Dairies need to invest more in milk procurement

Dairy players are now targeting smaller cities for expansion as consumption of milk dairy products is on the rise especially processed milk products like cheese and packaged baby food. With the increase in demand, for milk processors focusing more on upstream linkages for procurement of raw milk is becoming crucial.

Rabobank has said in a report on Indian dairy sector which has seen increasing players entering milk processing sector that, "the profitability of milk processors can go up if they also invest in procuring the milk rather than just putting in capital into processing as this is also a necessary aspect for these companies."

In the last five year, the organised dairy sector has seen a value growth of 15% per annum and processed milk products have seen a growth of 20 to 25%, according to Rabobank's estimates.

Retail prices of dairy products have been increased but it has not had any impact on demand for dairy products and it constantly on the rise.

Milk processors with their own sourcing center in villages, rather than depend on intermediaries, have shown good performance. Processors do that by taking care of farmers need for his cattle by providing them feed and healthcare services which in turn caused farmers to have a stronger relationship with the company and also helps them earn better relationsations of for per litre of raw milk.

"There is scope for tier one processors to further improve their performance by focusing on milk sourcing. In addition, it is also critical for tier two processors who target tier one levels of returns to invest in procurement to secure raw milk," said Rabobank in a report.

Processors who do not have a reach when it comes to sourcing milk from the dairy farmer and depends on sourcing milk from the intermediaries end up paying a higher price for raw milk as well as the quality of the milk may not be good.

"In 2013, skimmed milk powder exports were at a record high which caused competition for raw milk procurement to increase between skimmed milk powder producers and liquid milk marketers. Raw milk prices saw a sharp increase of 20 to 25% in key milk producing states in 2013 compared to 10 to 15% the previous year," said Shiva Mudgil, senior indutry analyst at Rabobank.

Sourcing of good milk has become a key concern for these dairy players as small and marginal farmers have contribute to almost 70 to 80% of the total milk production as they have small land holdings which cause them to have smaller herd of cattle as well. Due to which providing good feed and animal care for their cattle is a huge issues for them.

The unorganised milk procurement channel to the organised channel will be a slow process Rabobank expects. Rabobank's estimates say that the organised milk procurement stands at 24% and over the next five years it will increase to 34%.