Dairies should invest more in milk procurement: Study

In the past five years, the organised dairy sector has seen value growth of 15% a year, while processed milk products have seen growth of 20-25%

Dairy companies are targeting smaller cities, as consumption of milk products, especially processed products such as cheese and packaged baby food, is on the rise in these regions. With the increase in demand, focus on upstream linkages for milk procurement is becoming crucial, Rabobank has said in a report on the Indian dairy sector.

"The profitability of milk processors could rise if they also invest in procuring milk, rather than just investing on processing, as this is also a necessary aspect for these companies," the report said.

Through the past five years, the organised dairy sector has seen value growth of 15 per cent a year, while processed milk products have seen growth of 20-25 per cent, according to Rabobank's estimates. Though retail prices of dairy products have increased, this hasn't had an impact on demand for dairy products, which is constantly on the rise, the report shows.

Milk processors that own sourcing centres in villages (they don't depend on intermediaries) have shown good performances. Such processors take care of cattle needs, providing them feed and health care services, which leads to better ties between the company and the farmers concerned, the report says. It also helps fetch better realisation/litre of raw milk, it added.

"There is scope for tier-I processors to further improve their performance by focusing on milk sourcing. It is also critical for tier-II processors that target tier-I levels of returns to invest in procurement to secure raw milk," Rabobank said.

Processors that depend on sourcing milk from intermediaries end up paying higher prices for raw milk; also, the quality of the milk might be sub-standard.

Kuldeep Saluja, managing director of Sterling Agro, said, "Currently, we procure 1.1 million litres a day from farmers directly. But we plan to move towards procuring more from them, as this will not only save us costs, but also ensure better quality." He, however, pointed out while Sterling planned to increase direct procurement, it would always procure a portion of its milk requirement (about 25 per cent) from intermediaries, as this was more a just-in-time set-up, and handy in lean seasons.

Vipin Gupta of Karnal Milk Foods said, "We are setting up a new plant in Uttar Pradesh that will process milk. Also, we will steadily increase our direct procurement."

"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. In 2013, raw milk prices saw an increase of 20-25 per cent in key milk-producing states, compared with 10-15 per cent the previous year," said Shiva Mudgil, senior analyst at Rabobank.

Sourcing of good milk has become a concern for dairy players, as small and marginal farmers account for 70-80 per cent of the total milk production. These farmers have small land holdings and, therefore, smaller herds of cattle. Owing to this, providing good feed and animal care for such cattle remain challenges.

A shift from the unorganised milk procurement channel to an organised one will be slow, feels Rabobank. It estimates organised milk procurement at 24 per cent of the total pie and expects this to increase to 34 per cent through the next five years.