Why milk prices have fallen by Rs 10/litre for farmers

Cooperatives saddled with excess stocks as private dairies slash procurement.

Written by Harish Damodaran | New Delhi | Updated: February 4, 2016 7:33 am
Most private dairies with a predominantly commodity (powder and ghee) portfolio have responded to the global crash either by sharply slashing their milk purchase price or even discontinuing operations in the last one year. Most private dairies with a predominantly commodity (powder and ghee) portfolio have responded to the global crash either by sharply slashing their milk purchase price or even discontinuing operations in the last one year.

Since April-May 2014, milk realisations for farmers have collapsed by around Rs 10 per litre.

Maharashtra farmers are currently selling cow milk, with 3.5 per cent fat and 8.5 per cent SNF (solids-not-fat) content, to
private dairies at roughly Rs 16 per litre, compared to Rs 26 one-and-a-half years ago. During the same period, farm-gate prices in northern India for buffalo milk, containing 6.5 per cent fat and 8.5 per cent SNF, have dropped from Rs 39-40 to Rs 29-30 a litre.

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The blame for this can be laid primarily on “global” factors. Prices of skimmed milk powder (SMP) at GlobalDairyTrade — the fortnightly online auction platform of New Zealand’s Fonterra Cooperative, the world’s No. 1 exporter — averaged $ 1,792 per tonne on Tuesday. The corresponding rate on April 1, 2014 ruled at $ 4,126 per tonne, which itself was below the record $ 5,142 for the same period the previous year.

The above unprecedented global crash has done three things to India’s dairy industry.

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First, it has brought exports to a standstill, with SMP shipments from the country plunging from a peak of 1.3 lakh tonnes in 2013-14 (valued at Rs 2,717.56 crore) to 34,490 tonnes (Rs 681.69 crore) in 2014-15 and a paltry 8,130 tonnes (Rs 155.73 crore) during April-November 2015.

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Second, low export demand has impacted domestic SMP prices too. These have declined from an average ex-factory level of Rs 240-250 per kg in April-May 2014 to Rs 140-150 now, even as fat (ghee) prices have remained stable at Rs 300-310 per kg. Lower powder realisations have affected the operations of private dairies — especially those in the North and Maharashtra whose revenues are mainly from commodities, as opposed to branded liquid milk sales.

When SMP and ghee were selling at Rs 250 and Rs 300 per kg respectively, a dairy would have grossed Rs 3,270 or so from processing 100 litres (103 kg) of cow milk with 3.5 per cent fat and 8.5 per cent SNF. After deducting Rs 300-350 of processing and packaging costs, they could pay up to Rs 2,950 for milk delivered at the plant. This price, at the farm-gate, would have worked out to about Rs 2,600 or Rs 26 a litre.

But at Rs 140/kg for SMP and Rs 300/kg for ghee, the gross revenue from the same 100 litres of milk would be just over Rs 2,300. Netting out Rs 350 of processing-cum-packaging costs and an equal expense for transport of milk from the farm, thus, effectively leaves Rs 16 per litre — which is what Maharashtra’s farmers are receiving today.

Simply put, most private dairies with a predominantly commodity (powder and ghee) portfolio have responded to the global crash either by sharply slashing their milk purchase price or even discontinuing operations in the last one year.

But the sharp cut-back in procurement by private dairies has resulted in a third outcome — diversion of the surplus milk to cooperatives, particularly in the western and southern states where they have a reasonable presence.

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During April-December, cooperatives put together have procured 14.1 per cent more milk over the average for same period of 2014-15. This growth is higher than the 10.7 per cent recorded for the whole of 2014-15 and the less than 2 per cent increase in 2013-14, when private dairies were aggressively chasing milk on the back of the SMP export boom.

The additional milk flowing into cooperatives has led to their accumulating excess powder stocks of over one lakh tonnes, which ordinarily would have been produced for exports. These are, instead, putting further downward pressure on prices. While cooperatives are saddled with too much powder, the only thing that has still kept them going is liquid milk sales, which make up anywhere from two-thirds to three-fourths of their total procurement. Unlike SMP, retail prices of pouch milk haven’t fallen. If anything, they have risen marginally in the last one-and-a-half years. This has also enabled cooperatives to pay farmers more than what commodity-focused private dairies are giving.

Farmers supplying milk to the Karnataka Milk Federation (KMF) unions are, for instance, now getting around Rs 21 per litre for cow milk. The cooperative is selling the same milk to consumers under its Nandini brand at Rs 33 per litre. KMF’s farmers are, in addition, receiving a state government subsidy of Rs 4 per litre, which, on an average daily procurement of 65 lakh litres, comes to nearly Rs 950 crore a year.

But it’s not only cooperatives. Some private dairies in the South like Hatsun Agro Product and Heritage Foods also have a significantly large liquid milk marketing business, insuring them against the commodity price crash that has hit their northern and western counterparts hard.

“My procurement has gone up 25 per cent this fiscal, as against the normal yearly increase of 12-13 per cent. All the surplus milk in Tamil Nadu, has been absorbed by me or Aavin (the state cooperative federation), while others (including private commodity players) are finding the going tough”, says R.G. Chandramogan, chairman of the Chennai-based Hatsun Agro, which owns the Arokya brand of liquid milk.

Liquid milk apart, the other consolation for the industry is ghee prices holding up, partly due to the government clamping down on butter oil imports after a couple of traders brought in an estimated 4,000 tonnes ahead of Diwali at landed prices of Rs 200 per kg. But the benefits of it would accrue more to buffalo milk, whose prices are, moreover, expected to firm up once the “lean” summer months set in. No such luck is foreseen for cow milk, which has lower fat and is also less prone to production fluctuations round the year.

“It is the buffalo that is probably going to save the dairy farmer”, sums up RS Sodhi, managing director of the Gujarat Cooperative Milk Marketing Federation (Amul).