The 2019-20 fiscal has witnessed the steepest rise in milk procurement prices in a decade, an increase of 19 per cent year-on-year between April to December 2019. The inflation is expected to be similar, at 18-20 per cent on year at the end of this fiscal, according to a recent Crisil report. Milk retail prices also rose by 3-4 per cent over April-December 2019, and are expected to be higher at 5 per cent for fiscal 2020. A sharper rise in milk procurement costs compared to retail prices led to a decline of 200 bps in the earnings before interest, tax, depreciation and amortisation (EBITDA) margins of large dairy players in the second and third quarters of this fiscal. Crisil, however, expects both milk procurement and retail prices to stabilise by the first quarter of FY20-21, as it expects milk procurement to increase. The report says that in the first quarter of fiscal 2021, the margin contraction should ease to 50-100 bps as milk procurement prices moderate.
So, what lead to the shortage of milk and a steep increase in prices? There were talks of India having excess inventory of skimmed milk powder (SMP) through the 2018-19 fiscal, as a result of which milk prices had softened and procurement had dipped dramatically. SMP prices had dipped to all time low levels internationally, there were not too many takers and a large portion of the excess SMP was bought by private dairies in India, which in return cut down on procurement. SMP prices had dipped to as low as Rs 150 per kg, from a high of Rs 300-Rs 350 per kg. Amul MD, RS Sodhi had told Business Today in 2018 that there were a large number of private companies and start-ups which had entered the dairy sector taking advantage of the fall in milk and SMP prices, and that their run in the industry would be short lived as milk prices were bound to go up.
In the beginning of 2019, the international prices started to increase and most of the dairy cooperatives were able to get rid of their idle inventory of SMP, which led to an increase in prices. The Crisil report attributes the fall in production to the high summer temperatures and lower availability of water due to the delayed monsoons. Thereafter, floods in various parts of the country were a further dampener as it led to poor animal health and therefore lower procurement. Also, water logging in green pastures kept animals from grazing and damage to crops such as maize and sugarcane, used for fodder, crimped fodder availability. All this led to a decrease in milk yield of cattle, and thereby lower milk production in the country. According to a senior dairy expert, the procurement especially dipped in the milk deficient states of Andhra, Jharkhand and Odisha.
The up-move, as per the Crisil report, started in May 2019, with Gujarat Cooperative Milk Marketing Federation (GCMMF, better known as Amul) and Mother Dairy hiking the maximum retail price of their full-cream milk pouches by Rs 2 per litre. The two giants followed this up with a further hike of Rs 2 and Rs 3 per litre, respectively, in December, taking it to Rs 55. Other large dairy processors have started following suit, spurred by the shortfall in milk production around the country, and thereby supply. Most of these prices hikes have happened in the month of December, which is unusual as it is flush season and procurement actually goes up by 30-40 per cent.
A number of private diary companies had approached the government to allow them to import SMP from countries such as New Zealand. "India produces 500 million litres of milk per day, and the shortage is about 50 million litres per day which has to be filled without doubt. This can be done only by import of SMP and butter so that the deficit can be minimised. Procurement prices are up, which is good for farmers but high procurement prices won't yield more production of milk and it must be understood," Rahul Kumar, CEO, Lactalis India, had mentioned in his blog. Kumar had said that the government needed to urgently import 100,000 tonnes of SMP and supply to the cooperatives as well as the private dairies. "We are on the verge of a disaster as in the coming summer, SMP rates would touch Rs 400 per kg, 70 per cent higher than the global SMP prices. Even at this price there won't be availability of SMP," Kumar had added.
The large cooperatives such as Amul and KMF, however, were against importing SMP, as they felt that the deficit was temporary and importing SMP would impact the milk farmers. In a recent interview with Business Today, Sodhi of Amul said that there was no shortage of milk and milk prices have now reached realistic rates. "The only people who are crying are the milk processors because they got used to buying SMP at rock-bottom prices at the expense of the farmer. There is no shortage, private dairies are cooking stories so that they can import," he had said.
Milk production this fiscal, according to the Crisil report, is expected to be lower by 5-6 per cent on-year at 176 million tonnes. As of December, milk production is estimated to have been lower by 6 per cent. The flush season that usually begins in November-December is estimated to have shifted by 1-2 months because of the delayed monsoon. So, milk production is expected to pick up from this month, which would limit any further fall this fiscal.
The report also says that in fiscal 2021, water availability is expected to be abundant as reservoir levels have risen significantly after a 10 per cent surplus monsoon. That would play a key role in sowing and harvest, which would, in turn, improve animal health. Reservoir levels were 41 per cent above the 10-year average as of January this year, compared with 5 per cent below the 10-year average level in January 2019. Further, rabi sowing area had increased 10 per cent as on January 31, 2020. This is expected to lead to a 12 per cent increase in crop production for the season. So, higher arrivals of key crops such as wheat, bajra, jowar and maize from March would mean copious fodder availability, which should raise milk production next fiscal. This is expected to stabilise milk procurement costs, bolstering the operating margins of dairy processors. So, milk prices, says the Crisil report, are not expected to rise any further in the coming few quarters, unless monsoons spoil the game for processors.