J a n u a r y 2 0 0 9 , K B S B a n k h a d p ro v i d e d a t o t a l o f $ 4 7 , 0 0 0 i n c re d i t
t o s e v e n p ro d u c e r g ro u p s t o b u y n e w m i l k i n g a n i m a l s .

RISK  N o r m a l l y, p ro v i d i n g i n v e s t m e n t l o a n s t o f a r m e r s i s v e r y r i s k y, b e c a u s e
o f t h e l o n g re p a y m e n t p e r i o d a n d t h e u n c e r t a i n t y w h e t h e r t h e
i n v e s t m e n t w i l l g e n e r a t e e n o u g h c a s h i n f l o w s t o re p a y t h e l o a n .

ANALYSIS  But the triangles of cooperation between KBS/BASIX, Reliance and

t h e f a r m e r g ro u p s h a v e h e l p e d t o re d u c e m a n y r i s k s i n t h e m i l k v a l u e
chain.

 T h e k e y e l e m e n t s f o r r i s k re d u c t i o n a re

 T h e t e c h n i c a l a n d b u s i n e s s d e v e l o p m e n t a s s i s t a n c e p ro v i d e d t o t h e
f a r m e r s b y B A S I X ’s f i e l d w o r k e r s .

 T h e c o m m i t m e n t f ro m R e l i a n c e t o b u y t h e m i l k a n d t o p a y p re m i u m
prices for quality milk.

 T h e f a c t t h a t t h e f a r m e r s o p e r a t e i n g ro u p s t h ro u g h w h i c h t h e y
s u p p o r t a n d c o n t ro l e a c h o t h e r a n d b u i l d a s s e t s t h ro u g h re g u l a r
savings.

 The sophisticated management information system put in place in the

milk chain which allows for close monitoring of the cash flows and
re p a y m e n t o f t h e l o a n s .
The triangles of value chain cooperation have turned the investment loan into a
financial service that is attractive to the farmers and at the same time viable for KBS
Bank.

Investment loan terms for Reliance milk producers . They look into

a. Product and financial flows

b. Risk management

c. Information flows and

d. Other financial products like livestock insurance and savings products

When analyzing the loan risk, KBS Bank uses the following sources of information

-Producer group status

-Information from the supply chain

 Several benefits to the three key stakeholders:
milk producers, KBS Bank/BASIX and
Reliance.

 Milk producers: Over 2,000 farmers now sell

milk to Reliance with the support of BASIX
and KBS Banks FS , they have increased their
sales to 2 to 3 liters a day (doubled their milk
income)

 Producer group members now have easier

access to credit at affordable rates.

 The farmers can also get regular technical

advisory services for a modest fee to help
them improve their production.
 BENEFITS CONT…
2. K BS Bank and BASI X
Of the 2,000 farmers selling milk to Reliance, 500 are now KBS Bank customers.
Seventeen producer groups with 400 members use agribusiness development services from BASIX on behalf of KBS
Bank.
Producer groups were saving an average of around $500 per month.

3. Re l i ance
R e l i a n c e p r o c u r e s a b o u t 7 , 5 0 0 l i t e r s o f m i l k a d a y. T h i s i s 8 3 % o f i t s c a p a c i t y – w e l l a b o v e i t s 6 0 % b r e a k - e v e n w i t h
increase fat and non-fat solids.
R e l i a n c e h a s s c a l e d u p t h i s a p p r o a c h b e y o n d K B S B a n k ’s o p e r a t i n g a r e a . I t i s n o w p r o c u r i n g m i l k f r o m 3 5 0 v i l l a g e s .
A n e w h i g h - c a p a c i t y c h i l l i n g c e n t e r, h a n d l i n g 1 5 , 0 0 0 l i t e r s / d a y, h a s b e e n p r o p o s e d i n t h e K B S B a n k o p e r a t i n g a r e a .

4. Chai n as a whol e
T h e c h a i n a s a w h o l e b e n e f i t s : m o r e m i l k , o f b e t t e r q u a l i t y, i s a v a i l a b l e t o c o n s u m e r s . T h e c h a i n i s m o r e e ff i c i e n t , a n d
produces a higher value product than before. The example and competition of this chain motivates other players in the
market (including the government) to improve their operations.
 Challenges:
 Availability of grassroots-level staff is difficult to find suitable qualified field staff such as
extension workers who could provide this type of services which is needed.

Competition from subsidized credit The government sponsors credit programmes that offer
low interest rates, 3-9 % a year. Farmers hear of these, so they are opposed to accept loans at
commercial rates. The actual fact is that, the subsidized programmes are hardly accessible, so
farmers are left without any loans.

Loan cancellations A recent government decision to forgive loans may hinder farmers from
keeping up their loan repayments in future.

Replication Reliance and BASIX have developed a operational approach to buy milk from very
small-scale producers. BASIX had a plans to this partnership as a model for dairying which is
absent in India.
 Challenges:

Effect on other milk traders In the villages where it operates, Reliance handles 50% of the
milk sold. Total milk production has increased, so more milk is being marketed. Many farmers
continue to sell milk by going to each house in a nearby towns, as well as to dealer other than
Reliance. The dealer often have good political connections, so Reliance is wishing to avoid
creating local political problems by engaging too much milk away from alternative market
chains.

For example, by brining back non- functioning chilling centres or to obtain milk in new
locations
  Big business benefits for the poor reliance is a big,
profit-oriented company. Its mission is to implement
business models that work - not to help the poor. In fact,
angry shopkeepers afraid of losing their livelihoods have
burned down Reliance supermarkets in some cities in India.
Such incidents have forced some state governments to ban
Reliance Retail (the parent company of Reliance Fresh).

Lessons  But the success of Reliance's involvement in the dairy

industry in Mahbubnagar shows that profit orientation is
not incompatible with the interests of the poor. The
producers get higher prices than before. Reliance's milk
procurement system is very efficient, produces a high-
value product: good-quality dairy products, conveniently
packaged, sold through supermarkets. To ensure a reliable
supply of raw material, it is prepared to pay the producers
a premium.
 Paid services for farmers they are get low-interest loans, advices on business development, livestock
insurance, and technical advisory services. These services enable the farmers to improve their
management, raise their productivity, improve livestock health, and produce better quality milk. The
farmers pay for some of these services directly; the rest is covered by a fee paid by Reliance. This
shows that the poor are able and willing to pay for services that support their major livelihood, where
they get support from the rest of the value chain, and where the transactions are transparent.

 Regular savings Small-scale farmers regularly have a problem saving on a regular basis. The system
provides a mechanism for them to do so and to generate a savings habit. This is a c t u a l l y, a basis for the
whole chain intervention.

 Commitment to the whole chain If large companies wish to develop the dairy sector, they need to go
for simply seeking business opportunities. They must be committed to the whole value chain: they
need to invest in the whole chain for it to function, and to get together with other actors in the chain.
THANK YOU

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