India’s dairy industry is in a state of flux. The oversupply of milk is both a crisis and an opportunity for the stakeholders — dairy farmers, cooperatives and organized private players.
For Ganesh Venkatram, a small farmer at Palahalli, a village near Srirangapatna, the delay in disbursal of the 5 per litre incentive offered by the Karnataka Government since February this year, has been a cause of concern.
Besides, the recent cut in procurement price by 1 per litre by the Mandya milk union has added to his woes. Farmers in Mandya resorted to sporadic protest against the cut in procurement price.
However, the comforting factor is that payments for the milk poured by Venkatram are realised in his bank account every week. “It (milk) is not like sugarcane payment that has been held up for the past two years for scores of farmers in the region,” he adds. Venkatram’s family owns 1.5 acres, where they grow sugarcane and paddy. Besides, they have reared two cows, which have provided a steady source of income.
Milk provides farmers with money around the year, says K Borah, a leader of Karnataka Rajya Raitha Sangha. However, considering that costs of feed and fodder have gone up, procurement price should be increased to at least 30 a litre, he adds. It is no surprise that over 70 million farmers earn a livelihood through dairying.
Says A P Ramesh in Arakere, who pours over 1,000 litres a day to the KMF cooperative: “The network built by the cooperative milk union is strong. Moreover they pay on time and there’s an element of trust built over the years. Though private players did try their luck by offering a price similar to that of cooperatives, milk producers are not keen to sell to them because they won’t get the subsidy.”
But industry players argue that such a subsidy skews the game in favour of cooperatives, as organised private entities are hard put to match the price. Some analysts fear that the recent subsidy announcement of 5 a litre by Maharashtra on the procurement price (the protests were fuelled by a price of 17 per litre) will hurt private players, who may not be able to offer a higher price.
This, in turn, could lead to reduced capacity to invest in processing capacities, perpetuating a situation of oversupply and, ironically, of distress among dairy producers. While Maharashtra and Karnataka offer a subsidy of 5 a litre, Telangana offers 4 a litre.
At present, the growth of milk production has outpaced that of setting up processing capacities, says RS Khanna, Chairman of Kwality Ltd, a private player in North India.
He suggests that the State governments stop subsidising milk production and, instead, channelise support to developing overseas markets.
“Instead of subsidising the production, the government should look at buying the milk products and supply them to schools as part of mid-day meal schemes. Such a move will automatically boost demand and stabilise prices,” he adds.
“The upsurge in milk production is likely to throw up unprecedented challenges of managing surplus. This can, on one hand, be a cause of drop in prices paid to the farmer and, on the other, create a problem in managing the price line for the consumer,” says Sharad Gupta, Editor and Publisher of Dairy India. While it appears that low prices may benefit private sector players in the short run, they may prove counter-productive in the long run, he observes.
Expanding amidst supply glut
At present, dairies, faced with an oversupply of both liquid milk and stocks of skimmed milk powder (SMP), have cut back on procurement, leading to a fall in prices. It does not help their cause that global SMP prices have fallen as well.
The Kolhapur Zilla Sahakari Dudh Utpadak Sangh Ltd, the largest cooperative dairy in Maharashtra, faces turbulent times. It sells all its products under the Gokul brand. Managing Director Dattatray Ghanekar says that since the dairy cannot stop buying from the farmers, about 5,000 tonnes of SMP is just sitting in the warehouses (the current SMP stock in the country is 2.3 lakh tonnes). The inventory has grown five times, while the usual inventory of the dairy is about 1,000 tonnes of SMP. Over 165 crore of working capital is stuck due to excess inventory.
However, there are enough indications to suggest that both private players and cooperatives, which account for 48 per cent and 52 per cent, respectively, of milk procured by the organised sector, are in serious expansion mode. Co-operatives led by Amul and KMF are expanding their processing capacities. Amul has expanded its footprint in Uttar Pradesh and the North-East, the milk unions under KMF are setting up a mega dairy in Mandya. Similarly, among the private players, Hatsun Agro is setting up a new dairy unit in Dharapuram and planning a greenfield unit in Solapur, whereas Heritage Foods Ltd, which acquired the dairy business of Reliance Retail Limited last year, is consolidating its operations and expanding its footprint in the North and other parts of the country.
According to Mayank Jalan, chairman and managing director, Keventer Agro, milk production in eastern India has grown rapidly in the last three years. West Bengal, which had to rely on milk procured from other States such as Andhra Pradesh and Bihar till 2014-15, is now able to sell milk from its own procurement. “On a macro level we are not a milk-deficit State. Milk production has gone up in West Bengal in the last three-to-four years. The quality of milk has also improved,” he says.
Keventer Agro, a group outfit of the 1,800-crore Keventer Group sells its pouch milk and ice cream under the ‘Metro’ brand and currently operates primarily in the Greater Kolkata region. It holds a 22 per cent share in the pouch milk segment and around 40 per cent share in ice cream in West Bengal.
Abhinav Shah, CEO, HR Food Processing, a Ranchi-based start-up, says the States of Jharkhand and Chattisgarh are largely milk-deficient. “We found an opportunity in Jharkhand. Though there were state co-operatives the quality of milk was not very good,” Shah says.
HR Food sells dairy products under the brand name ‘Osam’. The organised milk market in Jharkhand is pegged at around five lakh litres a day and Osam holds 15 per cent share in the segment. The company, which recently forayed into Bihar, is also looking to capture 10 per cent share in the region. Plans are also afoot to tap West Bengal market through its plant in Jamshedpur in the next three-to-four years, he adds.
In the South, several organised players such as Hatsun, Heritage, Creamline, Thirumala and Dodla have expanded significantly in the past decade. Sensing a big opportunity, multinational players like Lactalis of France entered the scene, while Danone has made a recent exit. The French major Lactalis bought a majority stake of Thirumala Dairy in Andhra Pradesh. The deal size was put at 1,750 crore.
The expansion of the private sector has largely been at the expense of the unorganised sector, which continues to dominate. “An organised market place becomes attractive for investors,” says K Bhasker Reddy, Chairman of the India Dairy Association’s Andhra Pradesh and Telangana Chapter.
According to Venture Intelligence, there were about 11 major deals where private investments (private equity and venture capital) flowed into the dairy sector in the last five years. The aggregate investments under these deals amounted to $249 million, with KKR’s $78-million investment into Kwality in June 2016 topping the list. While Motilal Oswal put in $17 million in Dairy Classic Ice Creams, TVS Capital invested $13 million in Prabhat Dairy, according to Venture Intelligence.
Tapping export opportunities
R G Chandramogan, Chairman, Hatsun Agro Pvt Ltd, the largest private dairy sector player, elaborates on pressing concerns. Most of the private sector players are caught in the price crash in the commodities as well as reduction in the milk prices, he says. “We (India) used to export about one lakh tonnes of milk powder every year. But for the last two years, there was zero exports due to global weakness in prices. The problem is this accumulated stock of close to two lakh tonnes. The local market doesn’t have the appetite to consume this excess quantity,” says Chandramogan.
He further suggests that the government needs to explore options to dispose of the excess SMP, which could include donating excess SMP to some SAARC countries in need of powder, by investing about 3,000 crore to get rid of the excess stock.
“Currently, export prices are ruling low in the international market. The best solution is to increase milk consumption in India. Mid-day meal scheme is the best suited to solve it with 15-20 gm of milk powder twice-thrice a week to each kid. This will not require much investment as mid-day meal scheme has its own budget,” he says.
With New Zealand resorting to mass slaughter of over 1,00,000 cows due to the outbreak of cattle disease mycoplasma bovis, the development in the world’s largest milk exporter presents an opportunity for Indian dairy shipments. “We should look at encashing those opportunities,” Khanna says.
It is feared that the current milk price crisis in Maharashtra may spill over to North India — the largest producer of milk when the flush season starts in the region around winter.
“The glut situation spreading to North India is imminent if not sorted out in time and it will boomerang again. The milk prices will drop there too,” says RS Sodhi, Managing Director, Gujarat Cooperative Milk Marketing Federation. Dilip Rath, Chairman, National Dairy Development Board, however, maintains that the current crisis situation in the dairy sector is “a temporary phenomenon” and with revival in the global factors, the domestic situation is set to change.
There’s optimism on the ground. Says Shitalda Sonaiya in Vithalpur in Gir-Somnath district: “We have suffered heavy loss in agriculture due to the recent floods. But animal husbandry is something we look up to even in a crisis.”
With inputs from Rutam Vora, Shobha Roy, Rahul Wadke,
KV Kurmanath, M Somasekhar,
R Balaji and TV Jayan
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