Understanding the dynamics of falling milk prices

Pashu Sandesh, 27^th July 2018

Procurement price of milk is at its lowest all over the country. Even during peak summer season the procurement prices have not seen any upward momentum. In Maharashtra the procurement price of cow’s milk (3.5% fat and 8.5% SNF) have seen an all-time low and reached to hit a bottom line price of Rs 17 per liter. However after a farmer’s agitation the state government assured a minimum price of Rs 25 per liter. Same is the case with majority of the states, where most of the dairies have reduced their procurement quantity as well as procurement price. The fall in procurement price of milk in India is attributed to a fall in the rates of skimmed milk powder (SMP) in international market where it has gone below Rs 125 per Kg. Let us understand the dynamics of the fall of SMP price in international market and its relation with fall of procurement price in domestic market.

What do dairies do with milk following collection ?

Dairies sell milk in three forms, first as liquid milk, second as SMP & Ghee, third as value added products. Mostly the surplus milk which is left after liquid milk selling is converted into SMP or value added products. Since there is a limited market of value added products, most of the surplus milk is converted to SMP which the dairies sell in open market or use it during lean milk production season (summer season).

Economics of SMP

From 100 liters of cow milk (3.5% fat and 8.5% SNF) a dairy makes 8.75 kg SMP and 3.6 kg of Ghee. For converting 100 liter of milk in SMP and Ghee a dairy spends approx Rs 500 (@Rs 5 per Lt of milk). At present the market rate of SMP has fallen to Rs 125 per KG and that of Ghee to Rs 325 per Kg. Now let’s see what revenue a dairy gets by converting 100 liters of milk to SMP & Ghee.

8.75kg SMP × Rs 125 = 1093

3.6 kg Ghee ×Rs 325 = 1170

Total = Rs 2263

It means going by current rate a dairy gets Rs 2263 by converting 100 Lt of surplus milk in SMP & Ghee. After deducting  the processing charges of Rs 500 the net amount left with the dairy is Rs 1763 (2263-500). This Rs1763 is the net amount which a dairy can pay to the milk producer for 100 Liters of milk. It works out to Rs 17.63 per liter. That’s why dairies have dropped the procurement price to Rs 18 – 24 per liter for cow milk.

How dairies are compensating the loss?

In today’s scenario liquid milk segment is still a profitable business. The dairies have lowered the procurement price, but the price to customer for liquid milk is kept same as before. So the dairies are making good margins in liquid milk business.

Was it always the same??

No, in the past making SMP was a profitable venture, when the price of SMP in the international market was above Rs 200 per Kg. The price of SMP in international market was at its peak in April 2013 ($5,142 per ton). During that year (2013-14) India exported 1, 29,817 tons of MSP worth Rs2, 717 crore. Since then the prices of SMP are constantly tumbling year by year. With the decrease of SMP prices in the international market our export of SMP also declined year after year. In 1017-18 India exported only 11,475 tons of SMP worth Rs 219 crore. With the decreasing export, the availability of SMP in our domestic market increased which resulted into bumper stocks of SMP with the dairies and fall of prices in domestic market. This year the price of SMP in international market has crashed down below Rs 130 per kg. At this price, export of SMP also became a huge loss making business.

Secondly there was no lean season this year. In dairy sector summer months (from March to June) is considered lean season. During this period the sale of liquid milk exceeded the procurement. To fulfill the increased demand of liquid milk the dairies consumed some of their stocks of SMP. But this year in lean season there was surplus supply of milk in the market and the SMP stocked in the dairies were not liquidated resulting in ever growing inventories of SMP with the dairies.

Thirdly the demand of milk and milk products in the market is not increasing in the ratio of production. These factors also contributed in the fall of procurement price of milk.