Milk goes off the boil but not for long

China’s consumption remains uncertain amid slower growth in most developed markets

Trace the global price chart for milk products over the last five years and you will be reminded of a particularly bumpy roller-coaster ride. Prices for skimmed milk powder in global markets (from vaulted from under $2,900 a tonne in early 2010 to over $4,300 by June 2011, only to sink back to square one by mid-2012. Within a year, prices again doubled to surpass the previous peak ($5,142 in April 2013). But the months since then have seen a big fall, with prices back to $2,400 in January 2015.

Global milk prices have been swinging wildly in response to pulls and pushes from costs and demand. Until the middle of 2011, rising prices of cattle-feed ingredients such as corn propelled dairy product prices upward. A growing appetite for milk products from China and other emerging economies also aided the price rise. In 2013, New Zealand’s largest dairy company Fonterra had to resort to a worldwide product recall after suspected cases of bacterial contamination. China instituted a temporary ban on imports from New Zealand. This was another trigger for prices to spike.

But after that episode in 2013, dairy products have given in to the bearish sentiment afflicting other agri-commodities. First, prices of feed ingredients began to fall, reducing costs for milk producers. Then, in 2014, China sharply cut back on its imports of milk powder, deciding to produce more of its requirements at home. Sanctions on Russia by the western world prompted it to ban imports of dairy products from the European Union too.

This led to a global glut in milk products. The global outlook for milk product prices in 2015 remains sober, with China’s consumption remaining uncertain and slower growth in most developed markets contributing to slack demand.

A different picture in India

In India, though, retail prices of milk for consumers have not reflected any of these global upheavals. Retail milk prices in key markets such as Delhi, Mumbai and Chennai have headed placidly only in one direction — up. Retail prices in Delhi, for instance, have risen in each of the last five years, from ₹22 per litre in December 2009 to ₹38 a litre by January 2015, an annual rate of 12.5 per cent. Mumbai has seen an even steeper price rise from ₹20 to ₹41 a litre. Chennai has seen prices double from ₹18 to ₹37. Milk and milk products have, in fact, been constantly pushing up domestic inflation, continuing to rise even as most other food product prices moderated.

The recent sharp decline in global dairy prices has had a limited impact on Indian milk prices as the domestic market is not open to global trade.

With the Government imposing quantitative curbs on imports of milk products, domestic shortages aren’t automatically filled by imports, even if global prices are ruling low. Conversely, while large domestic milk producers such as GCCMF (Amul) do convert liquid milk into skimmed milk powder (SMP) in the flush season and export it, such exports make up a very small proportion of domestic output. The recent global decline in SMP prices has prompted local producers to cut back exports from over 1.25 lakh tonnes a year to just about 25,000 tonnes.

These supplies may keep a lid on domestic milk prices over the next six months or so. But over the longer term it is domestic milk output that holds the key to prices.

Statistics from the National Dairy Development Board as well as studies by the RBI note that Indian consumption of milk and milk products has been rising at a rapid rate despite higher prices.

Increasing milk product consumption from an upwardly mobile middle class, and rising protein consumption with improving income levels of the poor have expanded consumption of milk and milk products in India.

Between 2005 and 2010, NSSO statistics show that Indian households increased their monthly expenditure on dairy products by nearly 70 per cent.

The country’s milk output rose only by 26 per cent during this period. Expanding domestic appetite for milk, even as the livestock population and their yields have not kept pace, has led to production running neck and neck with demand.

Yes, persisting shortages have prompted the NDDB to launch an ambitious National Dairy Plan to lift domestic milk output from 130 million tonnes to about 200 million tonnes by 2020, through livestock and yield improvements as well as better processing infrastructure.

But as the supply response is unlikely to be immediate, the tight demand-supply equation appears likely to persist. Milk prices may go off the boil in 2015; but don’t expect lasting price corrections anytime soon.

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