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Growth in Sector: 2018 to Make A New Beginning
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Tuesday, 16 January, 2018, 08 : 00 AM [IST]
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Dr R S Khanna
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A Review of 2017 Farmgate Price on Slide
The year 2017 ended with a sharp slide in farmgate prices of milk. During November-December, 2017, prices fell by 25% of the peak price during June-July, 2017, and was compounded with reduced intake of milk by both the cooperative and private dairies. The slide in farmgate prices was a reaction to skim milk powder (SMP) stock estimated in excess of 150,000 MT and drop in international and domestic prices of dairy commodities in particular SMP and ghee. The worry was that the stock of SMP was nearing expiry of shelf life. The decline in the market offtake of SMP lead to drop in price to Rs 140-190 per kg.
The fall in farmgate prices was pan-India. In Maharashtra, the farmgate price that had ruled at Rs 26 per litre during April-May had slid to Rs 16 per litre for cow milk during November/ December. Intervening Maharashtra government declared that a minimum support price (MSP) paid to the farmers would be Rs 27 per litre for cow milk, farmers seemed relieved. But the cooperatives did not pay, because of unfavourable market. During December 2017, the Maharashtra government sought explanation from the cooperatives but is yet to get response.
The situation has been generally similar in northern states of Rajasthan, Uttar Pradesh, Punjab and Haryana. Prices have fallen from a peak of Rs 41-50 for buffalo milk to Rs 35 in Uttar Pradesh and to Rs 28 in Rajasthan and Haryana for buffalo milk. In Rajasthan, farmers have been agitating because the cooperatives declared milk holidays or resorted to once-a-day collection. Private dairies in most northern states have been restricting purchase of milk just to meet with consumers’ demand of fresh milk and dairy products. The only dairies that continue to procure all the milk offered by the farmers are Tamil Nadu, Karnataka and Gujarat. In Tamil Nadu, the Aavin Cooperative has been purchasing milk as usual and continuing producing SMP. In Telangana and Karnataka, the governments have given subsidy of Rs 4-5 per litre to the cooperatives to support the dairy farmers. Gujarat cooperatives buy all the milk because they have so committed to their farmer-members. But outside Gujarat its cooperatives have slashed prices. As the year ended, the milk collection of Gujarat cooperatives had touched 2.14 crore litre in a day.
Seasonal Surplus of SMP and Subsidies
The surplus SMP stock of about 100,000 MT with the cooperatives and about 50,000 MT with the private dairies has contributed to the slide in farmgate prices. This is likely to repeat in the future. While the governments giving subsidy may feel contented that the farmers have been helped, it works against the private sector dairy plants. It needs to be underlined that the volume that cooperatives buy from farmers is just about half. The private dairies buy the other half. Administered pricing through subsidies hurts them and the procurement by the private dairies gets reduced than they would actually like to buy.
The situation of surplus SMP has been happening at regular intervals. During 2015, the private sector dairy plants had 50,000-60,000 tonne of SMP and the dairy cooperatives 120,000-140,000 tonne of SMP nearing expiry. The Central Dairy Development division granted Rs 176 crore to the cooperative dairies, during October 2015, to reprocess the SMP. The subsidy was limited to actual reprocessing cost not exceeding Rs 25 per kg of SMP and subject to an equal amount from the state and uninterrupted purchase of milk from milk producers. This scheme had miserably failed because none of the cooperatives availed this.
Managing Surplus SMP
There is need to follow active market intervention process on the basis as the European Union and the United States do. The US Department of Agriculture (USDA) has launched the Safety Net programme that works in collaboration with the National Milk Producers Federation (NMPF). The programme is called as Dairy Producer Margin Protection Program, or MPP. It is a flexible, comprehensive and an equitable help to protect the milk producer against the catastrophic losses to the dairy farmers. The US & EU also intervene by mopping up the surplus dairy commodities mainly SMP and butter. In fact EU had gone to the extent of buying cheese when it was surplus and prices were crashing.
During 2015, the annual subsidy paid to milk producers in the United States was estimated at US$15 billion, in the European Union US$11 billion, and in Canada US$6 billion. Just for these three put together, the subsidies amounted to US$32 billion. The correct option for India would be to set aside a corpus of Rs 500 crore to buy SMP and butter. Market should be intervened whenever the prices of dairy commodities crash and milk price paid to the farmers decline. The market intervention would stop the slide in prices immediately. The government would need to provide for the marginal losses in this market intervention. The SMP so purchased may be utilised by the government for distribution in schools for midday meal scheme, for international donations during natural disasters.
International Price and Impact on Exports
International prices for most dairy commodities have seen crash. During December 2017, the Global Dairy Trade, New Zealand, recorded average price for SMP at US$1,566 per tonne (Rs 100 per kg); for butter US$4,474 per tonne (Rs 2,900 per kg) and for butter oil US$6,392 per tonne (Rs 410 per kg). There is a forecast that during early 2018, the prices may further crash to US$1,500 for SMP, US$5,500 for butter oil. The barrier of import duty and transportation is not a barrier anymore. India imported 4,000 MT of butter oil just before Diwali. This has been the main reason for crash in prices of ghee and SMP. These prices make Indian dairy products non-competitive for export and a potential threat for imports.
Export of dairy products from India are considered insignificant. Highest ever dairy exports were during 2013-14 at 1.3 lakh tonne valued at Rs 3318.57 crore. During 2015-16, India exported 91,043 tonne valued at Rs 1711.64 crore; 2016-17: 54,845 tonne valued at Rs 1,000.31 crore; during April- December, 2017 exported 18,926 tonne valued at Rs 450.18 crore. This was also the period when the dairy farmers were paid the highest prices and there was consistent increase in farmgate price throughout the year. Crash in international prices and growing stock of SMP, butter and ghee have led to decline in average ex-factory prices of all commodities.
Developments during 2017
Interest of many international dairy companies continued in India. Malaysian yogurt brand MooCow was launched and would offer ice creams, frozen yogurt and yogurt drinks. South Korean giant Lotte Confectionary took over the Ahmedabad-based Havmor brand of ice creams.
Aavin, the dairy cooperative of Tamil Nadu, has been successful in getting a certificate for its milk of being fit for consumption in Singapore by the authorised agency. Obviously, the cooperative is elated to have set international quality standard for its milk. The cooperative is expecting to sell 50,000 litre of milk a month to begin with.
Food Standards & Safety Authority of India (FSSAI) organised a national summit on Transforming the Food Safety and Nutrition Landscape. The FSSAI issued guidelines for fortification of a variety of foods including milk and milk products. Kwality Ltd, being the first to have launched fortified toned UHT milk in tetrapack, was felicitated by the FSSAI for being an early adopter of milk fortification. The fortified milk provides more than 80% of the recommended daily allowance (RDA) requirement (as per ICMR 2010) for vitamin A and D.
NDDB launched a quality logo to signify safe and quality milk and milk products from dairy cooperatives. The quality mark would be synonymous with good quality and provide dairy cooperatives and producer institutions an edge in brand identity and a competition.
Chitale Dairy in collaboration with ABS India launched sexed semen from desi cattle breeds like Sahiwal, Gir and Red Sindhi cows and Murrah buffaloes. The technology would help the Indian dairy farmers to get sexed semen at 30-40% less than the imported sexed semen. Samad’s Herdman software was launched in collaboration with Hatsun Agro to manage the lifecycle data of cows. This would help increase the milk yield through better management practices. The software would help in testing pregnancy status well in time to inform the farmer of time to impregnate the cows and not lose precious time.
Price Movement in Six Years
A study of the milk prices paid during last six years was carried out in the milksheds of western Uttar Pradesh. The milkshed was chosen for study because the farmgate prices generally rule the highest in northern India and have a tendency to fluctuate significantly. Table 1 gives the actual prices paid and Table 2 shows the prices that have been corrected for inflation index as declared by the Government of India Income Tax department for the purpose of calculating financial gains. The milk prices have been standardised to milk containing 6.5% fat and 9% Solid-Not-Fat (SNF).
Observations and Conclusions
- Actual farmgate prices started to rise from April 2013, and continued until August 2014. This was the longest period during which there was no decline in prices. It actually coincided with the period during which the export of dairy products was the highest from India.
- Since then the actual farmgate prices have been declining and followed seasonal variation.
- Farmgate prices corrected for inflation have been rising from June 2013, until August 2014. This period also recorded a consistent rise in prices.
- Over the last six years the farmgate prices have been steadily going up (Graph 1).
- Over the last six years the inflation corrected prices have also been on the incline.
- The trendline for both inflation corrected and actual prices indicate that the prices would increase form March-April 2018 onwards and stabilise.
Increase in inflation corrected prices is a clear indicator that the dairy farmers in western Uttar Pradesh enjoy the increase that is above inflation. Perhaps milk contributes to increased inflation, though not very high.
Investment in Cooperative Dairy Sector during 2018
During 2018, the dairy sector would see increasing attention from the Government of India and the commercial banks. Already many commercial banks, flush with funds consequent to demonetisation, have been offering loans for dairy-based startups, standup schemes, and to small farmers for purchase of animals and for setting up of medium-scale dairy farms, construction of sheds, purchase of motorbikes and even smart phones. Bank of Baroda has tied up with Kwality and Heritage and State Bank of India with Tirumala of Groupe Lactalis. Loans and subsidies were given by Heritage and Surat Cooperative for purchase of cows and buffaloes to their members.
The Central government declared in its 2017 Fiscal Policy Strategy Statement, “Providing a safe and stable environment for the private sector to create wealth”; and has also admitted that ‘agriculture including dairy is India’s largest private sector enterprise.’ The Central government has already created Dairy Processing & Infrastructure Development Fund (DIDF) of Rs 10,881 crore under the NABARD/NDDB. It is expected to be disbursed between 2018 and 2020. The fund would be given only to such cooperatives and milk producers cooperative companies that are profit making and have good net worth. It is expected that some 39 milk unions in 12 states will get covered. The fund would be utilised to finance village dairy cooperatives with electronic milk testing machinery and instruments to check adulteration, 28,000 Bulk Milk Coolers (BMCs), rural milk chilling capacity of 140 lakh litre per day and additional milk processing capacity of 126 lakh litre per day.
The processing dairies are expected to be modernised for manufacturing value-added products. The fund helps 95 lakh farmers in about 50,000 villages and creates direct employment for about 40,000 people. In terms of value creation, the fund is expected to give additional rural income of Rs 50,000 crore per annum and would have a multiplier effect on the rural economy. The fund would be given on very soft terms – low rate of interest, interest subvention by the Central government, repayment over 12 years including a two-year moratorium. The proviso is that the beneficiary cooperative should invest 20% of the project cost itself and the state government should guarantee the repayment of loan.
By middle of 2018, the cooperative dairy sector is expected to get an investment of another Rs 20,057 crore through a loan being negotiated with the Japanese International Co-operation Agency (JICA). While details are being worked out between the Government of India and NDDB, this fund will be used to set up 1.05 lakh bulk milk coolers to store 524 lakh litre of milk per day in an additional 1.28 lakh villages. The funding will also be deployed to create milk and milk product processing infrastructure of 76.5 lakh litre daily and would benefit 122 lakh additional milk producers.
(The author is chairman, Kwality Limited, New Delhi)
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