Azerbaian Beef and Dairy Value Chain
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Описание
The theme of this case study is the critical role that supporting markets can play in value chain growth. The case ex-
amines how small-scale livestock farmers in Azerbaijan benefited from greater access to supporting markets for vet-
erinary products and services. Constrained by the remoteness of their farms and low incomes, small-scale farmers had difficulty accessing veterinary services, which were a critical gap to competitiveness. Because small-scale farmers are the principal production unit
for the beef and dairy value chains in Azerbaijan, closing this gap was viewed as a prerequisite for value chain growth.
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AZERBAIJAN BEEF AND DAIRY
VALUE CHAINS
CASE STUDY
microREPORT #75
July 2006
This publication was produced for review by the United States Agency for International Development. It was prepared
by Action for Enterprise, subcontractor to ACDI/VOCA, under the Accelerated Microenterprise Advancement Pro-
gram Business Development Services Knowledge and Practice Task Order.
AZERBAIJAN BEEF AND DAIRY
VALUE CHAINS
CASE STUDY
microREPORT #75
DISCLAIMER
The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for
International Development or the United States Government.
CONTENTS
EXECUTIVE SUMMARY
1
INTRODUCTION
2
VALUE CHAIN CONTEXT
2
VALUE CHAIN COMPETITIVENESS
4
LESSONS LEARNED
7
Azerbaijan Beef and Dairy Value Chains ii
Azerbaijan Beef and Dairy Value Chains 1
EXECUTIVE SUMMARY
The theme of this case study is the critical role that supporting markets can play in value chain growth. The case ex-
amines how small-scale livestock farmers in Azerbaijan benefited from greater access to supporting markets for vet-
erinary products and services.
Constrained by the remoteness of their farms and low incomes, small-scale farmers had difficulty accessing veterinary
services, which were a critical gap to competitiveness. Because small-scale farmers are the principal production unit
for the beef and dairy value chains in Azerbaijan, closing this gap was viewed as a prerequisite for value chain growth.
Other constraints to value chain competitiveness included lack of veterinary supplies, limited access to markets and
inadequate market information for dairy and beef. To address these obstacles, market actors invested in improve-
ments resulting in the delivery of higher quality veterinary services. These investments included: 1) farmers forming
groups to facilitate access to veterinarians; 2) private veterinarians modifying their service delivery to adapt to this new
clientele; and 3) private veterinary medical suppliers offering credit incentives to veterinarians and training them on
new product applications.
In making these investments, market actors wrestled with certain risks. For example, many small-scale farmers had
little money to invest in better veterinary products and services, and were dubious of the quality of medicines most
often found in the market. Veterinarians, with such cash-poor clients, were not sure they could cost-effectively pur-
chase supplies and deliver services to small-scale farmers.
Ultimately, investments resulted in lower production costs for small-scale farmers whose annual revenues conse-
quently increased by 40 percent. Farmers had no difficulty finding a ready market for the increased beef and dairy
production. In fact, domestic market preferences favor locally-produced meat and therefore domestic beef products
earned more than imported ones. Similarly, increased dairy production found ready buyers among the numerous
small-scale dairy processors.
Veterinarians were also able to realize greater sales volumes, although their profit margins were low. In addition, the
supporting market for veterinary products showed signs of growth. Small-scale farmers were buying more medicines
with increasing frequency, and some suppliers responded by investing in new retail opportunities.
There are a number of lessons that can be learned from this case with significance for development practitioners.
These include the importance of organizing farmers and consolidating demand for veterinary products and services
and practical techniques for facilitating this process.
INTRODUCTION
This case study discusses how small-scale livestock farmers in Azerbaijan’s beef and dairy value chains, struggling to
grow as the country transitions from a planned to a market economy, benefited from the growth in supporting mar-
kets for veterinary services and artificial insemination (AI) products. The critical role supporting markets can play in
value chain growth is the central theme of this case.
This case also examines several important considerations for development practitioners stemming from the inter-play
of supporting markets and actors in the core value chain. These include:
• Organizing farmers and consolidating demand for veterinary products and services created viable opportunities
for veterinarians—who previously questioned the profitability of serving small-scale clients. Moreover, as veteri-
narians acted on these opportunities, livestock farmers’ production costs dropped and productivity grew.
• Greater cooperation between veterinarians and their suppliers resulted in growth in sales of veterinary services
and AI products. The case illustrates how supporting markets have multiple levels of actors whose inter-firm rela-
tions are critical to success.
• The increased delivery and use of veterinary products and services resulted in improved livestock production and
spurred further growth in the supporting markets. As small-scale farmers benefited from using these products and
services, they procured a greater variety of medicines, opted for more expensive and higher quality medicines, and
purchased products and services with more frequency.
VALUE CHAIN CONTEXT
To understand the context in which this case took place, this section describes the market actors in the beef and dairy
value chains. A map of these value chains and supporting markets can be found as Figure 1 on the following page.
CORE VALUE CHAIN FUNCTIONS AND ACTORS
Production
Small-scale livestock farmers with few cattle are the principal source of domestic meat and raw milk in Azerbaijan,
although there are a handful of large-scale livestock farmers. In the previous planned economy, livestock were
raised, milked and slaughtered in collective operations. Small-scale farmers now own between three and ten head of
cattle and are individually responsible for milking operations and the overall performance of their livestock (taking
care of animal health, nutrition and reproduction).
Total raw milk production in Azerbaijan is roughly one million tons per year, which includes production from the
handful of large-scale dairy farms. Nearly 70 percent of the raw milk is consumed non-pasteurized, whether at the
household level or through products sold at local bazaars. The remaining milk is pasteurized and processed by other
enterprises. In all, local production satisfies only 45 percent of the national demand for dairy products; the rest is im-
ported, mostly in powdered milk form.
Local meat production cannot satisfy the entire national demand of Azerbaijan, which imports finished and semi-
finished meat products—the latter as an input for sausages and other meat products. Livestock from small-scale farm-
ers sold for meat are transported and slaughtered in central markets or bazaars. There is strong local preference for
fresh local meat over imported products.
Azerbaijan Beef and Dairy Value Chains 2
Figure 1: Azerbaijan Dairy and Beef Value Chain Maps
Dairy
Processing
Dairy
Production
Large-scale Livestock
Farmers
Dairy Value Chain
Beef Value Chain
Livestock
Trading
Distribution &
Retail
Beef
Production
Small-scale
Dairy
Processors
Large-scale
Dairy
Processor
Distributors and Retailers
Livestock
Slaughtering
Dairy Market
Beef Market
Veterianary
Services
Supporting Markets
Retail of
Veterinary
Products
Import of
Veterinary
Products
Veterianarians
Intervet:
International
Private
Supplier
Private
Retailers
State Veterinary
Supply Union
AI Product
Supplier
Butchers and Retailers
Small-scale Livestock
Farmers
Rural
Livestock
Traders
Azerbaijan Beef and Dairy Value Chains 3
Dairy Collection and Processing
There is one large-scale dairy processor and over 50 small-scale dairy processors in Azerbaijan that produce and
distribute pasteurized milk and other dairy products. The large-scale firm primarily transforms imported powdered
milk into milk, cheese and other consumable goods. The majority of the small-scale firms purchase and collect raw
milk from the country’s farmers and then pasteurize and transform it into similar goods. The market share of these
small-scale firms is fairly even: only one has a market share above 5 percent.
SUPPORTING MARKET FUNCTIONS AND ACTORS
Veterinary Services
Veterinarians, state employees in the planned economy, now charge farmers directly for their medical interventions
and medications, although they often accept in-kind payment from their more cash-poor customers. Veterinarians
participate in state-sponsored vaccination campaigns and management of disease outbreaks. They also provide farm-
ers with advice on animal breeding, feeding and quality control. In many cases, veterinarians are also a source of mar-
ket information on potential buyers and prices for meat. There are approximately 12 veterinarians to every 1,000
small-scale livestock farmers.
Veterinary Medicine and Equipment Supply
There are two principal suppliers of veterinary medicines and equipment in Azerbaijan. One, the State Veterinary
Supply Union (SVSU), is part of the Ministry of Agriculture; and the other, Intervet, is an international private sup-
plier. The SVSU imports supplies mainly from Russia and distributes them to private retailers. Intervet, a German-
Dutch veterinary pharmaceutical producer, brings in its products from Western Europe and sells them through its
representative company in Azerbaijan.
Artificial Insemination Supply
There is only one AI product supplier in Azerbaijan, a joint Azeri and Dutch government venture that imports Hol-
stein breed semen from abroad. AI products are then distributed to local AI service providers.
VALUE CHAIN COMPETITIVENESS
Locally produced beef and dairy products satisfy less than half the national demand even though they are competi-
tively priced. Due primarily to higher production costs, local beef costs slightly more than imported beef (selling for
$4 per kilogram compared with $3 for imported beef) but it is favored by local consumers. Dairy products, however,
enjoy a price advantage over imports. For example, local cheeses are 20-30 percent less than imported brands and lo-
cal pasteurized milk costs 12-15 percent less than imports.
GAPS IN COMPETITIVENESS
Despite the local preferences and price advantages for Azeri beef and milk products, respectively, local production
faces critical gaps in competing with imported products. The principal gaps concern low volumes and small profit
margins as a result of relatively high costs of local production.
The small-scale of operations and low incomes of most livestock farmers complicate their access to veterinary assis-
tance and animal health products and services. It is estimated that small-scale farmers are producing at only 40 percent
of their efficiency due to poor animal health and subsequent poor yields of milk and low rates of animal growth.
Weak supporting markets for veterinary products and services represent another important gap in competitiveness.
This reduces livestock farmers’ access to the products and services that could improve productivity and bring down
Azerbaijan Beef and Dairy Value Chains 4
production costs. This supporting market is weak as a result of the difficulties veterinarians have in cost-effectively
providing fee-based services to small-scale farmers. In addition, veterinarians have limited access to good quality vet-
erinary medicines and other products. Although similar products are readily available through retail outlets (supplied
by the SVSU), farmers are dubious of their quality and, not convinced of their cost-effectiveness, often choose to
forego treatment of their livestock with these products.
There are a variety of other competitiveness gaps facing the industries. Dairy processors, through their collectors,
have difficulties obtaining sufficient quantities of raw milk. Collection is complicated by the disaggregated supply from
small-scale farmers who often live in remote, hard to access locations. The existing number of collection points is also
insufficient to capture this supply. In addition, small-scale livestock farmers often lack adequate market information
about where and at what prices they might sell their livestock to be slaughtered for beef. Organizing transportation to
these locations is a further challenge, again because of the remoteness of many farmers in relation to their markets.
PRIORITY COMPETITIVENESS GAPS
An analysis of the beef and dairy value chains in Azerbaijan indicated that closing the gap in the high costs and low
volumes of production would have the most immediate impact on the growth of the value chains, especially in terms
of benefits to small-scale farmers. Interestingly, as this case shows, increases in farmers’ production volumes enhanced
their access to markets as these increases made them more attractive to buyers (especially dairy). Overall, the strong
demand for locally-produced beef and dairy easily absorbed the growth in production from small-scale farmers.
The remainder of this case looks at the joint actions of veterinarians, veterinary input suppliers and farmers (with fa-
cilitation assistance from a development project) as they strove to overcome their respective risks and realize the
benefits of investing in improved livestock and dairy production. Veterinarians were identified as the key value chain
actors whose services could best close the targeted gap. The role and activities of veterinary input suppliers were also
important, as seen below, to strengthening the capacity of veterinarians to provide their services.
MARKET ACTORS’ INCENTIVES AND RISKS FOR IMPROVING LIVESTOCK AND DAIRY
PRODUCTION
Small farmers
Small farmers had incentives to invest in the health and performance of their livestock. Healthier and more productive
livestock would boost production volumes and reduce unit costs, which would translate into higher revenues. How-
ever, farmers’ were uncertain of the cost-benefit of investing in veterinary services such as vaccinations, treatments for
ailing livestock, higher-value feeds and other measures that might improve livestock performance. Part of this skepti-
cism was due to the lack of satisfaction with medical treatments and vaccinations they had received or used in the past
(mainly through the SVSU). Farmers also viewed these as sizeable investments given their cash-poor reality and lim-
ited access to credit.
Veterinarians
Although many veterinarians remain nominal employees of the state, they have to generate revenues through services
to survive, giving them significant incentives to expand their businesses and market share. They faced constraints in
doing this, however, due to the high costs of reaching small farmers living in areas difficult to access. They also risked
lowering their profitability by focusing on a cash-poor client base that has difficulties making payments. Their lack of
experience in a market economy also left the veterinarians poorly equipped to market themselves and with little ex-
perience in developing new business strategies. As such, expanding their markets was risky.
Azerbaijan Beef and Dairy Value Chains 5
Suppliers of veterinary products and services
The suppliers of veterinary medicines, equipment and AI products had strong incentives to increase their sales vol-
umes, especially as the two major firms (Intervet and the AI product supplier) were recent entrants to the Azeri mar-
ket and were looking to establish their businesses. Their chief risks were that the users of their products would not
apply them correctly. Incorrect application would reduce their effectiveness and potentially tarnish the brand name of
products, which would undermine the companies’ growth prospects.
MARKET ACTORS’ INVESTMENTS IN IMPROVING LIVESTOCK AND DAIRY PRODUCTION
These incentives led to investments by market actors to improve their businesses. Many of these investments were
facilitated in a participatory manner by Mercy Corps, Azerbaijan (MCA).
Formation of farmers’ groups to agglomerate the demand for veterinary products and services
Drawn by their shared incentives to resolve difficulties in accessing services that could raise production volumes and
lower costs, small livestock farmers formed groups in order to facilitate access to veterinarians, who also participated
in the process, establishing a connection and familiarity with farmers. The formation process was deliberate. Farmers
identified their most common and pressing concerns and tackled readily achievable results first, building success and
momentum for tighter group adherence and viability.
Investments in new and higher quality veterinary products
Veterinarians, for their part, sought out higher quality products compared with those procured by the government and
found in local stores. Intervet was identified as a supplier of such products. To attract veterinarians, Intervet offered
buyer-credit of 50 percent of the cost of supplies, which addressed the cash-flow concerns of veterinarians. By offer-
ing buyer-credit, Intervet also hoped to increase its own sales volumes and develop customer loyalty.
The AI supply company invested in relations with veterinarians and provided information that would help them to
introduce their product to farmers. The AI supplier also invested in training veterinarians to deliver AI services to
farmers so that their product was applied correctly and so that farmers would be satisfied with the results. Veterinari-
ans, in turn, bought the product and marketed it to farmers.
Investments in new management strategies for veterinary businesses
Veterinarians invested in a range of improvements to the operations of their businesses. They invested in training in
marketing and business management skills. They invested time and money in developing new models for marketing
and delivering their services to small farmers. These included promoting and educating farmers on the benefits of
animal health care and disease prevention programs. Veterinarians also provided additional services at no extra charge
(animal production advice and beef and dairy market information) in efforts to develop their client base and loyalty.
RESULTS OF INVESTMENTS
Growth in the supporting markets for veterinary products and services
Within three years, veterinarians making these investments achieved 46 percent higher annual sales compared to other
veterinarians. Their services became more in demand by a larger client base that purchased increasing quantities of
their products and services. These veterinarians also successfully differentiated themselves from their competitors;
providing the higher quality medicines preferred by farmers, offering new services like AI and becoming an important
source of market information.
Preliminary indications, however, show that the profit margins on these new investments are low.. As some veterinari-
ans noted, they are busier than before but they do not perceive that they are making more money. The question arises
Azerbaijan Beef and Dairy Value Chains 6
as to whether this is a temporary situation considering the fact that most investments were made fairly recently. Ar-
guably, the potential long-term benefits of having an expanded, loyal client base favor those veterinarians who made
the investments. Those who did not make the investments could be seen as outside the flows of innovation and less
able to seize new market opportunities or withstand market downturns.
Finally, there are signs that the supporting markets are stronger as a result of all actors’ investments. This can be seen
by the increased levels of specialization and the continued business investments of the actors. For example, two vet-
erinarians have decided to specialize in the distribution of Intervet’s products, investing in their own supply opera-
tions that should further increase veterinarians’ access to these products. In another case, a veterinarian, persuaded of
the market potential for AI products, will soon import AI products direct from Europe, thereby increasing the com-
petition and availability of these products in Azerbaijan.
Increased learning and benefits to small livestock farmers
Farmers that regularly engaged veterinary services and procured the higher quality products had 40 percent higher
annual profits than other farmers. These results can be directly attributed to the reductions in animal disease and in-
creases in beef and dairy yields achieved through using better animal medications and adhering to the production ad-
vice and disease prevention programs espoused by the veterinarians.
Participation in groups allowed large numbers of farmers to access veterinary services at prices that were not available
to them as individuals. Veterinarians were able to schedule group appointments to deliver most of their services. This
reduced their transaction costs and allowed them to deliver services to small-scale farmers in a commercially viable
manner, despite the high costs of traveling long distances.
Farmers participating in groups also shared disease prevention information, which arguably helped them to better
prevent and manage outbreaks of disease. In addition, group members received market information provided by vet-
erinarians, which had previously been difficult to obtain.
Finally, women (who had been isolated from such information and services because of cultural restrictions regarding
engaging in one-on-one conversations with men) were able to learn from and engage with veterinarians as members
of the groups. This was especially useful as the women derived more of their household income from livestock pro-
duction than men.
Impacts on the beef and dairy value chains
Overall, the value chains appear more dynamic as a result of the investments of market actors and the growth of the
supporting markets. The recentness of investment activity and lack of other data, however, make conclusions prema-
ture. There are, nonetheless, some promising trends. In 2004, for example, beef production at the national level in-
creased by 3.1 percent and continues to find a ready demand in urban and regional markets. The results for dairy pro-
duction and its marketability are similar. Perhaps the most telling sign of greater value chain dynamism is that there
are more new first-time livestock farmers. Some farmers have even begun specializing in livestock fattening and
breeding operations.
LESSONS LEARNED
CONSOLIDATING DEMAND
The principal lessons of this case for development practitioners are the benefits of consolidating demand for support-
ing market products and services, and approaches to facilitating this process. Examples of these benefits included:
Azerbaijan Beef and Dairy Value Chains 7
• Veterinarians achieved economies of scale, reduced transaction costs and expanded their client base. Although
their increased sales volumes do not yet correlate to higher profits, it is likely that having loyal, more productive
clients strongly favors the long-term prospects of these veterinarians.
• Participating in groups increased farmers’ access to inputs and services and it arguably increased the rate at which
they adopted them. By sharing among themselves positive experiences about the new products and services, the
group members’ perceived risks were lowered. This helped them to justify the added expense of the inputs and
services.
• The veterinarians with access to larger numbers of farmers through the groups were more attractive customers
for the larger input suppliers, namely Intervet and the AI supply firm. In their view, these veterinarians would buy
more supplies and therefore warranted greater attention, which was bestowed in the form of buyer-credit, training
in AI product application and generally stronger business relations.
Successfully facilitating the consolidation of demand for supporting markets’ products and services is, however, chal-
lenging. Lessons from this case for development practitioners include:
• Facilitating group formation should aim to foster the economic interests of group members, focusing on a par-
ticular, common economic activity. In this case, the farmers’ focus was on increasing access to products and ser-
vices that would improve their livestock production. Farmers had specific complaints: their livestock were often
sick, production yields were low and they could not get veterinarians to come and assist them. As a group, farm-
ers were able to attract veterinarians and create sufficient economies of scale for veterinary services to be com-
mercially viable.
• Facilitators should help groups to achieve small goals in building their capacity to tackle larger, more complex
problems. Many of the groups’ first activities were gaining access to veterinarians and formalizing their relation-
ships through scheduled visits. Later, groups developed the means to share animal health and market information
and undertake disease prevention measures that required greater cooperation.
• The participation of women in groups, particularly their role in decision making, can be fraught with cultural
complications. Facilitators need to be sensitive to this difficulty and work with all members to help incorporate
women into the groups’ activities.
• Successes by livestock farmers’ groups can attract the attention of other development organizations who may
wish to use the groups as points of entry into rural communities. Group involvement in activities extraneous to
their livestock interests could dilute or introduce conflicting incentives and thereby jeopardize the groups’ cohe-
sion and sustainability.
VERTICAL LINKAGES IN SUPPORTING MARKETS
This case demonstrated that strengthening the linkages between veterinarians and their suppliers had a direct impact
on the beef and dairy value chains. Veterinarians providing services to a greater number of small-scale farmers were
able to differentiate themselves from their competitors. They were able to provide more and better services in part
because they had access to the medical supplies and AI products most demanded by farmers. By facilitating veterinari-
ans’ linkages with Intervet and the AI supplier, the development organization fostered profitable business relation-
ships between these actors that bolstered the growth of the overall supporting markets. This was critical to the sus-
tainability of the delivery of veterinary products and services to farmers.
The same best practices for facilitating vertical linkages between actors in core value chains apply to those in support-
ing markets. For example, facilitating embedded services like buyer-credit to overcome access to credit constraints is
Azerbaijan Beef and Dairy Value Chains 8
an effective means for businesses to strengthen relations and grow, whether in the case of Intervet’s relations with
veterinarians or when agricultural traders pre-finance farmers’ production.
Facilitating learning flows—assuring that market actors can relay consumer demand and share industry innovations—
is also important in supporting markets. In this case, veterinarians were an important conduit between farmers and
input suppliers. They were able to relay the farmers’ demand for higher quality medicines to the input suppliers, and
were also able to share innovations from the input suppliers (such as AI products) with the farmers.
Finally, supporting markets often have their own enabling environment that should be considered when designing
interventions. In this case, the supply of veterinary products and services was being liberalized at a different pace than
the markets for beef and dairy. For instance, the state still plays a major role in importing veterinary products: Intervet
and the AI supply firms are only recent entrants into the Azeri market. Development organizations might therefore
need to help quicken the liberalization of support markets so that they can have the greatest impact.
QUESTIONS RAISED BY THE CASE
There appears to be a virtuous, inter-dependent dynamic between the growth of small livestock farmers and the
growth of supporting markets for veterinary products and services. Questions arise as to how sustainable are the inter-
related economic prospects of the beef and dairy value chains and that of the supporting markets.
• How rapidly would the market for beef and dairy products need to grow for the profitability of veterinarians to be
secure?
• If the market changed, could the value chain and its actors respond? For example, if a new disease were to break
out, would the cooperative relationships forged to date serve both farmers and veterinarians well, such that there
could be an effective response?
• Will donor interventions eventually lead to oversupply in the beef and dairy markets? What would help mitigate
such an outcome?
Azerbaijan Beef and Dairy Value Chains 9
Azerbaijan Beef and Dairy Value Chains 10
Azerbaijan Beef and Dairy Value Chains 11
U.S. Agency for International Development
1300 Pennsylvania Avenue, NW
Washington, DC 20523
Tel: (202) 712-0000
Fax: (202) 216-3524
www.usaid.gov
Azerbaijan Beef and Dairy Value Chains 11
U.S. Agency for International Development
1300 Pennsylvania Avenue, NW
Washington, DC 20523
Tel: (202) 712-0000
Fax: (202) 216-3524
www.usaid.gov
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