Benefits Certain characteristics of smallholder dairy production systems¾intensive, year-round labor needs, the provision of regular income, and easy substitution of the product between home and market¾make dairy production a good example of pro-poor approach to agriculture and rural development. The production characteristics of smallholder dairying, such as use of crop residues, fodder-crop rotation, and production of organic fertilizer, provide a strong synergy with other parts of the farming system. Milk’s perishable nature and the limited marketing leverage of an individual small producer make it highly suitable for cooperative marketing and hence an important tool for farmer empowerment. However, smallholder dairying carries risks. In many cases, a small herd constitutes a large part of the farmer’s assets, and disease and death can wipe out these assets entirely, potentially leading to increased indebtedness and poverty. Policy and Implementation Issues Subsidies and dumping. With milk production mainly being a smallholder activity, and milk seen by many as a being a staple product, the dairy sector is the subject of political attention and inappropriate policies. Thus the sector has suffered from excessive price controls, and greatly distorting subsidies both in OECD and developing countries. In developing countries, the dairy sector has been negatively affected by the dumping of surplus subsidized dairy products by the EU and USA. With global trade negotiations in the WTO on the issue of agricultural subsidies, producer groups, local industry, donors and finance ministries need to discuss issues of domestic liberalization and appropriate adjustment that may be needed as a transition mechanism. Other policy issues encountered in Bank projects include cooperative monopolies (India), excessive interference of government in the sector, the introduction of unsustainable subsidies—for example for artificial insemination (AI) (India, Kenya, Morocco) and health services--and excessive food safety regulations. Markets. Milk, being highly perishable, requires daily collection and market delivery. Many past investments have focused on developing western-style collection, processing, and distribution systems, with pasteurized products. There is growing evidence, for example from Nairobi (Staal 2002), that this approach might be counterproductive. Pasteurization and packing costs nearly double the price of milk to consumers, thus reducing farm gate prices and limiting access by the urban poor. Giving the formal sector the exclusive right to distribute milk and milk products also affects employment opportunities for many small intermediaries involved in the distribution system. In addition, marketing through a formal collection system introduces one of the few economies of scale in dairy production, as it is often accompanied by a requirement for on-farm cooling equipment, which normally is profitable only with a production level of 100 liters or more per day. Such requirements, in situations where milk is boiled before consumption, are unnecessary, as boiling obviates the need for pasteurization.     
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