Companies in a fix as lower supplies in peak flush season spike milk prices

Higher prices help farmers, but pressure companies to pass the hike on to consumer

The rise in milk procurement prices in the flush season, though good news for milk farmers, is pressuring companies to pass on the hike to consumers.

This is unusual because milk prices tend to soften during the flush season, which runs from November to March, when supplies are 8-10 per cent more than normal, market players said.

However, trade and market sources said this year, milk supplies in the flush season were 20-25 per cent lower than last year, which has affected procurement rates as well.

As a result, several state milk cooperatives, along with private companies, have either raised retail milk rates or are looking to do so in coming weeks.

In Telangana, the State Dairy Development Co-Operative increased milk prices by Rs 2-4 per litre on January 1, while in Karnataka too reports said the state government was considering a price hike.

More than 80 per cent of the price a consumer pays for milk is passed on the farmers as procurement price, which is among the highest in agriculture products.

Market sources said average cow milk purchase prices across India since November had been quoting at Rs 29-30 per litre, while they were Rs 26-27 per litre during the same period last year (an increase of over 10 per cent), while buffalo milk was selling, on average, at Rs 41-42 per litre, while last year they were Rs 39 per litre (an increase of 5-8 per cent).

Prices of skimmed milk powder (SMP) were quoting at Rs 230-240 per kg and could have climbed to almost Rs 260, but the uncertainty over the pandemic situation and the impact it will happen in the coming months are keeping them in check.

“Milk supplies this flush season are down due to multiple reasons, including farmers investing less in cattle, lockdown during May and June, and poor feeding,” Rahul Kumar, managing director of Lactalis India, told Business Standard.

Kumar said high liquid milk procurement prices were not only putting pressure on companies to hike their retail rates but were lowering the domestic production of skimmed milk powder.

During flush months, milk companies purchase liquid milk and convert it into skimmed milk powder to be used during the lean supply months.

At present, India has around 150,000 tonnes of skimmed milk powder, which is less than the 200,000-230,000 tonnes required at the start of the flush season in March.

In global markets, skimmed milk powder is trading at around Rs 275 per kg, which does not make exports viable because domestic prices are near that level after accounting for transportation and storage charges.

Milk production in 2021-22 was earlier estimated to be much more than 210 million tonnes, but trade sources said, going by the low supplies in the peak flush season, production might be less than that.

Hetal Gandhi, director of CRISIL Research, said milk supplies had remained constrained this flush season because fewer animals were artificially inseminated in March-May 2021.

Milk production will rise at a slower rate of less than 3 per cent in FY22 as against a compound annual growth rate of 5.5 per cent in the past five years, she said.

“Milk procurement prices have increased also because prices of key fodder such as soya and oil cakes have risen by around 10 per cent in FY22 till September against last year,” Gandhi said.

Milk Production in Million Tonnes

Year	Production
2016-17	165.4
2017-18	176.3
2018-19	187.7
2019-20	198.4
2020-21*	208