January 17, 2014
Too many buffaloes, not enough cows and everyone wants their cheese
For India's milk output to keep pace with fast rising ice cream, cheese and butter consumption, it needs to change the composition of its dairy ruminant population.
by Eric J. BROOKS
An eFeedLink Hot Topic
Led by a growing middle class's rising consumption of processed dairy products, the growth of India's dairy industry has accelerated. USDA statistics indicated that in the six years inclusive from 2003 to 2008, the country's fluid milk production (across all ruminant lines) grew at a cumulative annual growth rate (CAGR) of approximately 3.1%, from 86 million tonnes in 2003 to 103 million tonnes in 2008. But from 2008 to 2014 inclusive, annual fluid milk output has risen at an approximate 5.1% CAGR, rising from 103 million tonnes to an eFeedLink estimated 138.5 million tonnes this year.
For 2014, prior to recent events, the USDA estimated fluid milk output across all ruminants to rise 4.8% to 141.5 million tonnes. However, a severe foot-and-mouth disease (FMD) outbreak that occurred in late 2013 got more serious early in the new year. In a January 13 article in the New Indian Express, Dr. T.P. Sethumadhavan, an agricultural economist at Kerala Veterinary and Animal Sciences University, stated that the FMD outbreak, "reduced the milk production by 25% in South India," adding that the outbreak has resulted in Rp9.5 billion (US$154.8 million) of lost output and reduced the country's GDP by 0.30% to 0.45%.
Given the FMD outbreak's severity, eFeeLink believes that that India's 2014 fluid milk output increase will be in the 2.7% to 3.0% range, or approximately 138.0 to 138.5 million tonnes. At the same time, it must be said that despite this year's FMD outbreak, the stage is set for annual fluid milk output growth of 4.5% or more for more than a decade to come, with some processed dairy lines to expand several times faster. This is not just because of India's assumed, ongoing growth in personal incomes, but also the market's relatively immature supply and demand fundamentals.
Milk output outraced by demographics, processed dairy consumption
Although it is the world's largest dairy producer, India's 17% share of the world dairy market lags its 17.7% share of the world population. India's relatively low share of world dairy market can be seen in the fact that milk is as central to Indian culture as pork is to China or beef to America. With Indian incomes rising and culture placing a high value on dairy based foods, its proportion of world dairy output will likely rise closer to 25% over the next two decades.
At the same time, annual fluid milk production increases of up to 5% struggle to keep up with overall dairy consumption growth. Led by lines such as cheese (which has consumption rising 10% to 12% annually) and ice cream (12% to 15% yearly consumption growth), the USDA estimates consumption growth across all dairy products averaged 6.8% in the decade from 2003 to 2013.
An intersection of social trends will power near double-digit rises in processed dairy consumption for decades to come. This includes rural-to-urban migration in a country where roughly 66% of the population or 700 million people are rural. As several hundred million of these people move into cities over the next two decades, their new behaviours will reinvent the quantity and quality of India's dairy consumption.
Chief among these will be the tendency of well-educated, newly urbanised young adults to consume non-traditional foods such as cheese burgers, pizzas, potato skins with cheese, low fat yogurts, bread with garlic butter or Alfredo sauce pasta dishes.
With urbanization, a coincident, rapid rise in the number of working women will require processed, fast cooking (and dairy containing) meals for their families. With the proportion of educated urban adults, and working women growing much faster than India's billion plus population, the dairy market implications of these demographic shifts are unavoidable.
Fast rising consumption of ice cream, cheese and yogurts is causing boosting demand for milk by-products used in the making of these value-added products. Output and consumption of non-fat dry milk powder and butter for example, increased on average by more than 8% annually from 2003 to 2013, while the volume of cheese increased 11% annually over this same time.
Relatively high investment returns creates a strong incentive to continue expanding production of processed dairy goods: Rabobank estimates that revenue from cheese, for example, is rising at a 16% to 17% annual rate, or approximately 40% to 50% faster than its production.
One reason fluid milk production kept pace with high consumption growth for processed dairy goods was because during the early 2000s, these same products accounted for a much smaller share of overall dairy consumption. A decade ago, fluid milk accounted for a vast majority of consumption and grew more slowly. With dairy lines that accounted for double digit annual growth making up less than a tenth of demand in the early 2000s, the overall demand for fluid milk grew at a manageable rate.
On one hand, the rising market share of processed dairy goods keeps India's dairy flourishing: Fluid milk will be the first dairy line to see consumption growth taper off. Fortunately, that will be compensated for by the faster growth of processed dairy foods, which comprise an ever increasing proportion of output.
On the other hand, from an under 10% market share at the turn of the century, Rabobank estimates that value-added dairy products made up 21% of the market in 2013 and will comprise 31% of consumption by 2020. That makes it harder for India's fluid milk output to keep pace with demand for the cheeses used in fast food, pasta, ice cream and yogurt.
As the accompanying graph shows, except during today's economic slowdown and an earlier one a decade ago, India's fluid milk supply is growing more slowly than demand for milk derivatives such as butter and cheese, which are critical inputs in the making of processed dairy goods.
Although India remains self-sufficient in milk, it becomes a nominal importer whenever demand for processed dairy products outstrips milk production. With the balance between fluid milk supply and processed dairy goods' demand growing ever tighter, unless India improves ruminant milk making productivity, it could become a chronic importer of products like butter and skim milk powder.
The good news is that with dairy productivity per animal equal to 15% of US levels, India could, in theory, easily achieve dairy self-sufficiency without relying on imports of skim milk powder, butter or cheese.
Unfortunately, the unique nature of the India's dairy sector makes this highly difficult to achieve. In mid 2013, the USDA interviewed industry sources who stated that only 60% of India's fluid milk production is sold for consumption –the rest is consumed by the families of the backyard farm producers themselves. Hence, even if farm size is not increased, at the very least, more productive ruminants would allow a higher percentage of milk to be sold commercially.
But the milk supply for making processed dairy products is even tighter than it looks: 42% of that 60% share of milk that makes it to dairies or urban consumers is distributed via informal processors with no processing standards, limited refrigeration capacity and little in the way of modern technology. Only 18% of India's total fluid milk supply actually makes it to formal, organised dairy processors with modern facilities.
In its most recent Indian dairy report, the USDA added that India's informal, mostly backyard dairy market is, "largely fragmented and a challenging environment due to its high-volume and low margin business of indigenous products, the supply constrained value chain for quality products and insignificant trade opportunities due to ever changing trade regulations."
With 40% of India's milk output consumed at their host backyard farms and another 42% distributed by undercapitalized, technology deficient retailers or middlemen, a meagre 18% of India's milk carries the burden of meeting near 10% annual demand growth for processed dairy goods.
Wrong change in ruminant supply mix
Of course, India's government is not blind to these facts. In 2012, it created a US$416 million National Dairy Plan, chock full of incentives to boost both the quantity and quality of milk the country produce.
Can this comprehensive dairy industry plan keep India self-sufficient in milk? Although its stated goal of producing 150 million tonnes of fluid milk by 2017 will be achieved, it is not certain how many other important objectives will be met.
Given the black box formed by India's vast majority of unaudited dairy producers, even the USDA admits that, "Little research is carried out on India's vast informal dairy sector."
But one thing is for certain: For dairy output to keep pace with consumer demand growth, a rising proportion of fluid milk must come from more productive ruminants. Although there are both productive and unproductive dairy cows, one fact cannot be denied: Genetics and breeding selection designed to boost animal milk output has also been centered on dairy cattle, not buffalo, sheep or goats.
Therefore, for India's fluid milk output to keep pace with its double digit growth in processed dairy lines for several decades, the proportion of milk coming from productive dairy cow breeds need to increase while that produced by buffaloes, less productive cows, or other ruminants should fall –instead, the opposite trend may be under way.
The accompanying chart show how from 2000 to 2009, the proportion of milk produced by dairy cows stayed constant, in the 44% to 45% range. But from 2010 onwards, the proportion of India's milk supply accounted for by dairy cows gradually fell, to approximately 42% this year.
India needs to triple ruminant milk making productivity before can it can match the efficiency of a Chinese dairy cow (which itself has less than half the efficiency of a US dairy cow). If the proportion of milk coming from more productive dairy cows was rising, the rapid substitution of cattle with superior milk making genetics in place of less productive water buffalo could, on its own, keep India's fluid milk supply ahead of demand for processed dairy goods.
But with the proportion of milk coming from cows falling and that coming from buffaloes actually rising, the opposite is true. Once its economy recovers, unless India quickly replaces hundreds of millions of water buffalo with modern dairy cows, the current mix of milk producing ruminants may find it difficult to meet near 10% annual demand growth for processed dairy goods.
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