Commodity Analysis

Why is milk getting costlier?

Bavadharini KS | Updated on September 29, 2019 Published on September 29, 2019

One of the main factors that influences the domestic price is the demand and supply of skimmed milk powder

Around the same time last year, farmers were pouring milk on streets to protest falling prices due to excess supply in the market. However, in recent months, key players in the dairy industry have increased the price of milk for end users. This is despite an increase in milk production over the years — about 5 per cent annually over the past 10 years. What has changed this year for the price to move up?

Simply put, it is lower supply of skimmed milk powder (SMP) relative to last year that is helping the milk price scale higher. Further, dairy companies have also been giving in to farmer requests for a hike in the price on the back of rising fodder costs.

But before we move into how market demand-supply forces work now, here’s a background on what has been happening in the milk market in the last two years.

The story so far

One of the main factors that influence the price of milk in the domestic market is the demand and supply of SMP.

In 2017 and 2018, there was excess supply of SMP in both the domestic and the international market. This was mainly due to some European countries removing the restrictions on milk production, resulting in a flood of SMP stocks in the global market. The Indian market, too, saw off-loading of large quantities of SMP stocks. These stocks (70,000-80,000 tonnes) would have been otherwise exported. Brahmani Nara, Executive Director, Heritage Foods, said: “Last year, we had 2 lakh tonnes of SMP inventory, which was one of the highest in recent times.”

The price of SMP in India dropped sharply between 2016-end and 2019-beginning, from ₹290 per kg to as low as ₹120 per kg.

As the global market was already flooded with SMP stocks, India’s exports also suffered. In 2017-18, the country’s SMP exports dropped 36 per cent y-o-y. The resultant increase in supply pushed the price lower for SMP in the domestic market, and powdered milk became cheaper than liquid milk, which is usually not the case.

Thus, suddenly, there was a demand shift from liquid milk to SMP, and the price of liquid milk started to correct a bit. However, this demand shift couldn’t pull the price of SMP significantly higher and it continued to trade lower relative to what it was a year ago. In September 2018, the Wholesale Price Index for powdered milk was down 16 per cent y-o-y.

On the other hand, dairy farmers were under distress, too. Dairy companies which procure from cooperative societies reduced their milk procurement as SMP was available as an alternative.

Cooperative societies, though, continued to procure from farmers, and failed to make payments. This pushed farmers to immense stress.

Since February, the price of milk has been firming up. This is thanks to reduced SMP stocks in the market. Also, lower availability of fodder (especially jowar and maize) with the delayed onset of monsoon has given a reason for farmers to ask for higher prices. Across the country, the price of milk has gone up ₹2-4 per litre, .

The price may not come down soon as fodder prices may continue to rule high. Production of coarse cereals is expected to drop this year — from 35 million tonnes in 2018-19 to 32 million tonnes for 2019-20.

Risks to price

The dairy sector is in a jittery state with the Centre negotiating the terms of the Regional Comprehensive Economic Partnership (RCEP). RCEP is a free-trade agreement (FTA) among the 10 member states of the Association of South East Asian Nations (ASEAN) and its six FTA partners.

Under this, the dairy industry has raised concerns on allowing imports of butter, cheese, and dry and liquid milk. India being self-sufficient in milk, these imports, if allowed, could adversely impact domestic farmers and dairy players as these products are far cheaper in the global market than in the domestic market.

NITI Aayog has projected India’s milk production to grow to 330 million tonnes by 2033, from 187.7 MT in 2018-19; while demand is estimated to grow only to about 292 MT. So, there could be a demand-supply imbalance in the market in future.

Published on September 29, 2019
This article is closed for comments.
Please Email the Editor