Spike in fodder costs raise fears of impending shortage of milk products

The flush season for milk this year, which runs from October to March, has been unusual in many respects for all stakeholders in the value chain. Supplies have been short and milk rates have risen with rising fodder prices pushing up production costs.

The fodder shortage was caused by a drop in wheat production due to an unusually warm rabi season and also on account of a spike in demand for maize from ethanol and starch makers plus general bullishness towards growing cereals. Wheat and maize are the two main sources of fodder. Costly fodder, in turn, meant that farmers underfed their cattle while the Covid-19 pandemic had slowed the pace of artificial insemination, all of which seems to have contributed to a drop in per-animal milk production in this flush season, industry players said.

For the industry, a weak start to the flush has triggered murmurs of a shortage of milk products in the months ahead with companies struggling to build adequate inventories. Those that are building stocks are doing so at prices that are appreciably higher than previous years.

Sources said in markets like Maharashtra, which accounts for a significant production base for milk products (principally butter and fats), cow milk prices are 20-24 per cent higher than last year at around Rs 33 per kg. In southern India, prices are currently being quoted at around Rs 34 per kg, which, too, are higher than last year.

During the flush season, milk supplies typically rise at least 30 per cent. In normal circumstances, India produces around 550 million litres of milk per day, which goes up by almost 30 per cent during the flush season (which starts after the monsoons and ends just before the summer). This supply infusion each season not only pushes prices downwards, but also provides ample liquid milk for companies to store by converting it into skimmed milk powder (SMP) for use during the lean months (April to September) and also manufacture products such as butter.

Trade and industry players say India annually produces around 300,000 tonnes of SMP and 100,000 tonnes of butter. Of this, 60-70 per cent is manufactured during the flush season.

Currently, industry sources say, India has 30,000-40,000 tonnes of SMP stocks; they need to be around 250,000 tonnes by March to ensure adequate milk supplies in the lean months.

“Overall, the weak flush also means the year’s total milk production might be less than projected. In 2021-22, India is believed to have produced around 221 million tonnes of milk. At a normal rate of growth, it should rise by at least 7-8 per cent in 2022-23. But going by ground reports and the way the flush season has started, it seems unlikely that the regular growth rate will be achieved,” Rahul Kumar, managing director at Lactalis India, a subsidiary of a French dairy conglomerate, told Business Standard.

However, government sources said talk of an impending shortage was incorrect. “There is no shortage of milk anywhere and prices are high only due to increase in fodder cost,” Sanjeev Balyan, minister of state for fisheries, animal husbandry and dairying, said on the sidelines of an event.

Kuldeep Saluja, managing director of Sterling Agro Industries, makers of the Nova Dairy brand, concurred that though SMP prices at around Rs 330 per kg were higher than the Rs 300-310 per kg in last year’s flush season, there should not be a problem in ensuring SMP supplies. “There could, however, be a drop in supplies of products such as butter and fats for the next six to eight months for which adequate measures should be taken,” he pointed out.

According to a report by ICICI Securities, pan-India wholesale milk prices have increased 10.2 per cent year-on-year in December 2022 against a marginal rise in general month-on-month wholesale prices at 0.6 per cent. Companies have raised milk prices repeatedly in the last few months, but there is a limit to which the increased cost can be passed on to the consumers.

“We note the prices of maize and wheat continue to be 27.4 per cent and 31 per cent up year-on-year in November 2022, which will likely lead to higher feed prices. Hence, we expect farmers to pass on any further inflation in key raw materials via higher milk prices,” the ICICI report said.

In milk, around 80 per cent of what consumers pay is passed on to the farmers in the form of procurement price. But the profitability of dairy companies is expected to fall year-on-year in the second half of FY23, the ICICI report reckoned.

A report by rating agency ICRA, too, said that it expected a contraction in the operating profit margins of Indian dairy companies in FY2023 due to cost-side pressures, even as they continued to witness a healthy revenue growth.

Fodder prices have increased by 28 per cent in November compared to the same month last year, the government said in Parliament on Tuesday. In his written reply, Fisheries, Animal Husbandry and Dairying Minister Parshottam Rupala added that the ICAR-Indian Grassland and Fodder Research Institute (IGFRI) in Jhansi has estimated that there were deficits of 11.24, 23.4 and 28.9 per cent in green fodder, dry fodder and concentrates, respectively. The deficit has worsened this year due to the near absence of maize, wheat and soybean and their record high prices.

The level of fodder inflation in November 2022 was the highest since June 2013. Feed and fodder prices account for 70-80 per cent of the milk production costs.

The good news, however, is that most prominent milk companies discount any tangible impact of the deadly lumpy skin virus on milk production and supplies in the ongoing flush season.

“Lumpy skin disease is largely prevalent among indigenous cow varieties, which anyway have very low per-animal yield. So, even if we assume that 200,000 cows might have died due to the disease, the per-day production would have gone down by 0.5 million litres and we produce 550 million litres of milk daily. Therefore, the impact is negligible,” Kumar of Lactalis said.

That is some relief as the dairy industry braces for a tough three months ahead.

Fodder for thought

• India annually produces around 300,000 tonnes of skimmed milk powder (SMP) and 100,000 tonnes of butter
• Of this, 60-70% is manufactured during the flush season (October-March), when milk production rises about 30%
• Currently, India has 30,000-40,000 tonnes of SMP stocks
• Stocks need to be around 250,000 tonnes by March to ensure adequate milk supplies during the lean season (April-March)
• Fodder prices rose 28% in November, putting fodder inflation at its highest since June 2013
• Feed and fodder prices account for 70-80% of milk production costs
• SMP prices at around Rs 330 per kg were higher than Rs 300-310 per kg in last year’s flush season