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December 8, 2016

Booming but inefficient: The opportunities and paradoxes of India's dairy sector
 
By ERIC J. BROOKS
 
An eFeedLink Hot Topic
 
  • Milk output has fallen below its longterm growth trend; India's paper currency crisis may cause it to miss 2017's projected 3.9% expansion
  • Despite the huge increases in output, dairy cattle still account for slightly less than half the milk produced
  • Booming beef exports decreased the incentive to substitute dairy cows in place of buffaloes
  • Bad inputs, low cow productivity, high feed costs keep growth near 4% rather than the 6% that is achievable
  • After years of stagnation, cow productivity is rising but most do so even faster to reach international levels
Challenged by costly low quality feed supplies and mounting consumer opposition to rising prices, Indian dairy production continues to boom, though by significantly less than the 4.7% average pace seen from 2010 through 2015. After rising by more than 4.5% in both 2015 and 2016, the next year will see Indian fluid milk production fall further below its longterm trend rate.
 
This is still much better than the incremental growth seen in mature markets or even the growth seen in large, fast growing ones like China. The real question is whether India's dairy industry is expanding as quickly as it could be. Moreover, the quality of the industry's output is starting to matter as much as its quantity.
 
From 97.1 million tonnes in 2005, output expanded 51.3% over the next decade, totaling 147.0 million tonnes by 2015. In 2017 however, a slowing economy will result in a slower, USDA projected 3.9% rise, from 154 to 160 million tonnes. This estimate however, was made before the country's recent paper currency reforms induced a liquidity crisis among lower income Indians. The unintended consequences of recent monetary reforms may result in both less production and consumption, and leave fluid milk output in the 158 to 159 million tonne range.
 
The impact of India's ongoing currency crisis notwithstanding, the USDA projects production of butter and SMP to rise by 3.8% and 5.6% respectively. The differential in expansion rates is mostly due to butter being a traditional, slower growing product while SMP is widely employed in rapidly expanding processed dairy lines such a yogurt or dairy-based desserts.
 
Prior to 2016, despite being challenged by an escalating interplay between lagging Indian corn and soymeal production, booming livestock demand, protectionist government feed crop policies and rising dairy production costs, the years since 2010 had been kinder. From 2011 through 2015 inclusive, fluid milk output growth has fluctuated in the 4.3% to 5.1% range.
 
However, by almost any efficiency measure, the industry is lagging. This reflects the sector's informal backyard nature, which is not fully responsive to market signals. According to the USDA, only 20% of India's milk production comes from organized business entities such as large farms, integrators or government sponsored cooperatives. It adds that, "Most of the dairy cooperatives and private dairies market products at the state or regional level and only a few players have a wider national presence."
 
Its unstructured nature does not reflect market-based economics as much as it does government programs that support and subsidize small holder farmers, lest uncontrolled consolidation turn them into a social problem of mass rural unemployment. Unfortunately, statistics show that the industry is paying a huge economic price for this protectionism.
 
In theory, rapid growth should have created huge incentives to make production more efficient but this has not happened. Even though dairy cows are more efficient than buffalo, their proportion of total fluid milk output has fallen. Based on USDA Indian milk production statistics, the proportion of fluid milk produced by dairy cows fell from 49.2% in 1995 to 43.0% in 2005 and will only amount to 47.0% in 2017.
 
Intersecting agribusiness trends, economic and cultural factors have held back the adoption of modern, more productive dairy cattle breeds. First among these is the fact that the backyard farms that account for most dairy production have neither the financial resources nor the business connections to purchase or import productive foreign breeds.
 
Second is the fact that when farmers want to boost their returns, it is far easier to do so by purchasing native buffalos than pricier, high end cross-bred cows. Not only are buffalos cheaper and more readily available but the milk they produce has significantly more fat than that of dairy cows. This enables dairy farms to fetch a higher unit price for buffalo milk than for cow's milk. This helps offset some of the advantages of buying expensive but more productive modern dairy cow breeds.
 
Lastly, unlike dairy cows, there are no religious restrictions on selling aging, less productive water buffaloes for meat. This is both revenue enhancing and a form of insurance, as it provides farmers a guaranteed minimum return even if dairy prices turn against them. Furthermore, with Indian beef exports (which are mostly buffalo meat) having risen by nearly 500% since 2000, meat exporters have created a perverse incentive to not upgrade dairy herds to more productive cows, particularly among smaller, undercapitalized dairy producers.
 
Moreover, the regions accounting for the greatest proportion of national milk output are the same ones most reliant on buffaloes. Six of India's 29 states (Uttar Pradesh, Rajasthan, Andrha Pradesh, Gujarat, Punjab and Haryana) account for 60% of its milk production. They rely on buffaloes for anywhere from 60% to 95% of their state milk production.
 
This inability to transition away from buffalo based milk production however, is only part of the problem.
Even among dairy cows, milk making productivity is more than just notoriously low: It is not starting to catch up to the milk production levels taken for granted not just in advanced countries but even in China.
 
Based on USDA figures, from 1995 through 2015, the average quantity of fluid milk produced by cows-in-milk rose 24%. The annual productivity 1.1% dairy cow productivity increase over the past two decades is no higher than the dairy productivity increases of cows in North America and Europe –except that with Indian cows being far less productive, their productivity should have been 'catching up' and rising several times faster over this time.
 
Within the sector itself, there are enormous productivity differences across ruminant classes, averaging less than 4kg/day across all animal types. Milk production ranges from a paltry 2.5kg/day in native cows, 5.2kg/day in water buffaloes and 7.2kg/day in imported non-native or cross-bred dairy cattle. These unfortunately, are far below the 11kg/day of Chinese dairy cows, 20kg+/day in leading EU countries or 28kg/day in the United States –and for 20 years, almost no progress has been made in closing this productivity gap.
 
The fact that even imported cows and cross-breeds produce less than half the milk of their genetically similar counterparts in other countries is due to poor feed quality and farm management. Feed is particularly problematic: Undercapitalized smallholders continue to use inexpensive farm scraps or traditional alternates like pulses instead of high quality ingredients such as corn or soymeal.
 
Moreover, due to an intersection of supply, demand and politics, even low inclusion rates of high quality feed ingredients like soymeal threaten the profitability of many smaller farmers. This is because India's poultry sector grew two times faster than its dairy industry, causing soymeal consumption to rise 390%, from 1 million tonnes in 2006 to 4.9 million tonnes in 2016. Demand also outraced supply in India's corn market, with consumption rising 71% over this same period.
 
With feed crop demand outstripping supply and the government protecting domestic producers from cheaper imports, India now has some of the world's highest feed costs. The USDA notes that the resulting, "insufficient feed and fodder resources" are then compounded by, "low [dairy cattle] genetic potential, falling water tables, [and] shrinking land resources due to urban sprawl."
 
It concludes that, "Indian dairy production is characterized as a low input/low output system mostly constituted by small and marginal farmers and landless laborers owning less than five cows or water buffaloes. In general, milk productivity of dairying animals is very low in comparison to global standards.
 
On one hand, with tariffs on 30% to 60% on most dairy commodity imports, the industry's bloated cost structure will not result in an import flood. On the other hand, the resulting combination of high production costs, low profitability and demand constricted by high prices keeps milk production from expanding closer to 4% annually rather than the 6% it would otherwise be capable of.

In response to such issues, the government is mid-way through phase I of its INR20 billion (US$320 million) National Dairy Plan (NDP).). It provides a wide array of development subsidies and incentives including such as breeding services, access to better feed inputs, dairy cooperative development and subsidies for milk collection, cooling and testing infrastructure. Under its Dairy Entrepreneurship Development, anywhere from 25% to 33% of the cost of dairy processing equipment, cold storage infrastructure or dairy marketing outlets can be subsidized.
 
Going forward, industry efficiency and productivity have shown gradual, incremental signs of turning upwards. Since it was implemented in 2012, the proportion of milk from dairy cows has increased from 43% to 45% --though this is still less than the nearly 50% that came from cows twenty years ago.
 
After several years of government assisted investments, cow productivity, which did not change from 2011 through 2014, rose 1.8% in 2015 and 2.4% in 2016. Based on USDA figures, cow productivity should rise 2.1% in 2017. With cow efficiency rising at nearly twice the slightly over 1% annual rate of the previous decade, the past three years are an undeniable improvement, and hopefully the start of an overdue, longterm upturn in productivity growth.
 
The bad news is that given Indian cattle's huge efficiency gap relative to even cows of the same species in other countries, this improvement in efficiency growth is simply not enough: Dairy cow productivity needs to accelerate into the 3.5% to 4% range for more than a decade if Indian cattle are to make any significant progress in closing their productivity gap with the milk producing ruminants in other countries. Perhaps we will see cattle productivity rise into that range at the close of the decade, when the National Dairy Plan's second phase commences.
 
Moreover, any improvement in the proportion of milk coming from dairy cows and animal efficiency should be complimented by a reduction in feed costs to the lower levels common in the rest of the world. It will take a combination of substituting dairy cattle in place of buffaloes, a steady rise in animal milk producing productivity and a (possibly import-driven) reduction in feed costs to boost Indian milk production's long run growth rate from the current 4% to above 6%.
 


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