India’s dairy sector faces challenges amid rising demand for high-fat products

Milk is a staple of the Indian diet, consumed in various forms across the country. However, the recent surge in milk prices has become a cause for concern for many consumers.

The country’s two largest dairy cooperatives, Amul and Nandini, have increased the prices of their full-cream milk variants. While toned milk remains an affordable option, the price difference between the two types of milk has widened significantly.

In this article, we take a closer look at the reasons behind this price increase, the impact on consumers, and what the future holds for India’s dairy industry.

Until October of last year, Amul charged Rs 10 more for full-cream milk than for toned milk.

This means that a liter of ‘Gold’ full-cream milk cost Rs 62 and a liter of ‘Taaza’ toned milk cost Rs 52 in Delhi. However, since then, the price difference has increased to Rs 12, with a liter of ‘Gold’ now costing Rs 66 and a liter of ‘Taaza’ now costing Rs 54.

The second-largest dairy company in India, the Karnataka Cooperative Milk Producers’ Federation, has also increased the price of its Nandini milk.

Earlier, the ‘Samrudhi’ full-cream variant of Nandini milk was being sold for Rs 50 per liter while regular toned milk was being sold for Rs 39 per liter. In March, the company increased the price in a sneaky way – consumers are still paying Rs 50, but now they are getting only 900 ml instead of 1 liter.

This means that the effective price of a liter of ‘Samrudhi’ milk has increased to Rs 55.56. Due to this change, the price difference between toned milk and full-cream milk has increased from Rs 11 to Rs 16.56 per liter.

The Tamil Nadu Cooperative Milk Producers’ Federation (Aavin) has recently increased the MRP of its ‘Premium’ full-cream milk in Chennai from Rs 48 to Rs 60 per liter, due to a shortage of fat.

While toned and standardized milk prices remain unchanged, some markets have seen the introduction of ‘cow milk’ with 3.5% fat and 8.5% SNF as a replacement for standardized milk.

This fat shortage has led to reports of branded ghee and butter disappearing from shelves as well. The shift can be attributed, in part, to the declining contribution of buffaloes to national milk production, whose milk has higher fat content compared to cows.

According to R S Sodhi, the president of the Indian Dairy Association, the share of buffaloes in total output was 46.4% in 2021-22, down from 56.9% in 2000-01, while the share of crossbred/exotic cows has increased and that of indigenous/non-descript cattle has declined over the same period.

The demand for high-fat milk products like ghee, ice-cream, khoa, paneer, and cheese is increasing, but the supply is mainly from crossbred cows that produce low-fat milk.

This mismatch is leading to higher fat prices, as per R S Sodhi, the president of the Indian Dairy Association. Even tea shops are now preferring buffalo milk, which has 15-16% total solids, making it possible to serve more cups of tea with creamier texture.

Another immediate reason for the surge in fat prices is the rise in exports of ghee, butter, and anhydrous milk fat during 2021-22, totaling over 33,000 tonnes valued at Rs 1,281 crore.

The increase in exports occurred when milk production was declining due to farmers underfeeding their animals, shrinking herd sizes, and outbreaks of lumpy skin disease among cattle, compounded by the Covid lockdowns and higher feed costs.

The resumption of economic activities after the lifting of lockdown restrictions has led to a surge in demand for milk products. However, the supply of milk has been impacted by various factors, including exports.

Global fat prices rose from $3,850 per tonne in September 2020 to a record $7,111 in mid-March 2022, resulting in domestic shortages of milk. Ex-factory prices of yellow and white butter, which had crashed to Rs 225-275 per kg during the demand destruction period in March-July 2020, had soared to Rs 420-430/kg by February-March 2022.

Despite reports of the government planning to lower the import duty on milk fat, Union Animal Husbandry and Dairying Minister Parshottam Rupala has dismissed any such move.

However, high prices are expected to encourage farmers to invest more in their animals and increase milk production as an alternative to imports.

In the milk industry, October to March is the ‘flush’ season when supply exceeds demand. The surplus milk is processed into skim milk powder (SMP) and butter fat, which are stored and used during the ‘lean’ summer-monsoon months (April-September) when demand for milk products like curd, lassi, and ice cream increases while milk production drops.

However, in the 2022-23 season, milk procurement fell, leaving dairies with a shortage of surplus milk. Dairies have to purchase milk solids for reconstitution, which is taxed at 5% for SMP and 12% for milk fat, while milk is not taxed.

The GST on milk solids adds up to the cost of reconstituted milk, which is passed on to the consumer. To reduce the cost of reconstituted milk, the government could eliminate the GST on milk solids used for reconstitution or reduce the GST on milk fats to 5%.

The current GST on milk fat is an anomaly when vegetable fat (edible oils) is taxed at 5%.

In conclusion, the Indian dairy industry is facing multiple challenges, from supply-side pressures to export-induced inflation and the GST anomaly. These challenges are affecting both the producers and consumers of milk and milk products.

The Indian government needs to address these issues by incentivizing farmers to increase milk production, reducing the GST on milk solids used for reconstitution purposes, and reviewing the GST rates on milk fat and SMP.

If these steps are not taken, it is likely that the prices of milk and milk products will continue to rise, making them less affordable for the average consumer.

It is essential to share this article to raise awareness of the challenges facing the Indian dairy industry and to encourage public discourse on possible solutions.

Consumers need to be informed about the factors affecting milk prices and the potential impact on their household budgets.

At the same time, policymakers and industry stakeholders need to be engaged in a constructive dialogue to find workable solutions that balance the interests of all stakeholders, including farmers, dairies, and consumers.

By sharing this article, we can contribute to a more informed and engaged citizenry that is better equipped to tackle the challenges facing the Indian dairy industry.

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