Milk prices will continue to rise over the medium term because of sustained demand-supply mismatch and increasing input costs, credit rating agency Crisil said in a report.

With milk product exports forming around 5 per cent of India's total milk production, and domestic demand for dairy products remaining strong, the demand-supply gap is expected to continue to widen over the medium term. This, along with increasing input (fodder and transportation) costs, will push milk prices up over the next three to five years, the report said.

However, the Government of India's recent order prohibiting export of milk powder and casein and allowing duty-free import of milk powder and butter will help enhance domestic supply over the near term, and keep milk prices stable over the next 12 months.

The impact of the ban on export of milk powder and casein is expected to be minimal on the credit risk profiles of 55 Crisil-rated dairy players (including co-operative milk federations).

The rating agency assessed that buoyant demand scenario will enable these rated players to increase their sales in the domestic market, and pass on increases in the prices of raw milk. In addition, flexibility in the production process will enable players in the dairy industry to shift production to milk and milk powder, which have strong demand in the domestic market, rather than also producing casein, which has low demand in India.

In February, to contain further price increases and shore up supplies, the Government prohibited export of milk powder and casein (which form 70 per cent of India's dairy product exports, estimated at $144 million for 2009-10. Furthermore, GoI has allowed National Dairy Development Board to import 30,000 tonnes of milk powder and 15,000 tonnes of butter and butter oil at zero duty, which will boost milk supply by up to 0.35 million tonnes.

“With exports forming less than 5 per cent of the total milk production, and imports comprising a small portion of overall demand, the Government's measures will, at best, plug the demand-supply gap over the next 12 months,” said Mr Gurpreet Chhatwal, Director, Crisil Ratings.

Milk prices, according to Mr Manish Kumar Gupta, Head, Crisil Ratings, are expected to continue their upward trend over the next three to five years as domestic demand for milk and dairy products is expected to outpace supply.

The demand for milk and value-added dairy products in the domestic market has been growing at over 6 to 8 per cent per annum because of increasing income, rising aspirations, and consequent growth in per capita milk consumption.

However, the report said growth in milk production will continue to lag at around 4 to 5 per cent per annum over the next five years, despite the Government's plan to double India's milk production by 2020, through initiatives such as enhancing milk productivity through genetic improvement of milch animals, increasing availability of fodder, and incentivising farmers. This is because the benefits of Government's plan are expected to accrue after three to four years.