Innovation of Agricultural Partnership for Dairy Farming

Abstract

This paper studies an innovative agricultural partnership model in the dairy industry. In the developing regions, farmers are constrained by limited resources. On the other hand, the investment cost can be high for a social enterprise to set up new facilities and raise dairy animals all on its own. Under the partnership model, the farmers raise their dairy animals during the maturing stage, while the social enterprise receives the mature dairy animals from the farmers and raises them during the milking stage. This not only reduces the social enterprise's investment cost but also ensures quality and virtually expands the farmers' capacity as the mature dairy animals are brought to the social enterprise's facility. We find that the performance of this model depends on the farmers' original capacity and the capacity expansion ratio. A larger original capacity can either increase (when the expansion ratio is small) or decrease (when the expansion ratio is large) the social enterprise's profitability. Compared with the conventional decentralized model where the farmers raise the dairy animals all on their own and the independent integrated model where the social enterprise raises the dairy animals all on its own, the partnership model is particularly preferred when the market size of the social enterprise's dairy products is intermediate. We also consider the case where the government provides subsidies for quality improvement. Interestingly, we find that the quality of the dairy products might even decrease because the subsidy might incentivize the social enterprise to switch to a different business model which results in an unintended consequence. Finally, we consider the case where instead of its own profit, the social enterprise maximizes the sum of its profit and the participating farmers' profits. We find that under such an objective the social enterprise will attract more farmers to participate in the partnership and produce more dairy products; however, this does not necessarily increase total social profitability as the social enterprise's own profit decreases.