Milk procurement prices defy trend to hold steady in this peak flush season

Pent-up demand in the post-Covid scenario, faltering supply due to delay in artificial insemination programme cited as reasons

Profit margins of dairy companies set to improve this year, says CRISIL

7 min read Last Updated : Dec 09 2020 | 2:54 PM IST

India’s milk market is showing a very different trend in the peak flush season this year.

Bang in between the peak flush season, when milk supplies are usually higher than normal, procurement prices have started heading north. This is a deviation from the usual trend, because common economics show that when supplies go up prices go down if demand remains stable.

Before we explain this phenomenon, let's take a quick look at the price scenario.

Average procurement prices of cow milk the past few weeks have hovered at Rs 24-26 per litre, moving even beyond this in some parts, while buffalo milk procurement prices are in the range of Rs 40-44 per litre.

Until last year, procurement prices of both kinds were at least 10-15 per cent lower than these levels due to excess supply. The flush supply months run from October to March, after which the lean months start.

Cattle naturally lactate during the flush period, while milk production dips during the summer months that follow.

India usually gets 0.50-0.52 million litres of milk daily from farmers, which is collected by cooperative and private dairies along with individual milk men.

However, during the flush season, output rises to 0.55-0.60 million litres a day.

But this year, despite the peak flush season, supplies haven’t moved up much while demand has come back in a big way after the easing of the lockdown.

“There is sudden demand from the marriages and the hotel industry as several people who had postponed their celebrations because of the lockdown are now coming back in good numbers to meet their requirements which has pushed up demand,” Rahul Kumar, Managing Director of Lactalis India, one of the world's largest milk producers, told Business Standard.

Kumar said while demand has risen, supplies haven’t kept pace as the annual artificial insemination programme got delayed due to the lockdown, impacting calving and milk production.

Some experts said as farmers were forced to underfeed their animals due to high fodder cost and drop in milk prices, the flush season hasn’t led to a spurt in supplies.

“Supplies will improve in the coming months which could bring down prices,” Kumar said.

The price of skimmed milk powder in the country has also improved from Rs 170-180 a kilogram quoted a few months back to over Rs 210 a kg now, a rise of around 23-25 per cent.

But things were not always good this year for milk farmers.

In fact, milk was among the first sectors to be hit by the Covid lockdown as demand simply disappeared from hotels, restaurants and bulk consumers.

Rating agency Icra had, in a research report a few months ago, predicted that milk procurement prices corrected slightly in July-September to Rs 24 a litre and were expected to remain in the Rs 22-25 range (in 2020-21), due to ample availability of liquid milk owing to muted demand and the onset of the flush season from October 2020.

The change in trend is a surprise for everyone.

Lockdown impact

Like many other sectors, the Covid-19-induced lockdown came at a very wrong time for over 80 million dairy farmers in India.

After consecutive years of low prices, milk procurement rates had started looking up during the 2019-20 flush season providing much-needed additional cash to farmers.

But, just as farmers were getting some increased return from milk, the Covid-19 lockdown was imposed in March end.

The lockdown led to a sharp slump in demand from bulk consumers such as hotels, restaurants, dhabas and road-side tea kiosks, which were forced to shut down.

Demand from marriages and social gatherings also dropped as the government prohibited people from crowding.

Sales of major milk products like ice-cream and butter milk, which usually spike during peak summer season also dropped as sale points were closed.

The net result of all this was that milk procurement rates by private dairies and cooperatives dropped, badly impacting the farmers.

In case of buffalo milk, reports said that procurement price has dropped by 20-40 per cent since April 2020 from the pre-Covid months, while in case of cow milk the drop was even more.

What was all the more depressing was that the drop in prices came during the lean season, when prices generally tend to rise as supplies are low.

Pre-Covid months

But milk prices weren’t always depressed.

In fact, between November and February, procurement prices had moved up by 20 per cent on average in most parts of the country and over 35 per cent in some areas, bringing much needed relief to millions of farmers across the country after three straight years of dirt cheap procurement rates.

For farmers, particularly in commodities like milk, where more than 80 per cent of the consumer price gets transferred into the farmer's account, the increase signaled a much-needed reversal of a trend after three years of low price realisation. The development could have sparked off a major turnaround in India’s rural sector depending on the level of transmission from end-consumer to farmers.

Delayed onset of the flush season, coupled with talk of shortage in milk production, has pushed prices northwards in the pre-Covid months to the extent that the industry was looking to import over 0.5 million tonnes of Skimmed Milk Powder (SMP) to meet a possible shortage during the lean period that started from April.

There were questions on India’s milk production for 2019-20 as well, and many players felt that the number is almost 8-10 per cent lower, as supplies weren’t adequate despite the peak flush season.

SMP prices, which were ruling at Rs 150-170 a kg just a year back, doubled to Rs 310-320 by late February-early March.

Butter prices were quoted at Rs 290-310 a kilogram while cheese was selling at Rs 350 per kg.

India’s SMP stocks had plunged to 30,000-40,000 tonnes, while the norm is that the country should have stocks of around 125,000 tonnes ahead of the lean season that runs from May to August.

Post Covid

Before the imports could materialise, the milk scenario changed dramatically post Covid-19 lockdown and the same diaries that were chasing farmers for their milk, started lowering rates as demand from bulk consumers dropped.

Small private diaries simply stopped buying milk or even if they purchased, it was at vastly discounted rates as demand dried up.

In domains like Maharashtra, though the state government stepped in with some support mechanism, it wasn’t enough.

The surplus milk which the small private dairies refused to procure, came into the basket of cooperatives while there wasn’t any increase in forward sales of high-value items such as ice-creams, butter milk and cheese.

During the lockdown months of April to June, average daily procurement by cooperative dairies across the country fell by around 3.4 per cent from the same period last year, but daily sales dropped by almost 9 per cent, leading to pile up of the inventory.

In 2018-19, the cooperative milk unions collectively procured an average of 50.77 million kg of milk per day as compared to 47.53 million kg in the previous year, with a growth of about 7 per cent.

Sale of liquid milk reached 35.45 million litres a day in 2018-19, which is slightly higher than that in 2017-18.

Of the total estimated milk production in India of over 180 million tonnes, about 48 per cent is either consumed at the producer level or sold to non-producers in rural areas.

The balance 52 per cent is marketable surplus available for sale to consumers in urban areas.

Out of marketable surplus it is estimated that about 40 per cent of the milk sold is handled by the organised sector, the rest by the unorganised sector.

In the unorganised sector, the share of cooperatives is going down as compared to the private sector.

Table: Milk production in million tonnes