The Hindu Business Line : The economics of liquid milk marketing

For a typical dairy in the South, standardised milk containing 13 per cent total solids (4.5 per cent fat and 8.5 per cent solids-not-fat) will cost about Rs 13.40 a litre at the dock, assuming a rate of Rs 103 per kg of solid. Against this, it could effectively realise about Rs 125 per kg of solids, which translates into Rs 16.25 a litre. This is exclusive of dealer commission and retail margins, which are covered in the retail price of Rs 18 or so.

Thus, there is a margin of Rs 2.85 a litre for the dairy, within which the costs of processing, pouches, labour, overheads and advertising have to be met. At the end of it, the dairy may earn between 3.5 and 7 per cent depending on the efficiency with which it handles procurement and distribution. That would range from about 60 paise to Rs 1.10 a litre.

Advantages

So what is it that makes liquid milk marketing attractive? “One advantage is the high turnover and liquidity that this business generates. This is unlike products (ghee, skimmed milk powder, etc.), where stocks tend to build up. The margins may be higher there, but so are working capital requirements,” notes Mr R.G. Chandramogan, Managing Director of the Rs 585 crore Hatsun Agro Product Ltd.

According to him, it makes sense for a dairy to allocate 60 per cent or so of its procurement towards liquid milk sales and the rest towards products. “When powder or ghee prices are high, you make money and ride the commodity cycle. By when product prices fall, liquid milk provides a fall-back option, from where there is guaranteed liquidity,” adds Mr Chandramogan, whose company procures 14-15 lakh litres per day (LLPD) and sells 9-9.5 LLPD of pouch milk.

Not easy

In fact, while the current ban on powder exports has hit most northern dairies hard (given their predominantly product-oriented portfolio), Hatsun, Amul and other branded milk players have been relatively unaffected.

But liquid milk is not easy business. Besides a distribution network to ensure daily flow from and into the booths, a well-oiled infrastructure to procure fresh milk from farmers is a must. In its absence, dairies have to rely on recombining milk from powder, the prices of which are prone to wild swings. Delhi’s Mother Dairy, for instance, annually buys around 20,000 tonnes of powder, covering roughly a third its daily milk throughput.

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