Liquid milk scores over commodities in dairy biz

For those in, or wanting to enter, the dairy business, the real money today is in liquid milk.

While marketing of liquid milk has been traditionally monopolised by cooperatives – the likes of Amul, Mother Dairy, Nandini and Aavin – there are now many private players, such as Hatsun Agro Product and Heritage Foods India Ltd, increasingly entrenching themselves in the business.

Currently, raw buffalo milk, containing 6.5 per cent fat and 9 per cent solids-not-fat (SNF), is being delivered to dairies in the North at around Rs 31 a litre. For 100 litres or 102.8 kg (one litre of milk equals 1.028 kg), that translates into Rs 3,100. The choice is whether to process the 100 litres into commodities – which is what most dairies in the North do – or market it as liquid milk in pouches.

If the commodity route is employed, the 100 litres processed would yield 6.68 kg of fat (ghee) and 9.25 kg of SNF or skimmed milk powder (SMP). At the prevailing ex-factory prices of Rs 255 a kg for ghee and Rs 195 a kg for SMP, the gross realisation would be about Rs 3,508. But this excludes conversion costs on account of fuel, utilities, packaging, labour and other overheads that come to roughly Rs 16 a kg in ghee and Rs 18 a kg in SMP – or adding up to Rs 273 on 6.68 kg and 9.25 kg respectively.

The dairy's net realisation, then, from processing 100 litres of milk into commodities is only Rs 3,235, which just about covers the basic cost of raw material. And if one provides for interest, depreciation and other financial charges, the commodity business is a losing proposition at today's realisations on ghee and SMP and the cost of milk delivered at the dairy dock.

On the other hand, full-cream liquid milk (6 per cent fat and 9 per cent SNF) is, at present, retailing at Rs 35 a litre in Delhi. After deducting Rs 2 towards processing and packaging, Rs 0.75 for local transport, Rs 1.50 for retailer/distributor margin, and Rs 0.50 for advertising and other marketing costs, the net realisation works out to Rs 30.25 a litre or Rs 3,025 for 100 litres.

However, the raw milk sourced by the dairy contains 0.5 per cent extra fat. Factoring in the value of this additional fat takes the effective realisation from selling 100 litres of full-cream milk in pouches to Rs 3,150. Although this is below the realisation from commodities, there are at least two factors tilting the economics in favour of liquid milk.

One, the current Rs 31-a-litre raw milk cost is a “lean season” price, which is bound to come down as supplies improve with the monsoon's arrival. Two, once raw milk prices fall, it would also lead to lower prices of ghee and SMP, which is not the case with liquid milk.

“The advantage with liquid milk is that once you raise prices, they remain at that level. There is no retail consumer pressure to reduce prices even if there is a decline in raw milk costs. This is not so for ingredients, where prices are volatile and move in tandem with raw milk costs, as is usual with commodities,” an industry source pointed out.

According to him, the ingredients business makes sense only “if you produce and stock up during the flush season (when milk is available cheaper) to sell in the lean summer months (when realisations on ghee and SMP are higher)”. That, of course, entails locking up funds and incurring interest costs – unlike in liquid milk, “where procurement and sale is a daily round-the-year activity.”

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