The Hindu Business Line : Dairies lose on powder, ghee as prices drop

Milk vs products
A dairy producing SMP and ghee at prevailing rates cannot afford to pay more than Rs 16.30 for a litre of milk delivered at the dock.
A dairy selling 100 litres liquid milk would not only earn Rs 1,900 from milk per se, but also from the extra 3.5 per cent fat (3.6 kg) that can be skimmed off and converted into ghee.

Harish Damodaran

New Delhi, Sept 12

With prices of skimmed milk powder (SMP) and ghee dipping, liquid milk marketing has emerged as the cash cow for domestic dairies.

Consider, for example, the economics of processing buffalo milk containing 6.5 per cent fat and 8.5 per cent solids-not-fat (SNF). Suppose a dairy were to convert 100 litres or 102.8 kg of milk (one litre equals 1.028 kg) into products, it would be able to sell 6.68 kg of fat (ghee) and 8.74 kg of SNF (SMP).

At Current realisation

At current realisations of Rs 130 a kg for ghee and Rs 110 a kg for SMP, the gross revenue from processing 100 litres would be Rs 1,830. But on the other hand, the dairy would also incur conversion costs — on account of fuel, power, labour and packaging — of around Rs 2 per litre or Rs 200 for 100 litres. Thus, the net realisation (excluding depreciation, interest and other financing costs) comes to Rs 1,630.

In other words, if a dairy producing SMP and ghee at prevailing rates is to recover even basic costs, it cannot afford to pay more than Rs 16.30 for a litre of milk delivered at the dock.

Liquid milk

But assume that the same milk, with 6.5 per cent fat and 8.5 per cent SNF and bought at Rs 16.30 a litre, is marketed as liquid milk. Currently, ‘toned’ milk — which only contains three per cent fat and 8.5 per cent SNF — is being sold in Delhi at Rs 19 a litre. A dairy selling 100 litres would not only earn Rs 1,900 from milk per se, but also from the extra 3.5 per cent fat (3.6 kg) that can be skimmed off and converted into ghee. The additional revenue from this at Rs 130 a kg is Rs 468.

In all, a dairy sourcing buffalo milk at Rs 1,630 per 100 litres can expect to realise a total of Rs 2,368 from marketing toned milk and the surplus ghee. At the same time, one should also factor in costs of processing (pasteurisation, labour, pouches and other overheads, which add up to Rs 2 a litre or Rs 200 for 100 litres) and local transport, trade commission and other marketing expenses (another Rs 150 for 100 litres). Even if these are deducted, the net margin from liquid milk marketing works out to Rs 388 per 100 litres or almost Rs 3.9 a litre.

Profitability

One reason for the relative profitability of the liquid milk business has to do with the significant ‘price correction’ that has happened in recent times. Since February 2006, there have been four rounds of milk price increases totalling Rs 4 a litre, including the most recent one from August. Over this period, product prices have ruled flat. In fact, since July, SMP realisations have dropped from Rs 145 to Rs 105-110 a kg, while ghee has similarly fallen from Rs 155 to Rs 125-130 a kg.

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