September 25, 2012

India's milk purchases likely to drop by October

Due to excess stocks of skimmed milk powder (SMP) lying within the country, India's major milk producers are either expected to trim their procurement from farmers or stop it completely by next month.

Usually, purchase of milk rises manifold from October onwards because of abundant supplies owning to the flush season. The milk is procured by both cooperatives and private milk companies to meet the current demand and also for converting into powder for use during the lean season starting from April, when the supply drops.

However, this year most private dairies and also some cooperatives said that because of abundant stocks of SMP lying with them they would not able to procure much fresh milk or might even have to stop procurement as their operating liquidity is blocked in the inventories.

According to industry officials as on date the country has around 128,000 tonnes of SMP stocks, while the annual demand is around 88,000 tonnes, a surplus of around 40,000 tonnes. In other words, the country's entire requirement of SMP is already available with milk companies before even the main procurement season has started. One kilogramme of SMP is made from 11 litres of fresh milk.

"In such a situation there won't be any buyer in the market, because of which farmers would be forced to sell their produce at lower rate making less cash available to them for purchasing feed or for upkeep of the animals," said Kuldeep Saluja, managing director of Sterling Agro Industries Ltd, makers of the Nova brand of milk and milk products.

He said already some big milk procurers have started slashing the purchase price of milk from farmers and more will follow suit as and when they enter the market. "The current purchase price of milk is INR27 (US$0.5) per kilogramme and it is expected to drop to almost INR24-25 (US$0.45-0.47) per kilogramme because of abundant supplies," Saluja said.

As R.G. Chandramogan, managing director of Hatsun Agro Products Ltd, a large listed dairy company, which procures 0.75 million tonnes of milk annually said the whole problem started after government agencies imported almost 50,000 tonnes of SMP in the last few years to tide over a domestic scarcity which never really existed. "The SMP was imported to ensure adequate supplies, but in reality there was no such shortage," Chandramogan said.

He said that assuming the official figures which said that milk demand is growing at 6% per annum while the supply is rising by only 4%, the country should have had a shortage of around 13 million tonnes in the last five years given the milk production in 2011-12 was around 130 million tonnes.

However, the maximum import in any given year has not been more than 45,000-50,000 tonnes or 0.33% of the production, which means that there is some discrepancy in shortage figures. Given that milk in north India is primarily sourced from buffaloes, industry officials feel that the problem is expected to more acute in north India than in southern parts.

"Unless government immediately announces a one-time export subsidy of INR30 (US$0.56) per kilogramme, milk farmers will have no other option but to send their animals for slaughter as purchases will drop," Saluja of Sterling Agro said.

However, there are different voices within the industry itself. As R.S. Dixit, chairman and managing director of Gopaljee Ananda said that it is not unusual for milk prices to fall during flush season a supplies increase, but this year there is little chance of even that happening as fodder cost has gone up and so also the transportation charges, so farmers won't be selling at low rates.

Meanwhile, the government on its part has floated the idea of creating buffer stocks of SMP to absorb excess stocks for use in times of scarcity and also to creating domestic demand for milk through use of SMP in social security programmes. The issue also figured in a recent high-level inter-ministerial meeting on food inflation.