Dairies under margin pressure as milk prices remain stable

Availability increases due to lower exports and with prices remaining stable

With milk prices remaining stable on account of low export demand, dairy players’ margins are likely to take a hit. As the lean summer months set in, when production usually dips, farmers expect a three-to-four per cent rise in procurement prices. Dairies across India claim there is hardly any scope to raise the price being paid to farmers as margins are already down 30-40 per cent, compared to last financial year.

Kuldeep Saluja, managing director of Delhi-based Sterling Agro, said, “In the Northern belt, some dairies have seen an erosion of 40 per cent in their margins. Our margins at Sterling Agro have been hit by 30 per cent this financial year, and going by the export outlook, which is unlikely to pick up in the next six months, FY16 is going to be one of the worst years for Indian dairies in terms of margin growth.”

According to rating firm India Ratings & Research, dairy firms have been operating with almost steady operating margins of five to eight per cent in the past five years. “Companies operating in value-added dairy products are comparatively better placed than the ones with milk as the prime revenue generator.”

R G Chandramogan, managing director, Hatsun Agro, too, admitted that margins are under pressure, and for FY15, there are hardly any profits. One of the reasons behind the low profitability is that raw material costs account for 70-80 per cent of the total expense burden of a dairy, and as procurement prices to farmers have risen in the past few years, the margins have been adversely impacted.

R S Sodhi, managing director of Gujarat Cooperative Milk Marketing Federation (GCMMF), which owns the Amul brand, said dairy cooperatives do not work on the margin principle as the higher realisations are passed on to the producers. However, Sodhi admitted that this year, there is no scope to raise the procurement prices beyond three to four per cent as production is stable.

India Ratings report, too, maintained that: “Dairy cooperatives operate with the primary focus of providing additional income to farmers without profit maximisation. We expect cooperatives to continue to report low profit margins of below five per cent (profit after tax margins) in FY16.”

With hardly any exports in sight owing to weak international prices, dairies are sitting on an inventory of at least 50,000 tonnes of skimmed milk powder.

Procurement prices are around Rs 550 a kg of fat by GCMMF dairies, and in northern India, the prices are Rs 34 a kg for buffalo milk and Rs 29 a kg for cow milk. Officials from Karnataka Milk Federation (Nandini brand) and the Rajasthan Cooperative Dairy Federation (Saras brand) said production so far has been good.

India Ratings expects dairy sector’s market size to increase 15.6 per cent year-on-year. Production in FY14 was 138 million tonnes (mt), and it is expected to increase to 151 mt by FY16.

Milk production, in particular, emanates from 70 million rural households scattered across the country. Almost 45 per cent of the milk produced is consumed by households themselves.

Of the remaining 55%, which is marketable surplus, 34.5% is sold in the urban market as loose unpackaged milk and 40% is sold as processed products through informal markets. Only a little over 25% of the milk and milk products are sold through formal markets in India.