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Indian dairy exporters are likely to be tested with the abolition of the milk quota regime in the European Union (EU) on March 31, with increasing competition within the block given the variance in production costs between the member States.
“The removal of the quota system will benefit low-cost producers, such as Ireland and The Netherlands, which will be able to produce greater quantities of dairy products. With consumption likely to remain constant in the region, exports will rise as well,” said RS Sodhi, Managing Director, Gujarat Cooperative Milk Marketing Federation (GCMMF), the owners of ‘Amul’.
The system, in place since 1984 to overcome surplus production, had in any case done little to dent EU dairy exports that grew 45 per cent in volume and 95 per cent in value over the last five years, as per a European Commission (EC) note issued this week. Members who exceeded their quotas were fined a ‘super levy’ of around 28 Euro (Rs 1,900) per quintal.
“Given our low-cost of production, we will be competitive. The industry has to focus locally anyway given rising consumption and output, while China and Russia have been scaling back on purchases,” added Sodhi.
SMP prices
While there is unlikely to be any impact on milk prices domestically, skimmed milk powder (SMP) prices may be dragged down once again after having inched up over the past few months. Globally, SMP prices fell from more than $4,000/tonne last April to about $2,300/tonne by November. Average prices rose to a little more than $2,700/tonne (approximately Rs.1.7 lakh) last month.
Domestic prices are currently rule between Rs 180-200/kg from nearly Rs 275-290/kg a year ago. Cooperatives are estimated to be sitting on stocks of almost 90,000 tonnes given the unviability of exports at present, while private sellers did negligible business in the category once prices declined. It is estimated that about 100,000 tonnes of SMP is produced domestically each year.
“Ireland has the lowest production costs in Europe, it’s supposedly on par with New Zealand. So countries like that which had traditionally been pushed down in the quota system should see a spurt in their production capabilities which will put negative pressure on SMP prices,” said an industry source, who did not want to be named, adding that Russian imports could see prices firm to Rs 220-240/kg.
“With removal of the quota, EU countries are looking at aggressively growing their exports and have invested more than 1.5 billion euro collectively to increase their processing capacity over last few months. Weakening of the euro against the dollar saw EU players dumping their stocks piled up over last year in international market at throw-away prices,” said Devendra Shah, Chairman, Parag Milk Foods.
Competitiveness
Other industry voices were more circumspect, however, and believed that it was too early to tell if there would an impact on domestic exporters.
“No one can really say they will be affected since a lot of factors need to be assessed. For output to rise there, capacities need to increase, which is difficult since land holdings are capped and more expensive today,” said Sidhant Gupta, Director, Kwality Ltd., adding that increased production would be matched by rising demand.
Gupta said exporters need to become more competitive in the long run. “There might not be that much of an increase in EU output but Indian exporters have to become more competitive. The government needs to step in with incentives to help them,” he said.
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