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Milk Collection Centers in Samtskhe Javakheti (2011)

The research and analysis was done to support the Mercy Corps Project entitled Market Alliances Against Poverty in the Samtskhe-Javakheti Region of Georgia. The principle focus of the research was to look at milk collection centers (MCC) in Samtskhe and evaluate why some work and others do not, in order to aid Mercy Corps in their selection of MCCs and MCC managers in the future.

Firstly, the dramatic changes in price, production and consumption that occur throughout the year clearly suggest that, out of season, there is still an under-served market demand.

Secondly, the nature of demand is shifting. Increasing incomes in certain sections of society, an increase in the role of supermarkets, a range of pressures to create improvements in phytosanitary standards - these factors suggest that a shift from home production of cheese to factory production is inevitable. Together, this seems to suggest that, across the country, the role of factory producers and milk collection centers is likely to grow even if milk and cheese consumption does not.

The region of Samtskhe-Javakheti is also a particularly interesting place where this shift could happen. It is responsible for 14% of the country’s milk production and, according to national statistics, has the highest yield per cow in the country. It has also been ‘reconnected’ to the rest of the country relatively recently so that in the last few years it has become dramatically easier to transport products between the region and the rest of Georgia.

Milk Collection Centers
In our research, and through repeated closed- and open-ended interviews, we were able to generate abbreviated profit and loss statements for each of the businesses we assessed. These allowed us to distinguish between the more and the less successful businesses in terms of income generated and profitability. By connecting this information with an understanding of their general business operation we were able to identify some general conclusions about which business models work and which do not.

Our analysis also allowed us to investigate some of the commonly suggested explanations for poorly working MCCs. In our early discussions with experts at the beginning of the research we discovered a whole range of hypotheses to explain the challenges in the dairy sector, including seasonality, disease and unreliability of supply as well as changeable demand, poor technology and cultural attachment to cheese-making.

The first major division to be made between the different types of milk-buyers is between the MCCs that do not produce cheese and those that do. As such, both our investigation and the analysis below were divided along those lines.

For non-producing MCCs the single biggest determinant of success is volume of milk collected and sold. As many of the costs are essentially fixed, there are considerable economies of scale to be offered to MCCs that collect large volumes.

For MCC/producers, volume was not the only factor determining success: some producers seemed able to employ different strategies to enhance profitability even when faced with low volumes. Some collectors/producers have used streams to provide cheap refridgeration, have stored cheese for sale out of season when prices are higher or utilised good relations with large retailers to ensure high volume demand.

The main aim of the project was to inform Mercy Corps on how to proceed in its support of MCCs and MCC/producers. Therefore the recommendations generally relate to that issue.

MCC or MCC/producer?
• The first main choice is between supporting MCCs or MCC/producers. Generally, it seems as though supporting producers to enhance their network of MCCs is a more reliable strategy than setting up entirely new MCCs.

Starting new non-producing MCCs
• Experience When setting up the MCCs it is clear that serious efforts have to be made to ensure that people understand what they are taking on. Milk collection is extremely hard work and brings with it a range of risks.
• Finance It would be helpful in the starting phase if the new MCC had the cash available to pay for the milk immediately, at least during the first few weeks. If we imagine that a new MCC collects 750 liters per day at 50 tetri per liter, then this would require GEL 5625 for the first 15 days. To cover 10 days would cost GEL 3750.
• Location Proximity to good milk supplies seems far more important than proximity to producers.

Helping existing MCCs
• Mercy Corps could keep a simple central list of MCCs and cheese producers in the region that could allow producers to connect with different MCCs depending on the time of the year.
• Producers should understand that if they want to extend the collection time in the year, then offering a percentage margin to MCCs will be more effective than offering a fixed margin. For example, offering a 12% margin (with 50 tetri as a floor milk price) would seem reasonable.
o This would mean, for example, that if the price of milk goes up to 60 tetri, then the MCC would get 7.2 tetri per liter instead of 6.

Assessment of future project
• Business plans need to be assessed against the experience in this sector to date. It takes time for MCCs or producers to build up the network of suppliers and if they do not have existing markets for their goods, this also takes time. This fact is often not reflected in cash-flow projections
• Experience is crucial and it is almost always better to build on existing businesses than start new ones. BP’s MCCs, Akaltsikhe Agro’s difficulties and Khizabavra should all highlight the importance of experience.

Utilising existing capacity
• There is already significant over-capacity in cheese production. Even the most successful cheese producers are not close to capacity and with Akaltsikhe Agro, the Patriarch’s facility in Akhaltsikhe, Ude and others hardly producing there should be considerable demand for milk.
• The BP-financed MCCs also represent a resource and effort should be made to utilize this resource; it is not clear why this has not already been done.

Overcoming seasonality
• Seasonality of milk production can be combated by moving the breeding cycle of cattle or by better storage of cheese. At the current time, storage seems the far easier option.
o Storage facilities like the one that Mercy Corps has supported in Akhaltsikhe are clearly a good idea, though it will not be possible to assess whether the business-model works until it has regular customers.
o Supporting the extension of storage facilities of existing producers may also help them to justify expansion of production.
o It is certainly worth talking to banks to see if banks could use stored cheese as collateral for loans since the returns on storing and selling cheese later seem to be considerable and could justify fairly high interest payments.
• Seasonality of milk provision created by movement to high-mountainous areas is not necessarily debilitating, as the majority of farmers still do not do it. However, for the time being, the only way to avoid it is to locate MCCs near to villages where the practice is less common.

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