'Dairy sector reeling under low prices, high SMP inventory'

The country's dairy sector will continue to reel under the pressure of high skimmed milk powder (SMP) inventories and low prices, till the global market for SMP and casein revive, according to India Ratings.

The recent policy measures of increasing import duty on whey, offering subsidy to milk farmers and exemption from the goods and services tax (GST) for certain categories will provide a marginal relief to the sector, it added.

Milk production in the country grew annually at 5.90 per cent during FY13-FY18 and the rating agency expects it to reach 186 million tonne in FY19, which will lead to a higher market surplus in the system.

Due to limited growth in demand, the industry is forced to convert the highly perishable commodity into SMP, to be sold on business-to-business platform in the domestic and international markets.

However, price growth in the international market has been slow since June 2017, after a brief recovery during April 2016-May 2017.

"This has led to SMP stock piling up, which also reflected in the procurement prices in some states," it said.

As the procurement prices have remained subdued due to demand-supply imbalances, many state governments are witnessing agitation from dairy farmers.

The depressed demand in the international dairy market has had a major impact on dairy farmers and the government through custom duties and exports incentives is trying to influence international dairy trade.

Whey imports, which accounted for 74.89 per cent of the dairy imports, grew 65.38 per cent year-on-year in FY18 to 16.99 million kilogram due to their weak international prices, according to the agency.

By increasing the custom duty on whey milk powder to 40 per cent from 30 per cent, the government has taken steps towards incentivising the consumption of piled up domestic stock and increasing its domestic production.

The government is further trying to increase the export incentives to 20 per cent and looking for untapped export destinations.

India Ratings believes that though this could push exports, it would negatively impact international market prices where there already is a supply glut.