Dairies' margins under pressure on 20% hike in milk procurement cost

At the farm gate, cost has risen by at least a fifth this year

 Faced with a sharp increase in milk procurement costs, private dairies and co-operatives are facing margin pressures this season.
 

After dips over recent years, milk prices have risen sharply. At the farm gate, the procurement cost has risen by at least a fifth this year, to Rs 27-28 a litre for Gujarat Co-operative Milk Marketing Federation, producer of the Amul brand of products, from Rs 21-22 a litre last year.

“Milk procurement cost has gone up because of drought in some parts of Maharashtra,” says Amitabha Ray, chairman, Schreiber Dynamix Dairies.

Part of the rise in procurement cost has been passed on to consumers. Most entities in the unorganised sector have raised retail milk prices by Rs 2 since January 1, to Rs 60-62 a litre in Mumbai and its suburbs. Those in the organised sector might follow.

“Milk prices had plummeted over the past few years due to fall in consumption in the Middle East (distressed geopolitical situation, economic stress on soft crude oil prices) and in China following an economic slowdown. Asia and Europe had cut import quotas. However, since all Asian countries are now milk-deficit, except India, one of the largest consumer and producer, prices have started to trend up,” said Abneesh Roy, analyst with Edelweiss Securities.

All players in the sector are eyeing the value added segment, where margins are better. However, access to milk sources is pivotal to any pan-India expansion plan.
 

Amul has around 60 dairy plants and processes around 28 million litres of milk a day. The average daily milk procurement saw a compounded annual growth rate of 12.3 per cent over FY11-16.

“Companies having infrastructure for direct milk procurement from farmers are at a huge competitive advantage, as it assures steady milk supply and consistency in quality, at a relatively lower price. But, developing an integrated back-end chain and procuring milk outside one’s core region is cumbersome, due to the time required to build relationships with farmers/agents and negotiating prices,” said Dhaval Mehta, analyst with Emkay Global Financial Services.

Emkay estimates Rs 15 crore of capital expenditure for an incremental 100,000 litres a day of milk procurement. Dairies with enhanced facilities in this regard are better placed. 

Among dairy companies, Parag Milk Foods is best placed with its value-added product portfolio in the dairy industry with strong presence in high growth cheese and whey category and higher marketing spends compare to peers. Also, the company enjoys strong brand spends and earnings growth visibility.

Chandrababu Naidu founded Heritage Foods, meanwhile, has been focusing on new geographies and strengthening distribution network to drive growth.