Operation Flood was the vehicle for India’s White Revolution that quadrupled India’s milk production to almost 78.3 million tonnes in three decades from 1970 to the end of the 1990s. The flooding has continued unabated since then. Now the surging levels in certain geographical pockets have reached proportions where they threaten to drown their originators upstream and marketers downstream in the dairy supply chain.
The main artery of organised dairy supply chains is the milk supply chain: the primary input for manufacture of all dairy products—butter, cheese, milk powder, packaged milk to name a few—is raw milk. The upstream suppliers in the milk supply chain are innumerable small producers linked to a milk grid in a cooperative structure through the replication of the ‘Anand Model’. The bigger private players also follow a similar model. As a result, irrespective of their production capacity the producers linked to the organised supply chains—mostly regional or national in nature—are part of the formal market.
Until late 1990s, the supply of milk in the country was barely enough to meet the burgeoning demand; the dairy imports filled the gap. Today, India is world’s largest milk producer, yet she is not amongst the top ten exporters of dairy products as it is also the world’s largest consumer of milk. India allows selective export of dairy products depending upon the internal stock situation. Milk being perishable, the dairies generally convert any surpluses in to whole milk powder (WMP), skimmed milk powder (SMP), casein products and dairy whitener. SMP, a primary ingredient of milk-based products like chocolates and ice creams, is a major Indian export.
Indian dairy exports have been marginal and inconsistent. Still, with supply driving the domestic milk market, Indian dairy supply chains are slowly becoming part of global supply chains.
But for the Indian milk producer, big or small, even a tenuous linking with global supply chains has meant being subject to vicissitudes of the international dairy market at large with greater intensity and frequency than ever before. The fortuitous combination of circumstances that helped Indian exporters absorb surplus domestic production and reap profits over the last two years is over.
If Indian milk production rose rapidly in previous three decades, the overall world production surged substantially by more than 50 percent in the same period. Prevailing economic and geopolitical trends indicate that this global milk glut is likely to continue: EU milk production quotas ended in April this year for good; Russian ban on imports of dairy products from EU in retaliation to EU sanctions does not seem to be ending soon; Denmark is back in market after resolving its quality issues, and Chinese demand is yet to pick up.
The FAO Dairy Price index from mid-2002 onwards continues to be on a roller coaster ride. It stopped short of touching an all time high of 280 in 2014. Now as the index stands at 167.5 on a downward trajectory, Indian domestic prices are higher than international prices.
Also Read
In North India and Maharashtra, as the demand and supply equilibrium reset, by April this year the private dairies were already paying Rs. 8-9 per litre less to the farmers than earlier. In response, the Maharashtra government fixed a minimum price of Rs.20 per litre for producers, similar to Minimum Support Price (MSP) of agricultural commodities. In Vidarbha region of Maharashtra alone, state dairy department, a loss making body, is procuring around 40,000 litres of surplus milk daily and converting it into SMP. Unlike food grains, SMP has a shelf life of around a year and processors have to auction it before life expiry. The domestic prices of SMP have also dropped considerably in response to the global downturn in prices and rising inventories.
However, converting surplus milk in to SMP and selling it off is not a solution as SMP is often reconverted into milk. Therefore, as private players and government off load their excess SMP inventories in domestic markets, the net glut in milk supply continues.
The breakeven prices for milk producers will only climb up as the cattle feed prices also remain high due to their MSP. The WPI of milk that has steadily doubled from base year, 2004-05 to 2013-14 reflects this linkage. This rising trend of breakeven prices coupled with extreme fluctuations in global prices will slowly render Indian dairy exports uncompetitive. On the other hand, if farmers do not realise the cost price of milk, they will cull cattle, reduce production or leave dairy farming altogether. But India can ill afford to reduce its pockets of surplus milk production; considering the demographic and consumption trends, even to maintain self-sufficiency she will have to almost double its production by 2027.
Moreover, a deeper embedding with global dairy chains would be inevitable due foreseeable trends: reduction of direct subsidies falling within the WTO’s ‘Amber Box’, growth in share of private parties, the growing size of dairy supply chains and entry of foreign businesses.
Therefore, as the dairy market gets increasingly supply driven, the challenge before India is to simultaneously boost milk production, find an outlet for surplus milk in sub-regions and maintain links with the global dairy supply chains. This challenge if ignored may turn the milk deluge in to a drought.
Prashant K Singh is a supply chain management and logistics professional with the Indian Air Force. The views expressed are personal
Twitter: @ZenPK