Saddled with huge carry forward inventory of Skimmed Milk Powder, the Indian dairy sector is staring at a further build up in stocks with the onset of a flush season in South India tracking an early monsoon this year.
According to multiple sources in the dairy sector, the current carry over stock of SMP is estimated at about 200,000 tonnes, which is unlikely to be absorbed until end of 2019. While the private players are worried, the co-operatives are unperturbed.
The SMP prices have already slipped by about ₹100 a kg from last year’s peak of ₹240. According to trade sources, SMP prices in loose are hovering at around ₹145-165.
Unreal prices
"These do not reflect the real prices. This is the distress-sale scenario amid lack of demand. We have extra inventory and forecast of a good monsoon is further adding to it. In this situation, till October 2019, we don't see the scenario improving," said Kuldeep Saluja, Managing Director, Sterling Agro, a leading dairy products exporter.
However, cooperative behemoth, Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF), which sells milk products under Amul brand sees no reason to panic as the climatic conditions are causing decline in milk production, which will absorb the excess inventory.
"Due to severe heat wave conditions, the milk production is adversely affected and has declined. It is advisable to keep stock around this season because the production will increase only around Diwali. Till then there is going to be shortage. Whatever stocks are there currently, will be consumed in the next 4-5 months," R S Sodhi, Managing Director, GCMMF said.
India's annual SMP consumption is estimated at 500,000 tonnes against a production of 600,000 tonnes - spread between cooperatives such as Amul and Karnataka Milk Federation's Nandini Dairy as well as private players based in Delhi and Maharashtra. The remaining quantity of one lakh tonne is the exportable surplus.
Inventory build-up
"There has been no export since past two years with international prices ruling lower than the domestic prices. This is the reason, we have an inventory build-up of about 200,000 tonnes. If in this season also the SMP production is 6 lakh tonnes, the carry over will go to 3 lakh tonnes, which will be difficult to absorb without export incentives," said R G Chandramogan, Chairman and Managing Director, Hatsun Agro.
However, in the international market, SMP prices hovered around US $2,045 per tonne, which works out to about ₹140 a kg. Due to lower international prices, the dairy players are finding it difficult to export. According to market estimates, the combined SMP inventory with KMF and Amul is about 1.5 lakh tonnes, while that of private and corporate producers is about 50,000 tonnes.
"It's not just SMP, there's a glut in ghee also as there is no demand," says R S Khanna, dairy expert and chairman (non-executive), Kwality Ltd. "We may see some offtake from mid-June once the festive season starts," he adds.
Khanna further said that the Government should look at subsidising the exports to the tune of 30 per cent to prevent a further build-up in stocks. The Indian Dairy Association is likely to take up the issue of subsidising the exports with the government soon.
Exports likely
The industry wants 1.5 lakh tonnes to be procured from the cooperatives from Central funding and shipped out to SAARC nations, which often face milk shortage.
"The government should come forward and buy the excess quantities form the cooperatives and send it to SAARC countries. This will cost them about ₹3,000 crore, but once the excess is exported out of country, it will bring things in order," a private player said.
Sodhi further stated that international SMP market has already started improving. The benchmark GDT Price Index for SMP has recovered from US $ 1675 in December 2017 to US $ 2047 now. But is still lower by about US $200 than the comparable month last year. "Another 5 per cent increase in international SMP prices and we will see exports resuming. There is hardly ₹10 a kg difference between local and international prices. Indian consumption will also grow," he added.