Dairy Production: The Institutional Context

Dairy production in general is organized along several supply chains. At the basis, there are the farmers that deliver milk to the dairy processing industry, to purchasers such as traders, or process their milk on farms. The processing industry then turns raw milk into products for fresh consumption (e.g., milk, yogurt) or into cheese, casein, milk powder (full cream and skimmed), and whey products. Those products are then either exported by traders and wholesalers or delivered to retailers and food services (including fast-food companies) who then pass the products on to consumers. The production of dairy products generates interdependencies, because firms in the supply chain depend on each other to be able to produce dairy products. Three different forms of interdependencies can be distinguished within the supply chain (Lazzarini et al., 2001):

  • • Sequential interdependency: the output of one firm is the input for the next firm.
  • • Reciprocal interdependency: firms depend on each other's input and output.
  • • Po oled interdependency: given a certain goal all firms perform different well-specified

tasks but relatively autonomous.

For providing a farmer's income milk has to be purchased and processed. Processors, in turn, need a continuous high-quality flow of milk enabling them to continue production. Also, they need wholesalers, retail, or food-service companies that purchase their dairy products. The latter needs dairy products to meet customer demands. It generates sequential interdependency, which is also reciprocal. To add the desired value (e.g., processing, packaging, marketing), all actors need a flow of milk that is consistent in both quality and quantity. Pooled interdependency is generated when firms within the supply chain deal with policy and regulations (both proactively and reactively) and in efforts to preserve the image of the dairy sector. Scandals like bovine spongiform encephalopathy and dioxin stresses the mutual dependency to assure food safety. Interdependencies thus collectively affect individual firms as well as the entire supply chain (Smit et al., 2009).

Supply chains, in turn, are subject to stakeholders' influence, (i.e., producer associations, NGOs, and government bodies). Their influence can provide opportunities and constraints for dairy production. Producer associations like DairyNZ, an association representing New Zealand dairy farmers, or the Dutch Dairy Marketing Board, very often mediate between and represent the common interests of their members. They also maintain the contacts with other producer associations and stakeholders such as NGOs and government bodies.

NGOs in their relationship with the dairy sector mostly address issues with regard to animal welfare, the environment and food safety. For example, as a response to the concern of three NGOs about the sustainability of the import of soy from Latin America, the Dutch diary processor FrieslandCampina started a joint program in 2006 with these NGOs to ensure that all imported soy for feedstuff from Latin America would be produced in a sustainable manner (Smit et al., 2009). Overall, NGOs tend to favor and promote eco-friendly dairy production initiatives.

Government bodies basically provide frameworks for dairy production (e.g., the USDA's National Organic Program (NOP) or the European Common Agricultural Policy (CAP)) and impose regulations that can provide opportunities or constraints for eco-friendly dairy production. European Union (EU) policy as a result of the World Trade Organization negotiations and CAP reform, for example, is reducing the intervention prices and export restitutions, which forces the dairy sector to compete more globally. As a consequence, the price differential between eco-friendly dairy products and conventional dairy products may increase. In contrast, however, the EU Nitrate and Water directives are putting restrictions on the use of fertilizers, which may lead to an increase in costs for dairy production. Conventional farmers, therefore, may have to buy feedstuff, which provides opportunities for organic farmers as they are already obliged to reduce the use of fertilizers. This, in turn, will narrow the gap between ecofriendly and conventional production (Smit et al., 2009).

Overall, it illustrates that the institutional context is a very important factor that can both stimulate and constrain eco-friendly dairy production initiatives. It has an impact on the entire supply chain and is linked to the market for eco-friendly dairy products. If demand is low, processors might be reluctant to convert because it may not be economically viable. They may have to compensate farmers for the higher costs they incur, and they may not be able to bring about the difference between conventional and eco-friendly dairy products that justifies a price premium. Moreover, trade policies currently favor cost-effective production methods that provoke more competition and increase the price differential. Despite the widespread support eco-friendly dairy production receives, a complete transition toward eco-friendly production seems unlikely (Roe et al., 2008; Smit et al., 2009; Lamine 2011). Nevertheless, it does not imply that eco-friendly dairy production initiatives cannot be successful, which will be elaborated next.

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