Faced with a sharp increase in the milk procurement
costs, private dairies
and co-operatives are facing huge margin pressures on their business, prompting them to start focusing on value-added products in order to remain afloat in the business.
After plummeting over the past few years, milk prices have risen sharply this season. At the farmer's gate, the procurement cost has risen at least by 20 per cent this year to Rs 27-28 a litre for large players such as Gujarat Co-operative Milk Marketing Federation (GCMMF), the producer of Amul brand dairy products. Last year, the price was about Rs 21-22 a litre. Interestingly, raw material prices remained lower with a marginal increase in animal feed prices.
cost has gone up because of drought in some parts of Maharashtra. Hence, we are trying to help farmers in all possible ways, including raising of their realisation from milk supply. We are in continuous dialogue with farmers to extend all possible support to them. We are already in the value-added segment which we will continue. Business is not all about making money. Such rises and falls continue in every business, including dairy, and we expect the situation to normalise soon,” said Amitabha Ray, Chairman and Managing Director, Schreiber Dynamix Dairies
Pvt Ltd, the producer of Dynamix brand dairy products.
Meanwhile, a part of the surge in the procurement cost has already been passed on to consumers with most unorganised sector players having raised retail milk prices by Rs 2 since January 1 to Rs 60-62 a litre in Mumbai and suburban areas.
“Milk prices had plummeted over the last few years due to a fall in consumption in the Middle East (due to distressed geo-political situation, economic stress on soft crude oil prices) and in China following economic slowdown. Europe had cut import quota, increasing the supply in Asia. However, since most Asian countries are still in milk deficit (except India which is one of the largest consumers and producers), prices have started to trend up,” said Abneesh Roy, an analyst with Edelweiss Securities Ltd.
Meanwhile, Amul sees huge scope for growth for organised sector players. Amul has around 60 dairy plants and processes around 28 million litres of milk a day. The average milk procurement
per day has clocked a compounded annual growth rate (CAGR) of 12.3 per cent between FY 2011 and FY 2016.
“Companies having infrastructure for direct milk procurement
from farmers are at a huge competitive advantage, as it assures steady milk supply and consistency in milk quality at a relatively lower price. But, developing an integrated back-end chain and procuring milk outside one’s core region is very cumbersome and difficult due to the time required to build relationships with agents of farmers and negotiating prices with farmers,” said Dhaval Mehta, Research Analyst with Emkay Global Financial Services Ltd.
The latest report from Emkay’s estimates Rs 15 crore capital expenditure for an incremental 1,00,000 litres per day of milk procurement. Hence, the competition is stiff for setting up of fresh milk procurement
facility. Hence, dairies
with strengthened procurement facility will benefit from the competition.
Among dairy companies, Parag Milk Foods is best placed with its value added product portfolio in the dairy industry with strong presence in high growth cheese and whey category and higher marketing spends compare to peers. Also, the company enjoys strong brand spends and earnings growth visibility.
Chandrababu Naidu founded Heritage Foods, meanwhile, has been focusing on new geographies and strengthening distribution network to drive growth.