February 27, 2020
Robust demand growth, supply bottlenecks define India's dairy industry
Decades of rapid growth are tapering off as the old dairy farming model reaches its limits. The industry's next chapter of development requires politically painful reforms.
By Eric J. Brooks
An eFeedLink Hot Topic
By some measures, India is the world's largest dairy market, producing almost twice as much milk as second-place America and six times more than third-ranked China. For the last several decades, India's low dairy productivity and per capita consumption have been catching up to that of other countries.
Coinciding with strong, urbanization-driven income growth, the last ten years has seen Indian dairy enjoy growth of more than 5% all but one product line. Milk output has risen by 4% annually since 2000 and over 5% since the late 2000s. –Now, boxed in by both short-term circumstances and longer running, worsening issues, this has not been the case since 2018.
Due to high feed costs, narrowing profit margins and below-average pastureland conditions, India's dairy industry had a disappointing 2019 and is poised to endure more of the same in 2020. Last year's monsoon precipitation was average but highly inconsistent. It featured a disappointingly dry start, followed by exceptionally heavy rainfall in many areas during the latter half of the monsoon.
2019's late starting, patchwork monsoon resulted in some grasslands flooding while others remained abnormally arid. The resulting poor pastureland conditions forced a greater reliance on feed at a time and caused its cost to rise far ahead of farmgate milk prices, thereby trimming profit margins.
This resulted in narrower dairy farming profit margins and depressed output, forcing the USDA to scale back Indian milk production estimates. 2019's fluid milk output rose 1.8% to 191 million tonnes, from 187.7 million tonnes in 2018. The resulting 1.8% increase was significantly lower than the 3.9% increase to 195 million tonnes initially expected or the 5% to 6% annual growth taken for granted since 2005.
With poor returns and below-average pastureland conditions persisting into this year, the USDA's 2020 fluid milk output estimate was also scaled back from the initial 202.2 million to a much smaller 2.1% rise to 195 million tonnes –it assumes that this year's monsoon precipitation restores regions with arid pastureland from H2 onwards. All this is substantially below the average 5.6% annual increase in milk production that occurred over the ten years ending in 2018. It also lags the 5.3% annual increase in domestic fluid milk consumption that occurred from 2008 through 2018 inclusive.
Like many other Indian dairy statistics, this 'average' 5.3% annual milk consumption growth conceals underlying disparities. Over that ten-year span, a below-average 4.2% yearly increase in demand for butter/ghee was counterbalanced by 5.8% annual growth in the quantity of milk demanded by food processors. Furthermore, even before the post-2018 slowdown in milk output expansion, dairy processors were having trouble keeping up with demand.
Over the 2008-18 decade, food processors demanded 6.3% more SMP annually but output increased by an average of 5.5%. This is due to India's ongoing mass urbanization, buoyant expansion of fast-food and processed food lines, and the rapid consumer income growth that drives them all. It stimulates annual consumption growth for a wide variety of processed dairy goods. The USDA estimates that since 2010, annual consumption increases for condensed milk (10%), infant formula (12%) yogurts(15%), ice cream (15%) and cheese (17%) far exceed the annual increase in milk output.
In the face of such powerful demand fundamentals, SMP producers overlooked 2019's low 1.8% milk output increase and made 5.8% more SMP than in 2018. As a by-product of SMP production, output of butter/ghee also raced ahead of milk output, rising 4.5% last year.
2020 will feature more of the same: To take advantage of India's growing appetite for processed, high-end dairy goods, output of SMP(+5.5%) and butter/ghee(+4.3%) will again race ahead of milk output(+2.0%). –Even so, the projected two year, 11.5% increase in SMP production from 2019 through 2020 inclusive cannot keep up with the 11.8% rise in SMP consumption over this period.
SMP production can only grow faster than milk output by processing a higher proportion of it over the short-term. Over the long term, SMP output cannot grow faster than the supply of milk.
Because output of high-end dairy goods is constrained by SMP availability, the post-2018 slowdown in milk output growth could make it difficult to maintain rapid growth momentum in the industry's most value-added product lines. Last year, SMP supply only kept up with domestic demand growth by reducing the quantity exported, from a USDA estimated 45,000 tonnes in 2018 to 10,000 tonnes in both 2019 and 2020.
Moreover, supply-side constraints including industry structure, cattle quality, feed inputs, and distribution networks make it increasingly hard to sustain high growth rates.
For example, over 80 million out of a 1.4 billion population are dairy farmers but according to India's department of animal husbandry, 95% of them own five or fewer milk-producing cattle. While there is a rapidly increasing number of farms with 50 to 200 head of dairy cattle in leading milk-producing states such as Uttar Pradesh (16.3%), Rajasthan (12.6%), Madhya Pradesh (8.5%), Andhra Pradesh (8.5%) Gujarat (7.7%) and Punjab (6.7%), even at today's rapid growth rates, their efficient operations will make up a very small portion of overall output for at least another one to two decades.
The government knows that accelerating the industry's move to a more modern, productive business model risks throwing tens of millions of farmers into unemployment before the economy can create jobs for them. Hence, unless India can achieve the 10%+ annual growth China did for two decades, rapid modernization of the industry's scale economies and business model is politically impossible to achieve.
One side effect of modernization's slow pace is wide disparities in dairy cattle productivity. From 2012 through 2019 inclusive, the total number of dairy cows increased 11.5%, from 117.5 million to 131.0 million head. Over these same seven years, actual cow's milk production increased a much faster 35.2%, from 46.4 million tonnes to 60.4 million tonnes. This increase was mostly due to the rising proportion of cattle accounted for by imported exotic breeds or cross-breeds. Their population increased by 32% over this time.
Superior imported cross-breeds (26%) and exotic breeds (1%) account for 27% of India fluid milk production, followed by the 21% share of local cattle breeds, 3% by goats. The other 49% of India's milk supply comes from its vast but less productive dairy buffalo population.
Buffalo inventories peaked at 195 million in 2012 and thereafter steadily declined, to just under 176 million head last year. Even here, however, steps are being taken to boost productivity. Thanks to selective breeding, from 2012 through 2019, the proportion of those in milk dairy buffalos rose 4.3% while those who are dry fell 10.2%. Uttar Pradesh has the heaviest concentration of buffalo population at 33%, followed by Rajasthan (12.4%), and Madhya Pradesh (9.5%).
Large regional variations in milk yields between cattle species and across regions lead to exceptionally great supply/demand disparities.
Daily milk yield per cattle varies greatly among animal type, with Indian government estimates ranging from 11.5kg/day for exotic breeds (which make up 1% of the cowherd) to 7.6kg/day for cross-breeds (26%), 6.2kg/day for buffaloes (49%), and 3.7/kg for indigenous cattle (21%).
With the most productive breeds accounting for the smallest proportion of dairy livestock, Indian milk yields per cow remain astonishingly low. At 5.2kg/day, India's average milk yield per dairy cattle compares poorly with China's 14kg/day, let alone Britain's 22kg/day or over 30kg/day taken for granted in US dairy cattle.
Productivity differences between superior and inferior dairy cattle breeds are further exacerbated by equally large disparities in feed quality. Due to the industry's unconsolidated structure, the low productivity cattle majority gets the least nutritious feed inputs. The USDA estimates that to maximize their milk-making productivity, Indian dairy cattle require 80 million tonnes of compound feed annually ---but will consume no more than 10 million tonnes this year.
Almost all the high-quality feed will go to a small minority of productive cross-breed cattle and be fed to them by large farms and integrators. The vast majority of less productive Indian cattle in small scale farming operations will continue to have their low productivity levels made worse by being fed farm scraps and feed inputs of low nutritional value.
64% of dairy cattle feed is made up of crop residues from harvests of sugar cane, wheat, rice, and pulses. Lower quality inputs including millet, alfalfa, clover, and sorghum comprise 18% of dairy cattle rations. Pastureland grazing accounts for 12% of feed intake. Professional, high-nutrition inputs such as soymeal, corn, and oil cakes make up a mere 6% of rations –but a much higher proportion in that small minority of large scale, professionally run farms.
To make matters worse, small scale dairy farms face competition for these feed inputs from Indian manufacturers ranging from chemical companies to pet food companies and fiberboard makers. This has made even low-quality inputs more expensive for a majority of the nation's 80 million dairy farmers.
Even without improving cattle genetics or farm management, milk yields could be vastly increased by merely substituting high-quality feed inputs in place of the low-quality raw inputs that make over 80% of rations. The proportion is actually much higher among the small scale dairy farms that dominate the industry's structure.
Moreover, as Indian milk demand outpaces the country's limited land area, the quality of feed given to a majority of its cattle is deteriorating. The USDA estimates that Indian dairy cattle receive 11% less dry fodder, 35% too little green fodder and 45% less feed concentrates than what they require.
The resulting feed input supply deficits are now exerting upward pressure on dairy production costs. In 2019, increases in the cost of cottonseed oil cake (24%), fodder (10%) and mustard oil cake (4%) far outraced a 2.5% increase in Indian milk's average farmgate price.
Nor is this a short-term trend: From 2011 through 2019, the cost of mustard oil cake increased roughly 90% and cottonseed oil cake by 70% --but milk's farmgate price only rose 45% over this time. Over the same eight years, the cost of fodder rose by the same amount as that of milk. After 2018 however, fodder has been in increasingly short supply and shows signs of inflationary momentum.
All these supply-side dairy farming scale, feed and cattle quality disparities are matched by equally large demand-side differentials.
Based on Indian government statistics, per capita milk availability jumped from 261ml/day in 2005 to 394ml/day in 2020. –But in a country one-third the size of the United States, this overall number hides huge regional variations: Across 15 states per capita milk availability ranged from 1,181g/day in Punjab and 1,087g/day in Haryana to 189g/day in Kerala and 158g/day in West Bengal respectively. This disparity is due to more than the fact that Punjab has state of the art dairy facilities that many regions do not have. It is also due to serious demand-side demographic and technological disparities.
Indian government statistics indicate that those in the top 8.5% income bracket are city-dwelling and spend 40 times more on dairy products than the lowest 8.5%, rural-based income bracket. Moreover, milk and butter/ghee account for approximately 40% of urban dairy demand but 90% of rural per capita dairy consumption.
But this income divides and rural-urban disparities are also defined by inconsistent distribution networks: While cold chain infrastructure has now penetrated most areas of large cities, it is still badly lacking, particularly in the rural areas of states with low per capita milk availability. India's future dairy demand growth depends on boosting the distribution of cold storage dependent, high-value goods as much or more than it does on rural income growth. Until cold storage infrastructure is as ubiquitous in India as it is in China, demand growth cannot be fully actualized.
Assuming steady improvements to cold storage infrastructure continue, the real challenge is restoring the near 6% annual growth taken for granted prior to 2019. Lowering rising input costs, improving cattle genetics and boosting milk yields are all part of the solution.
Of these, milk yields are the easiest to raise over the short-term –but at a nasty political price. Given India's limited land area, this would require an immediate, rapid boost to the supply of high-quality inputs –and that means becoming a world-leading net feed crop importer. That would cause serious economic hardship for domestic corn and soybean farmers.
Consolidating the industry into a far more productive, large scale capital intensive model entails the unemployment of economically vulnerable, uneducated peasant farmers. Even so, it is increasingly clear that India is reaching the growth limits of its current small scale, undercapitalized dairy farming model. To maintain growth momentum beyond well into the 2020s, something will have to give.
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