OCTOBER TO MARCH are the busiest months for 35-year-old milk farmer Naresh Parmar in Sandesar village on the outskirts of Anand, home to the country’s largest dairy company, the ₹72,000 crore Amul. Typically known as the flush season, this is the time when milk production goes up by 25-30% due to favourable weather conditions (summer months are the slack season for milking), and Parmar on average pours 30-40 litres of milk every day at the Sandesar Milk Producers Cooperative Society (a part of Gujarat Cooperative Milk Marketing Federation [GCMMF], the parent body of Amul).
The flush season is a busy time for dairy companies, too. This is the time they procure the most and convert milk into skimmed milk powder, which eventually helps in meeting the heightened summer demand for ice-cream, lassi and milk shakes.
However, the flush months of October 2022-March 2023 were rather unusual. The ₹10 lakh crore Indian dairy industry, also the world’s largest milk producer, witnessed a decline in production. Parmar says the yield of his cows dipped 2-3%, while Amul MD Jayen Mehta says the decline in milk production was 1% in FY23.
But smaller cooperatives (and private dairies) have a starker story to narrate. Their deficit could be as much as 7-8%. “We normally get a flush between November and January, that’s when there is surplus milk. Last year there was no flush, and milk production came down, we faced a shortage of milk,” says Bhupendra Suri, CEO, Godrej Jersey. Dairy cooperatives of Gujarat, Karnataka, Tamil Nadu, Rajasthan and Bihar supply 65% of the milk procured by cooperatives. According to agriculture and dairy consultant Aditya Jha, private dairies have been importing milk powder to cope with the deficit, mainly from New Zealand and Europe. Though it is difficult to point out the exact percentage of decline, the shortfall is significant, claims Jha.
In fact, the CEO of a leading grocery retail company points out that Amul’s milk deficit in the past year has been much more than 1%. “There was a shortage of Amul butter, and their ghee supply is still patchy,” he says.
According to the Department of Animal Husbandry and Dairying, India produced 220 million metric tonnes of milk in 2022, the same as in 2021. That amounts to a 5-6% dip in annual milk production since that’s the average rate of growth of the industry that got stalled in 2022, leading to a shortage in supply, particularly for the organised sector comprising milk cooperatives, dairies and the private sector.
The organised sector procures 38% (83.6 mmt) of total milk produced but with the fall in production, supply is constrained as farmers and doodhwallas retain a bulk of the remaining 62% of milk produced for their use.
This has forced the organised sector to offer higher prices to procure milk.
Cooperatives and private firms, which were paying ₹18-19 a litre in the months following Covid, had to increase procurement prices to ₹33-36 per litre, leading to a 15-18% jump in consumer price of milk and value-added products.
“The milk production growth rate collapsed to zero last fiscal from an average 5-6% year-on-year,” explains Jha.
So, why is the organised sector not able to procure more milk? Though the India dairy story is all about farmer cooperatives, most milk farmers, says Jha, prefer selling the milk they produce on their own. “They get higher margins and consumers also don’t mind paying a slight premium sine they consider the milk as fresh,” explains Jha. In fact, Suri of Godrej Jersey says the company fell short of products such as ghee and curd in early April.
To meet the demand, the country imported $1.4 million worth of milk and cream in FY23, a 31% increase from the previous year, according to DGFT data. “However, the import numbers can’t be used as a yardstick to compare the demand-supply mismatch. Almost 62% of the milk produced in India is procured by the unorganised sector, which is consumed by farmer families or bought by unorganised doodhwalas, of which nobody has a count,” explains Rahul Kumar, CEO, Lactalis India. The country is clearly not importing enough to plug demand-supply gap. After all, it’s a political hot potato. A spokesperson of the Ministry of Animal Husbandry first said that the government would consider imports to meet demand, but later clarified that Centre is yet to take a decision on imports. Experts says with elections round the corner, the Centre will not take a chance with imports as that is not just politically unpalatable for the world’s largest milk producing country but could impact farmer livelihoods as domestic prices will crash immediately. “The hope is that in the upcoming flush season would see improved milk production and the shortfall would reduce,” says Jha.
The Genesis Of A Crisis
India’s current milk shortfall is largely due to the events that unfolded during the first two waves of the pandemic in FY21. While private consumption increased, institutional demand dipped around 40% during the fiscal, dealing a huge blow to the dairy industry.
“Since there was a dip in demand, most dairies ended up with more milk. The excess milk got converted to commodities (such as skimmed milk powder), and when that commodity came to the market, the price of the commodity crashed by 20-25%. As a result, most private dairies reduced the price they paid to farmers. But farmers had to pay more for fodder since cereal cost had increased. Hence, they started cutting down on feed cost and invested less on new animals,” explains dairy industry veteran and former Amul MD R.S. Sodhi. Around 60% of the cost of milk production is feed cost and that got impacted, he adds.
The increase in feed price was due to high inflation across categories such as edible oil, wheat, vegetables, pulses and animal fodder. Cattle feed prices went up by almost 25% last year. While milk farmers like Parmar were covered by their respective cooperatives and continued to nourish their cattle, majority were left out. This accentuated the crisis, affecting productivity during the flush seasons that followed.
And, as if that wasn’t enough, cattle in most parts of the country contracted the contagious lumpy skin disease through FY21. It may have led to just 1% of the cattle (cattle population in India is around 53 crore) perishing, but the disease impacted milk productivity severely. “Inter-state movement of animals stopped due to the spread of the disease. In Gujarat, for instance, most farmers buy animals from Punjab and Maharashtra. New animal induction stopped for six months, which also contributed to the reduced growth in milk production,” says Sodhi.
“While we managed to give a good price to producers in Gujarat and kept the momentum going, the trend in the rest of the country was not the same. Farmers were selling milk at ₹18-19 per litre (during Covid) in Maharashtra, and this led to a dip in their investment in cattle feeding. Besides, the price of cattle feed also increased by 25-30%, which further added to the problem,” says Mehta of Amul.
When milk supply increased during peak Covid, most dairies procured milk at a lower price and converted it into skimmed milk powder. This brought down powder prices to ₹200 per kg in FY21. Most private dairies increased their value-added products portfolio, thereby ensuring a healthy topline growth, but the move proved counter-productive when institutional demand was restored in 2022. They exhausted their accumulated stocks and that’s how the shortage began.
Several private dairies, according to Venkat Shankar, founder and partner of consulting firm, ExQ, also exported higher than usual quantities of skimmed milk powder and butter (dairy fat) to global markets in 2022. “When dairies started exporting, it drove prices of milk further north.”
It was during this time that inflation was also at its peak and fodder prices were at an all-time high. Dairies increased procurement cost by 20%, which pushed up their final selling prices. While cooperative brands such as Amul raised prices by ₹2, Odisha-headquartered dairy start-up Milk Mantra increased prices by ₹4. Lactalis India, on the other hand, saw a steep 18% increase in prices in both liquid milk and value-added products.
With farmers not investing in their cattle and fodder prices running high, the flush season of FY23 came under pressure. “Since there is surplus milk during the flush season, prices are lower and people usually buy more milk, which they store by converting into powder. Never in the past have selling prices gone up during the flush season. Dairies, on the contrary, had to increase prices during October to March,” explains Kumar of Lactalis.
Amul’s Mehta holds private dairy companies responsible for the volatility. After all, the private sector collects more milk than cooperatives. Around 38% of the overall milk produced in India is handled by the organised sector, out of which the private sector collects 20% and cooperatives collect 18%. “Farmers are under pressure. Their cost of production has gone up and they need to be compensated. On the other hand, the private lobby wants cheaper inputs because they want higher profits. They want to buy raw material at the lowest price and make the finished goods at the highest price, so that they are profitable. Our model is different. We buy the milk at the highest price and sell it to consumers at an affordable price.”
While procurement prices in most states dipped to ₹18 per litre (vis-a-vis ₹31 pre-Covid), Mehta claims Amul did not undercut. “We got more milk than what we usually do, we processed and exported. At one point of time when Europe had 3 lakh tonnes of skimmed milk powder, GCMMF had 3.5 lakh tonnes. Last year my milk availability was down by 1% but business was up by 18.5%. We could use part of that inventory in our products. The world market was down by 40% year-on-year, but we got 40% more realisation.”
Dent In Profits
With procurement costs increasing upwards of 20%, most dairy companies, especially the private ones, are seeing their margins shrinking by 5-6%.
“Our value-added products have grown strongly (since demand went up),” says Singh of Godrej Jersey.
“While we have faced inflation on the fresh milk procurement side, we have balanced the impact on the consumer price with increased productivity and cost-saving initiatives,” adds a Nestle India spokesperson.
Lactalis India has taken an 18% price hike, though the overall hit borne by the company is upwards of 20%, says Kumar. “Profitability of all dairy companies has been low.” He adds that private players are at a greater disadvantage as they don’t get any subsidy from the government unlike dairy cooperatives. “In Tamil Nadu, Aavin sells full cream milk at a lower rate than us (it is cheaper by around ₹18). Their procurement cost is ₹30 and the government gives them a subsidy of another ₹6 per litre, so it is priced at ₹36. For the dairy the cost of milk is just ₹30.” This explains why most private dairy firms have a strong value-added products strategy since it gives them better margins.
Sodhi, however, believes milk inflation and price hikes are exaggerated. “The price increase in the last 15 months may be 14-15%, but in the last 36 months it has gone up by 18-19%, which means the actual rise on a year-on-year basis is less than 6%.”
There has been minimum inflation in milk, he adds. “Edible oil prices doubled, prices of vegetables and pulses went up by 35-40%, and poultry prices increased by 30%. In milk, demand increased when institutions opened post Covid. Whatever commodities dairies were holding got exhausted. When stocks fell, supply reduced, procurement prices went up and dairies started paying more to get milk,” he further explains.
No To Imports
So, does India really need to import milk products?
Amul’s Mehta says the narrative around the scarcity of milk has been created by the faction of dairies and milk-based beverage manufacturers, who apart from procuring are also dependent on commodities to run their business. “This faction perhaps wants cheaper commodities to come into the country. It will be good for them but it will dampen market sentiment,” says Mehta.
“Importing is not an option. If you import, in the long term, it will lead to low production just as it happened in case of edible oil. If you give consumers cheap milk by importing, then she will get used to it. It will be detrimental for the economy,” adds Sodhi.
Kumar of Lactalis says one normally imports to compensate the gap, but it is too late for the same. “It was to be done on time. Maximum shortage of milk happens during summer (when cattle productivity depletes by 20-25%) and we are already into summer. The import should have happened in January since that’s when milk prices increased.”
The moderate summers this year have helped milk production, claims Singh of Godrej Jersey. “With the farmer getting a better rate, he/she has started feeding the cattle well. The cattle feed price has also began to rationalise. All these factors have improved milk production in the last one month.”
Mehta of Amul agrees. “We got as much milk in March as in February. Our procurement in April was 7% more than last year, while March was 3-4% higher. We are hoping for a 7-8% annual increase in May and June.”
Sodhi doesn’t expect the regular 6-7% growth that the industry registers in a normal year in FY24, but he doesn’t foresee a shortage either. “Now that farmers are getting a good price, you can expect good milk this winter,” says the former Amul MD.
However, Shankar of ExQ doesn’t see milk prices softening till year end. “There is a deficit and come July, the festive season will begin, and demand will go up. I don’t expect any pricing relief till the next flush season in November.”
Despite the crisis, the Indian dairy industry isn’t faring too badly compared to global peers. A dairy farmer in Europe, who fetched `55 for a litre of milk last year, gets a 35% lower price today. Prices of skimmed milk have also fallen by 30-35% across the world. On the contrary, milk inflation in India is averaging at 6-7% (with FY23 seeing an all-time high of 15%).
Experts think the industry’s woes need to be dealt with on priority before they go out of control, destroying all the gains of the White Revolution.