General history of dairy cooperative in Indonesia

The first dairy cooperative⁶ in Indonesia was the cooperative SAE (Sinau Andadani Ekonomi) Pujon, in Malang, East Java established in 1962. Until the end of 1970s, other dairy coopera-tives were founded particularly in places where the local farmers have already kept dairy cat-tle (see Figure 10-1). Nevertheless, during the time period from 1960s to 1970s, dairy coop-eratives were experiencing many challenges. Selling milk to the dairy industry was a daunting task, since they had to compete with the uncontrolled importation of cheap milk powder. An-other challenge of competition was brought by the middlemen who buys directly from the dairy farmers and might have offered more attractive payment than the cooperatives. Hence, cooperatives became less active and some ceased the operation.

Despite the fact that the formation of cooperatives was intended, ideally, to provide services related to dairy activities – such as milk collection, delivery, loan, extension and training – to the members; Sulastri et al. (2002) made an insightful remark on the underlying reason of the establishment of dairy cooperatives, in particular the first dairy cooperative SAE Pujon, namely to curb the prevalence of opportunistic behaviour among dairy farmers:

4 FAO’s figures differ from those of Yusdja (2005, p. 259) that introduced a differentiation between the number of dairy cattle owned by cooperative members and non-cooperative (private company). Yusdja’s figures show a diverging pattern: while the population of dairy cattle owned by cooperative member experienced a sharp de-cline, that of non-cooperative exhibited a steep increase. Interestingly the degree of decline and increase were approximately the same, thereby indicating a transfer of ownership from cooperative members to non-cooperative. Unfortunately, Yusdja (2005) failed to mention the data source for further clarification.

5 Cf. Stanton, Emms and Sia (2005, p. 16)

6 Actually, already in 1949 a group of farmers in Pengalengan, Bandung, West Java formed a “cooperative“

called Gappsip (Gabungan Petani Peternak Sapi Indonesia Pengalengan) or literaly translated Uniof of Farmers Rearing Dairy Cattle in Pengalengan. This “coooperative” was then dissolved in 1961 (Masdien.2009) or 1963 (Baga 2004, p. 277).

Purposes of cooperative establishment were to eliminate the problems of unfair competition among the dairy farmers in pricing of milk, bad quality of cows, low milk production and low quality of milk. Before the dairy cooperative was established in 1962, the farmers were compet-ing with each other by decreascompet-ing the milk price but mixcompet-ing the milk with the water in order to get more profit. (Sulastri et al. 2002, p. 19).

In 1978 dairy cooperatives from different provinces established Board for Coordination of Indonesian Dairy Cooperatives (Badan Koordinasi Koperasi Susu Indonesia – BKKSI) that later on evolved into Union of Indonesian Dairy Cooperatives or UIDC (Gabungan Koperasi Susu Indonesia – GKSI) in 1979⁷. This organisation was formed with the main purposes (Su-lastri et al. 2002, p. 20):

 to give guidelines to dairy cooperatives on how to provide different services to dairy farmers (dairy cow supply, fresh milk marketing, technical support, feedstuff production, basic veterinary services, milk equipment, milk tankers, milk processing and training) and to upgrade the services rendered;

 to strengthen both cooperative personnel and system;

 to provide loans in the form of equipment like cooling machines, milk cans, tankers, and motorcycles;

 to give advise to GoI on policy making in the dairy sub-sector (such as in the case of Busep);

 to negotiate with the DPIs regularly about the pricing arrangements based on the milk quality; and

 to facilitate the importation of dairy cattle for dairy cooperatives and farmers.

However, the performance of services rendered by UIDC was considered to be inferior and insufficient by the interviewed cooperative leaders, particularly when compared to the service costs demanded by UIDC. To cover the service costs UIDC deducts a certain amount from the milk payment by DPIs to cooperatives⁸. Particularly in Central Java the issue of transparency

7 Cf. Baga (2004, pp. 78–79)

8 Cf. Nugraha (2007: 45)

and accountability in managing the funds⁹ contributed by cooperative members has been in the limelight of dairy VC stakeholders’ attention.

During the 1980s dairy cooperatives were involved intensively in various government support programs. On the one hand, dairy cooperatives acted as the beneficiary of such programs, as in the case of grants e.g. for cooling or pasteurisation machine. On the other hand, and per-haps most importantly, coops had been systematically directed towards playing the role as

‘intermediary institution’ in the ‘cooperative model’ introduced in 1983 (see Figure 10-2):

Figure 10-2 The cooperative model introduced in 1983: Cooperative as intermediary institution Source: own compilation¹⁰

As depicted in Figure 10-2, dairy cooperatives played a significant and strategic role within government support programmes. Apart from managing the collection of milk delivered by

9 The issues of transparency and accountability are closely related to the prevalence of opportunistic behaviour.

See Sub-chapter 10.2.1.6.

10 Cf. Kartadihardja (1988) in Sulastri et al. (2002, p. 20)

dairy farmers and its delivery to DPIs, dairy coops organised the collective buying of dairy cattle and concentrate feed and their distribution to the dairy famers (see the ’flow of goods’).

The costs incurred for these services were covered through the deductions from the milk payment to the dairy farmers.

Predominantly, dairy coops were the only gateway for any flow of money towards the dairy farmers (see the ‘flow of money’). Subsidised loans by GoI were disbursed through mainly state-owned banks which in turn disbursed these either via UIDC or directly to the coopera-tives. The cooperatives managed such loans either in ’executing’ or ’channelling’ model: In the first model the coops as the loan recipient received the fund, managed it by themselves, set the interest rate, and assumed the risk of any loan default; whereas in the latter the coops acted as a ’broker’ supporting the bank in organising the loan, mediating the dairy farmers as the loan recipient, received some fees, but did not assume the risk of any loan default. The loans were not given to the dairy farmers as cash fund, but as dairy cattle purchased by the cooperative. There were, however, cases where the banks directly disbursed the loans to the dairy farmers or farmers groups (depicted by the arrow with broken line in grey colour). In such cases, the role of cooperative was limited only in giving recommendations for the dairy farmers or farmers groups to get the loan directly from the bank.

Sulastri et al. (2002, p. 21) argued that thanks to the effective implementation of this coopera-tive model, dairy farming took root and started to take-off in Indonesia during the 1980s. This is indeed true, yet in the sense of quantitative dimension: The number of dairy farms and cat-tle rapidly increased and the domestic milk production grew significantly (see Figure 5-2).

Nonetheless, in other dimensions, such as qualitative and organisational improvement, dairy co-operatives and dairy farmers had not yet achieved significant development. On-farm prac-tices were and are generally still inefficient, hygiene problems raged on, and even many dairy cooperatives were involved with high incidence of bad debts¹¹.

10.2 Lesser-performing interaction system

In the lesser-performing interaction systems, value chain upgrading has not taken place. It does not mean, however, that there were no attempts to initiate improvements and introduce

11 Riethmuller et al. (1999b, p. 19); also in Stanton, Emms and Sia (2005); Moran (2007); and many others

changes. But rather, the actors or individuals in such systems chose to maintain the existing condition.