Supply shortage pushes skimmed milk powder price up 25% in three months

To help dairy companies boost their margins in coming quarters

In a major relief for dairy companies, prices of skimmed milk powder (SMP) have jumped by nearly 25 per cent over the last three months due to supply shortage.

Trading currently at Rs 160-170 a kg in local markets, SMP prices moved in a close range of Rs 125 and Rs 140 a kg for several quarters until August, following supply glut in domestic and global markets. Lack of global demand reduced India’s exports of SMP to ‘nil’ last year as the world was facing huge supply surplus of SMP.

Many players, therefore, cut their SMP production to create a balance between supply and demand in the market. Now, with the festive and wedding season coming in, many distributers have built their pipeline inventory amid expectations of an upsurge in its demand.

“Many SMP producers cut their production over the last few quarters resulting into lower supply into the market. Since, the ongoing festive and ensuing season are expected to be good, SMP demand has steadily gone up. The demand-supply scenario is driving SMP prices high,” said R S Sodhi, Managing Director, Gujarat Cooperative Milk Marketing Federation (GCMMF), the producer of Amul brand milk and its derivatives.

Low realization from SMP dragged net profit of dairy companies in the last few quarters. For September 2018 quarter, for example, turnover and net profit ratio of Parag Milk Foods, the producer of Gowardhan brand dairy products, fell to 19.74 versus 21.46 in the same quarter last year. Parag Milk Foods posted net profit and total income of Rs 284.1 million and Rs 5616.30 million for the quarter ending September 2018 as compared to Rs 230.60 million and Rs 4949.50 million for the same quarter previous year.

Similarly, Prabhat Dairy reported a net profit and total income of Rs 43 million and 5384.60 million for July – September 2018 quarter compared to Rs 23.40 million and Rs 3533.70 million for the comparable quarter last year.

“SMP prices in the international market have also gone up. The price recovery has yielded good demand of India’s SMP in the international market,” said a senior industry official.

India’s SMP exports this year is estimated at 35,000 tonnes as compared to ‘nil’ during the previous year.

Meanwhile, the scenario is likely to turn in favour of dairy companies in coming months due to peak milk supply season between December 2018 and March 2019. Milk being a perishable commodity with shelf life of a mere 3 hours, farmers would have no option but to sell their produce to dairy companies. Experts fear that milk prices might decline to below the threshold limit of Rs 25 a litre fixed by the government of Maharashtra and slightly higher paid to farmers in other states.

“Milk prices have not risen over the last two – three years despite having a sharp increase in its cost of production. Both feed prices and labour cost have gone up resulting into a margin pressure on dairy companies. But, the SMP price rise has come as a breather,” said Sodhi.

“While the broader market correction in recent quarters has dented dairy stocks, we remain positive on the sector’s long-term potential. Latest Crisil report estimates the industry to post 12-13 per cent compounded annual growth rate (CAGR) over next three years (16-18 per cent for organised players), as India remains under-penetrated, with rising share of organised players and consumption of value added products,” said  Shradha Sheth, an analyst with Edelweiss Securities Ltd.

 

During the peak milk supply season between December – March, dairy companies produce SMP to sell milk in powder form for future consumption.