Milk the ‘cow belt' better

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Unless farmers receive remunerative prices, they will have little incentive to produce and supply more milk to dairies.

Harish Damodaran

After sugar, it is milk that could be heading for a domestic supply crisis in the not-too-distant future. And just as in sugar, flawed policies benefiting neither consumers nor producers are to blame here too.

The accompanying table shows milk production in different States and compares it with the quantities procured by cooperative dairies. A striking pattern emerges. Five northern States — Uttar Pradesh, Rajasthan, Punjab, Haryana and Madhya Pradesh — produce almost half of India's milk. But their share in total cooperative milk procurement is slightly over 17 per cent.

On the other hand, four States — Gujarat, Maharashtra, Karnataka and Tamil Nadu — contribute less than a quarter of the country's milk output and yet account for nearly 70 per cent of the overall cooperative purchases. In Gujarat, every third litre of milk leaving the udders of a cow or buffalo lands in a cooperative dairy affiliated to Amul. Likewise, the cooperatives in Karnataka, federated under the Nandini brand, process over 26 per cent of the State's milk.

In Tamil Nadu and Maharashtra, the cooperatives do not have the stranglehold of an Amul or Nandini, but they still handle 14-15 per cent of their States' milk. If one includes procurement by private companies such as Hatsun Agro Product, Parag Milk & Milk Products and Schreiber Dynamix Dairies, the organised sector's share of milk in the two States would be around 30 per cent — roughly the same levels as in Gujarat and Karnataka.

Cooperative failure

Contrast this with the North or the eastern region of West Bengal, Bihar and Orissa, where cooperatives do not procure even five per cent of the milk produced. For all the talk by the National Dairy Development Board (NDDB) of establishing ‘new generation cooperatives' and ‘producers institutions', the cooperative sector has made little headway in the Cow Belt, thereby pulling down the all-India numbers.

Cooperatives today handle just eight per cent of India's total milk, with their average procurement of 247.18 lakh kg per day (LKPD) in 2008-09 being half of the 488 LKPD target under the NDDB's ‘Perspective 2010' plan.

The cooperatives' limited success in the North and the East has, further, not been counterbalanced by a robust private sector, for which the prevailing model of milk procurement is largely responsible. The milk that private dairies source typically comes through three levels, starting with the village agent who buys from farmers and handles 200-300 litres a day. This milk goes to a bulk vendor, who collects 3,000-odd litres from many agents. At the third stage is the contractor, who, after aggregating and chilling up to 40,000-50,000 litres, transports it to the dairy.

The above extended chain of milk collection is neither cost-efficient nor amenable to quality control by the dairy processor. It also denies a reasonable price to the farmer. Currently, milk with 6.5 per cent fat delivered at the gates of northern dairies for about Rs 23 a litre would not cost more than Rs 17 at the farmers' end. The gap between the two prices mainly accrues to intermediaries along the chain. Moreover, the private dairies operate mostly in the flush winter-spring period, when there is abundant supply of cheap milk for manufacture of powder, ghee or casein.

Direct procurement

This is not the case with Amul, Nandini or even some private concerns such as Hatsun Agro, who follow a vertically integrated model of direct, round-the-year procurement. For them, the cost of collection, chilling and transport from the farm-gate to the dairy-gate does not exceed Rs 1.50 a litre, allowing farmers a greater share of the cake.

Take Amul, which would be paying its farmers roughly Rs 350 for every kg of fat this year, after adding Rs 30-40 of bonus from distributed profits. At Rs 350, the farm-gate price for full-cream milk (containing six per cent fat) would come to Rs 21 a kg or Rs 21.6 a litre. But even after paying this price and incurring a transport expense of Rs 1.70-1.80 all the way from Mehsana in Gujarat, Amul is able to sell the same milk in Delhi at Rs 28 a litre. This is as much a reflection of the sheer efficiency of its procurement operations as the corresponding inefficiency of the northern dairies (the NDDB-owned Mother Dairy included).

The advantages of vertical integration over outsourcing of procurement can also be seen from Hatsun Agro's experience. The company, over time, has invested around Rs 100 crore in setting up 62 chilling centres that feed its nine dairies in Tamil Nadu and Karnataka. These centres, with cooling capacities of 10,000 litres to 100,000 litres a day, are located within 25-30 km of the primary milk collection points.

The raw milk procured from farmers is first brought to the chilling centres by small ‘Tata Ace', ‘407' or ‘Mahindra Pik-Up' vehicles of 1,400-2,600 litres capacity. This milk is then kept chilled for three-four hours, before it is taken to the dairy by larger 20,000-litre tankers.

Having its own network of chilling centres has enabled Hatsun to not only process better quality raw material, but collect more milk from more farmers in a given area, reducing average per litre collection costs. This was not possible earlier when the milk had to be procured within a limited time-frame to avoid spoilage on reaching the dairy. The area's milk potential could, therefore, not be fully exploited.

Depriving farmers

The time has really come to extend similar models of direct procurement in a big way to the Cow Belt. The existing outsourcing model both deprives farmers of a fair price and consumers of good quality milk. It is ironical that Delhi today — despite its proximity to India's top three milk producers plus Haryana — does not get fresh milk round the year.

If consumers are forced to drink milk reconstituted from powder and white butter, it is simply because there is no proper institutional mechanism seamlessly connecting farmers to dairies and further to consumers.

Outsourcing procurement to intermediaries worked so long as cattle feed prices were reasonable and sufficient fodder was available for grazing. But with growing export markets for feed as well as meat pushing up both variable (maintenance) and fixed costs of animals, farmers are increasingly finding it worthwhile sending their buffaloes to the slaughter house rather than milking them.

Unless farmers receive remunerative prices, which the outsourcing model certainly does not provide, they will have little incentive to produce and supply more milk to dairies. It is this core issue — not short-sighted measures such as banning milk product exports and allowing subsidised imports — that deserves attention from policy-makers.

Related Stories:
Centre launches plan to boost production of milk
Rising feed costs, milk powder imports hit dairy industry

(This article was published in the Business Line print edition dated December 4, 2009)
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