Milk prices may rule easy despite drought fears

While a looming drought is causing worries over resurgent food inflation, there is one commodity – milk – that could offer some respite.

Falling global prices rendering exports unviable, coupled with farmers tending to sell more to dairies in weak monsoon years, may see consumers not spending more on milk this time.

In 2013-14, India exported nearly 1.3 lakh tonnes (lt) of skimmed milk powder (SMP) worth over ₹2,700 crore on the back of high international prices and a weak rupee.

“This year, exports won’t cross 0.5 lt, as we are barely doing 3,000 tonnes a month,” said an industry source.

The country’s annual SMP production is 5-6 lt. Dairies bid up milk prices when export demand is high, as it was last year.

“Export realisations are currently ₹215/kg, as against ₹250 from domestic sales. Last week’s move scrapping the 5 per cent duty credit scrip incentive (on free-on-board value) will make shipments even less remunerative,” the source pointed out.

Domestic prices have also fallen from the ₹285-290 levels until three months back. “Dairies are ready to supply even at ₹230/kg for large orders. There is enough surplus powder in the system now,” he added.

Diaries require about 12 litres of milk to produce a kg of SMP. A ₹50/kg drop in SMP realisation will force them to offer ₹4/litre less to farmers.

“The phase of huge procurement price increases we saw from around November is over. From now on, prices will rule flat or lower because there isn’t any export demand at current global realisations,” noted RG Chandramogan, CMD, Hatsun Agro Product Ltd.

Since December, SMP prices at the fortnightly auctions of New Zealand’s Fonterra Cooperative Group, the world’s No. 1 exporter, have tumbled from $4,868 to $3,810 a tonne (Indian powder fetches a $100-200 discount to international rates).

Two factors are driving this fall. The first is a production rebound in New Zealand after last year’s drought, the country’s worst since 1972-73.

The second has to do with the end of the European Union’s 30-year-old milk quota regime – which sets caps on how much each member-country can produce – from April 1, 2015. The dismantling is expected to boost output, especially from relatively low-cost producers such as Ireland and Poland.

But lower export demand apart, there is another reason why domestic milk prices may rule easy. In years of low rainfall, farmers step up milk sales to make up for lost income from their main crop.

Gujarat Cooperative Milk Marketing Federation (GCMMF), for instance, reported a 9-10 per cent jump in procurement volumes in 2002 and 2009, both severe drought years.

“When the rains aren’t good, farmers go in for short-duration fodder crops that can be fed to animals, rather than raise cotton or groundnut. Dairying, thus, becomes their primary income source,” observed RS Sodhi, Managing Director, GCMMF.

There is a flip side, though.

In poor monsoon years, farmers accord priority in feeding to buffaloes and cows already in milk, while pregnant animals and calves tend to suffer fodder deprivation. This can, in turn, impact future milk production via a disruption of the reproduction-cum-lactation cycle of animals.

The payback time for this year’s drought could, then, well be 2015-16.