Setember 11, 2017
Indian milk metamorphosis: Powerful forces transforming the world's largest dairy market
By Eric J. BROOKS
An eFeedLink Hot Topic
• The stimulative impact of rising incomes is being multiplied by the closing of rural-urban consumption disparities and rising female workforce participation
• Demand for processed goods is rising far faster than milk output, supply has trouble keeping up with demand
• Better quality feed ingredients can boost medium-term productivity. Better farm management, higher quality dairy cattle species will be essential to boosting longterm output
Producing more milk than the combined output of 28 European Union countries, India's vast dairy market holds potentially vast synergies involving rapid demand growth, low productivity and incredible growth opportunities. The world's leading dairy producer has seen milk output increase at a 4.1% annual rate since 2000.
Over the short-term however, the industry is experiencing a supply-side slowdown: After rising by 4.8% from 147 million tonnes in 2015 to 154 million tonnes in 2016, higher feed costs and thinner profit margins are slashing 2017's expansion closer to 3.9% and a USDA estimated 160 million tonnes. Rather than decelerating, intelligent reforms could boost the current 4% growth rate could even rise above this level for a decade or two.
Unique circumstances imply there are at least four decades of rapid, pent-up demand growth in this market of 1.3 billion people. Moreover, demographic changes are having a multiplier effect on the industry's income-driven expansion: A major growth factor will be the narrowing of a consumption disparity that exists between the 60% of Indians living in rural areas and their wealthier urban counterparts.
Indian government statistics indicate that the urbanized top 8.5% of the population by income spends 40 times more on dairy products than the lowest 8.5%, rural based segment. Much of this expenditure difference is due to a higher proportion of urban income spent on processed dairy products.
Milk and butter/ghee make up slightly over 40% of urban dairy demand but 90% of the much lower rural per capita dairy consumption. Going forward, processed value-added dairy products will play a key role in this rural-driven expansion, and are already doing so. Over the past decade, the USDA estimates that the annual consumption increase for condensed milk (10%), infant formula (12%) yogurts and ice creams (15%) and cheese (17%) far exceed the annual increase in milk output.
Societal changes are also playing an important role. According to the USDA (GAIN Report #IN4089: India Dairy Products Annual), "More women are pursuing careers, especially those living in urban areas. With less time to cook meals at home, more families are buying ready-made dairy products like table butter, yogurt, paneer and other ethnic dairy desserts… such as processed cheese, flavored milk, probiotic drinks, ice cream and baby foods [infant formula]."
Rising female labor force participation has resulted in booming infant formula consumption. A study by Zenith International found that "India has the largest population of 0 to 4 year-olds in Asia." It estimates demand for infant formula is growing by 10% to 12% annually.
Never mind the rapid rise in personal incomes: Many other changes imply that processed dairy goods' consumption has at least four decades of rapid expansion ahead. There are dynamic, self-reinforcing interactions between rising rural processed dairy consumption, rural-to-urban migration, female labor force participation, women's' delegating of parental functions to day care centers and rising consumption of dairy-based fast foods such as pasta, milk shakes and pizza.
Unfortunately, with a population nearly equal to that of China and fraction of China's arable land endowment, suppliers find it challenging to keep up with demand growth. Fortunately, there is considerable scope to boost productivity substantially higher.
According to USDA statistics, a top American dairy cow produces 10+ tonnes of milk annually. China, Australia, and New Zealand have dairy cow productivity of ranging from 4 to 8 tonnes/year of milk. By comparison, annual Indian dairy cattle milk productivity ranges from 0.91 tonnes/year for indigenous cattle to 1.9 tonnes/year for water buffalo and 2.6 tonnes/year for crossbreed cattle. That is only 31% of China's dairy cow productivity and 12% of what a US cow produce over that same year.
With the proportion of milk obtained from water buffalo having stayed at a constant 55% to 57% since 2000, little progress was made in improving the dairy cattle herd. While buffalo milk's higher fat content makes it a good feedstock for processed dairy goods, low buffalo productivity (relative to modern dairy cattle breeds) counterbalances this advantage. The low productivity also makes for serious but unnecessary shortfalls of key feedstock inputs.
For example, with 61% of India's fluid milk production, America produced 1.05 million tonnes of SMP in 2016, nearly twice as much as India's 0.54 million tonnes –even though India has 30 times more dairy cattle!
While SMP equals 115% to 125% of America's butter production in any given year, India's SMP output went from 7.7% of butter production in 2000 to an estimated 10.4% this year. SMP powder is a proxy for the production of processed dairy items ranging from infant formula to yogurt and fast-food cheese. India's low SMP output points to supply-side deficiencies that cannot be sustained in the face of rapid, decades-long increases in processed dairy consumption.
Meeting demand for processed dairy goods without (politically explosive) mass importation will necessitate profound supply side improvements. One short-term measure requires the political will to liberalize the importation of feed ingredients: 64% of dairy cattle feed is made up of crop residues from harvests of sugar cane, wheat, rice and pulses.
A hodge-podge of second-rate inputs including millet, alfalfa, clover and sorghum make up 18% of dairy cattle rations. Pastureland grazing accounts for 12% of intake while high-quality feed ingredients such as soymeal, corn and oil cakes make up a mere 6% of rations. Thus, even without improving genetics or farm management, milk yields could be profoundly increased by merely substituting high quality feed inputs in place of the low-quality raw inputs that make up over 80% of rations.
The problem is that all meaningful reforms will exact a steep political price. Boosting the proportion of high-quality inputs could make India a net feed crop importer and cause hardship to the country's corn and soy farmers. Industry consolidation would substitute superior farm management techniques and modern cattle breeds in place of water buffalo –but would vastly boost rural unemployment among countless millions of water buffalo herdsmen.
Consequently, Indian dairy's long-term structure depends on cruel trade-offs. Shall we boost dairy cattle productivity to levels taken for granted in China? That would make millions of buffalo herders redundant. Or result in a flood of feed crop imports. Do we want milk production methods to be introduced more rapidly? Consolidation would be painful for rural dwellers who supply fluid milk for a living.
Such decisions will impact more than quantity or quality of dairy products the world's largest dairy market produces. It will determine whether Indian dairy becomes self-sufficient or import dependent, internationally competitive or suffers from some of the highest milk and cheese prices in the world.
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