A dangerous intervention

Skimmed milk powder 'buffer' might raise prices

The government’s proposal that a buffer stock of skimmed milk powder (SMP) be created in order to minimise volatility in milk prices is so unsound a proposition that it should be shelved. The proposal, sent to the inter-ministerial group on inflation by the food ministry, involves keeping a reserve stock of SMP with milk-processing units by offering them a handsome subsidy. The move, obviously, is in response to the milk industry’s plea that private- and cooperative-sector dairies are laden with unsustainable SMP inventories – around 130,000 tonnes in total – which may impinge upon their capacity to buy fresh milk from farmers during the current flush season (when supplies swell). The procurement prices of milk may, thus, crash, hurting milk producers. The industry is also pleading for an export subsidy to get rid of the excess SMP stocks in view of the depressed international prices.

However, the industry’s claims are not well-founded. The accumulation of SMP stocks is neither unusual nor entirely unwarranted. These inventories, in fact, are handy for dairy plants that wish to produce reconstituted milk to meet consumer demand in the summer, when supplies of fresh milk tend to dwindle. In any case, the overall demand for milk and milk products is rising much faster than any increase in production. Most dairies, private and cooperatives alike, have raised prices in recent months. Delhi’s Mother Dairy, a virtual appendage of the government, did so as recently as early last month. The fear of milk procurement prices collapsing, thus, seems unreal — though some decrease in prices is normal in the flush season. Indeed, the current milk powder glut is the result largely of the government’s earlier ill-advised import of 50,000 tonnes of SMP — which did not serve the intended objective of containing domestic milk prices, leading merely to an inventory build-up. Locking up large SMP stocks in a buffer may now push prices further up — besides posing other problems, including the risk of spoilage.

The dairy sector has grown without much fiscal support from the government. It has also displayed ample resilience when it comes to demand-supply fluctuations in the past. All it really needs is a hassle-free market, with no curbs on exports or imports to maintain the domestic demand-supply balance. The export of SMP and other milk products may also soon turn viable as global prices have begun to increase due to drought in the US and unfavourable factors in some other milk-surplus countries. The inter-ministerial group is reported to have suggested the creation of additional domestic demand for SMP as a way to liquidate excess stocks. However, it intends this to be done by encouraging the use of SMP in the government’s welfare projects — which could be unadvisable, given the leakages and misappropriations that are endemic to such programmes. The dairy industry, on the other hand, is better equipped to boost demand for SMP and SMP-based products by presenting them as nutritious, fat-free foods for health-conscious consumers. The government, on its part, would do well to refrain from needless intervention in the milk sector.