Myth is generally far away from truth. “The great enemy of truth is very often not the lie—deliberate, contrived and dishonest—but the myth—persistent, persuasive and unrealistic” said John F. Kennedy. My focus in this article is to highlight some of the myths on Indian dairying which should be unveiled so that we are pragmatic while organising future activities.
Demand outstrips Production
The first is the myth of huge production shortages in India, which will require us to undertake massive imports that will only go up in the future.
In 2014-15, India’s milk production crossed 140 million tonnes (mt), while registering a compounded annual growth rate of around 4.5 per cent in the last 10 years. As against this, the average growth of milk production in the world is 2.3 per cent. India accounts for over 17 per cent of the world’s total milk output.
These figures provide the base for analysing the myth originating from industry experts and survey reports about how in the last 5-6 years, India’s annual milk production has been increasing by around 4 per cent, whereas the annual milk demand is increasing by 6 per cent. A foreign expert went a step further, stating that India’s domestic milk demand is growing by 10 per cent, thus causing a shortage of a whopping 6 per cent every year.
Depending on whose mantra one takes as sacred or gospel truth, the annual growth gap would range from 2 (Indian expert) to 6 per cent (foreign expert). Either way, it means the country would face a deficit that could be met either through a massive production increase or resort to huge imports.
For example, a 6 per cent shortage figure would cause a gap equivalent of some 8.4 million tonnes per year. If this statement is believed, a cumulative shortage of three years would mean that India’s import would exceed the entire current milk production of New Zealand.
Clearly, it would be impossible to make up for a 6 per cent shortage through imports—when world production is only growing by 2.3 per cent and a large chunk of world trade of 40 per cent is accounted by New Zealand. Even the world as a whole will not be able to supply India, if its demand is outstripping production by 6 per cent.
Even if we consider the more conservative 2 per cent shortage figure, over the last six years this would add up to 12 per cent. That, on a production of 140 million tonnes, comes to around 17 million tonnes—which is the actual shortage India should have experienced and this would have needed to import by 2014-15 cumulatively going by this theory.
The reality is that during the last decade India imported only 120,000 tonnes of milk solids, which is equivalent to a million tonne of milk. On the other hand, the country actually exported over 1 million tonne of powder and casein during this period. Effectively India has been a new exporter during the last decade.
It raises a simple question: Could the country have really been in a position to export over eight times the milk that it imported if there was a shortage? The experts would, then, cite rising milk prices to support their case. But even this argument rests on thin ice: Milk prices have, no doubt, gone up in recent times. But the cumulative increase in the wholesale price of milk from 2004 to 2012 was 110.4 per cent as against 113.8 per cent for all food articles and 115.9 per cent for foodgrains. It is much lower than the 153.2 per cent increase in the wholesale price index for the ‘eggs, meat and fish group’.
During 2015, the cooperative and private dairies held a surplus milk powder stock of 120,000 tonnes—again equivalent to one million tonnes of milk. This is after exporting 8.5 million tonnes equivalent of milk products in the last decade. The dairy sector has been seeking intervention of the Government of India to incentivise exports. And, many processors today are paying lower prices to milk producers or cutting down on milk procurement volumes.
So, where does the question of a ‘structural shortage’ arise? Dairy exporters in several countries are pressurising the Indian government to lower import duties as well as sign free trade agreements (FTA) in a bid to access the country’s huge market. One could perhaps surmise that such a myth has been created by such lobbyists who want India to be soft on allowing imports of milk products through lower import duties and FTA!
The Panacea called FDI
The second myth is about the need for foreign direct investment (FDI) to sort out problems in the food processing sector that includes milk. We are made to believe that FDI interventions would reduce wastage and impending shortages in farm produce. The arguments here are similar to those given out in support of FDI in multi-brand retail.
Foreign retailers, it is said, would instil efficiency by, one, eliminating the intermediaries between the farm and the fork, compress the value chain to benefit both producers and the consumers, and two, catalysing huge investments in infrastructure for sourcing the farm produce, handling, storage and transportation and distribution and retail.
Both these are flawed assumptions. The evidence at least from the United States—home to chains like Walmart, Kroger, SuperValu and Safeway—is that the share of farmers for every food dollar spent by consumers has been drastically reduced from 40.9 cents in 1950 to 16.8 cents in 2012. This is from the data of none other than the US Department of Agriculture (USDA). In other words, the supply chain for milk in India is far more ‘compressed’ than in so-called advanced economies. There, much of the value between the farm and the fork is captured by expenses incurred not just in handling, processing, packaging, warehousing, refrigeration and transport, but also financing, insurance, marketing, brand promotion, labelling and shelf display.
As far as milk is concerned, in the United States, during 2012, the average dairy farmer received just US $1.81 for every gallon of fat-free milk that retailed at US $4.19. That amounted to a 43 per cent share. By contrast, the Indian dairy farmer gets about 70 per cent of the price the consumers.
This links up to the second point. Today, India has an organised dairy industry that handles about 26 million tonnes of milk, with the private sector accounting for 52 per cent and cooperatives the balance 48 per cent. The FDI/multinational component in this would not be even 2 per cent! If India’s milk production has grown from 22.2 million tonnes in 1970-71 to 58 million tonnes in 1992-93 and further to 146.3 million tonnes in 2014-15, and our farmers are receiving 70 per cent-plus share of the consumer rupee, it only exposes yet another mythical magic.
Corporate Dairy Farms
The third myth is that promoting fully automatic large corporate dairy farms is the way ahead—the only viable solution to ensure higher growth rate in milk production.
It is advocated that American-scale automised large farms in India can enhance growth in milk production at lower cost. Let me highlight that the US has three times our land size with less than one-fourth of our population. In 2012, the average value of farm land in the US was $2,650 per acre. Even if we take the figure of $7,200 and $4,050 for the top two US milk producing states of California and Wisconsin, it does not come to more than `400,000 an acre. And this is mostly good quality, well-irrigated and developed/levelled land—gradation of not more than six inches over one mile—that would cost at least 4-5 times more in India.
In addition, in the US, cost of capital is very low. It is possible to set up farms with large dairy herds and completely mechanised fodder cultivation, feed manufacturing, feeding, watering, data recording and of course milking operations.
In India, to set up such a say farm with, say 1,000 acres land, the investment in land at Rs. 10 lakh/acre, would be Rs. 100 crore. Capital for buying 10,000 cows, each yielding 4,500 litres annually, at Rs. 45,000/animal would be Rs. 45 crore. The total capital cost, then, just on land and animals is Rs. 145 crore. At annual interest of 12 per cent, the pay out would be Rs. 17 crore. This interest cost, when spread over 4.5 crore litres of milk (which is what the 10,000 cows would produce annually), will come to Rs. 3.90/litre. If to this, the cost of sheds, rotary milk parlours and other equipment are added, the total interest cost of capital invested on the farm will easily cross Rs. 6 a litre. And we are not even talking of other costs, especially the energy and expensive workforce that would be necessary to run and maintain such factory-size farms!
Therefore, the American model is unviable in India. It can work to a limited extent, provided the farmer-entrepreneur has family land of his own and does not have to invest freshly in land.
The best model of farm mechanisation in India is therefore one which leverages our inherent low labour cost advantage—something that seeks to improve the productivity of labour, supplemented with marginal mechanisation, rather than replace it with high-cost capital. The most viable case is where the farmer-entrepreneurs already own land and do not need to invest capital for purchasing fresh land. A farmer owning five acres of land can easily rear 30 animals yielding 3,000 litres/year and costing Rs. 12 lakh at Rs. 40,000 each. The capital cost over and above this—on shed, milking machines, fodder cutter and water guns for irrigation—can be limited to another Rs. 3 lakh. With milk sales of 90,000 litres at Rs. 25/litre, the farmer would be able to gross a turnover of Rs. 22.5 lakh. It would be possible for the farmer to do a turnover of 1.5 times the capital with a high margin and efficiency with the simple technology addition. Additional margin comes from calf rearing. If planned properly, it will not take more than 20 months to 24 months to recover the entire investment.
The above model can be replicated over larger farms going up to 150 animals or so. Beyond that, not only capital costs become prohibitive, but the overheads involved in managing and supervising the entire operations (including hired labour) also mount.
Western Dairy Products give Higher Returns
The fourth myth is about value added western dairy products being the only way for corporates to get better valuation in the Indian dairy sector.
There is a general perception among Private Equity (PE) investors that value added western products are the key for better returns. In the developed countries, cheese, yogurts, ice creams and chocolates are considered to be value added products and give higher returns to the milk processors. It is not the same scenario for these four products in India.
The total cheese market in India is about Rs. 650 crores. Of this, around 75 per cent is in the B2B category. The two other major categories where dairy products are used as a major ingredient like chocolates and ice cream are less than Rs. 7,000 crore each in market size. With the other categories such as yogurt hardly taking off in India, there seems to be no immediate scope for a large contribution of value added products to the Indian dairy sector.
Indian milk products with value addition are mainly milk sweets, paneer, khoa, channa (used as base for cow milk sweets), curd and ghee. Except for ghee, other products have short shelf life. There is need for technology to ensure longer shelf life for these products. Curd and paneer are gradually converting from commodities to branded products, but for a long time milk has been the main commodity which will control the price volatility and push the growth of the dairy sector in India.
With a large non-organised market still available for conversion from unprocessed to processed (pasteurised and/or homogenised) fresh packaged milk, what is required is technology for increasing the shelf life of milk and traditional dairy products and also to ensure good brand building, quality improvement and efficient cold chain so that a good product reaches the consumers.
The Indian food pallet is quite different and the western dairy products which are successful abroad do not find a ready acceptance in India. For example, the per capita consumption of ice cream is 28 litres/year in New Zealand and 21 litres/year in US as against just 0.3 litre/year in India.
Therefore, processed packaged fresh milk and traditional milk products are still a better option for the dairy processors in India versus the value added western dairy products.
Dominance of Cooperative Sector
The fifth myth is that the amount of milk handled by dairies in the cooperative sector is higher than the dairies in the private sector.
India produced 146.3 million tonnes of milk in 2014-15, as against 58 million tonnes recorded for 1992-93. The base year is important, for that was when the dairy industry was delicensed and the private sector allowed to freely establish dairy plants, subject to registration and other regulatory requirements under the Milk and Milk Products Order (MMPO), 1992. Till that happened, the country hardly had any large organised private dairies, barring the odd Nestle India or Milkfood Ltd.
But after 1992, a host of small and medium corporates entered the business. Today, apart from the Nestle and Milkfood, there are several private sector dairy plants in different parts of the country handling a million litres per day or more of milk. In addition, several more handle between half a million to a million litres of milk every day.
In 2013-14, cooperative dairies put together procured on an average 33.5 million litres of milk per day, whereas the organised private industry, covering those handling 50,000 litres and upwards, accounted for over 37 million litres per day. This works out to 48:52 ratio in favour of private dairies.
In fact, out of the total annual milk procurement of 33.5 million litres by cooperatives in 2013-14, more than 54 per cent was accounted for by just two state federations: Gujarat’s Amul (13.2) and Karnataka’s Nandini (5.0). Further, in 2000-01 the percentage of milk handled by cooperatives apart from Gujarat and Karnataka was 61 per cent. But in 2013-2014, this percentage had reduced to 46 per cent. This points to the cooperative dairy sector facing stagnation in most States, especially in North India and in the ‘Cow Belt’.
The private sector having overtaken the cooperatives today is implicitly admitted even by the National Dairy Development Board (NDDB). To quote from its Annual Report for 2010-11: “It is estimated that the capacity created by them (private dairies) in the last 15 years equals that set up by cooperatives in over 30 years”.
The remarkable thing about this growth of private dairies is that it has come about without any government subsidies or support from the NDDB. The processing capacities created have largely been on the strength of risk capital and entrepreneurial initiative—and with hardly any investment from multinationals!
Two facts emerge from this analysis. The first is that the country’s milk output has more than doubled since 1992-93. Coming on a higher base, it is a spectacular achievement—no less compared to the increase from 22.2 to 58 million tonnes registered between 1970-71 and 1992-93. That, of course, coincided with Operation Flood, launched in 1970. But unlike the Operation Flood programme built around cooperatives, much of the production growth and creation of fresh processing capacities after 1992-93 has been powered by the private sector.
Today, a host of private sector dairy companies are working closely with milk producers and providing them technical inputs and extension services. For example, my company procures around three million litres of milk every day, of which about 15 per cent comes from once Naxalite-prone Krishnagiri and Dharmapuri districts of Tamil Nadu. If we were not to work in close collaboration with the farmers, Naxalites would have remained active.
Many state governments grant subsidy to state cooperative dairy federations to ensure that the milk producer gets a remunerative price. The subsidy is as high as 20 per cent for cow milk price in some states. It is given arbitrarily and so neither helps the cooperatives nor the corporates. Subsidies are rarely utilised for the purpose they are meant for. There is either a political motive or to ensure that the cooperative does not show financial losses that will prompt their closure.
Subsidies curtail the freedom of the farmer and make the cooperatives slave to the state government. To increase consumer prices, the cooperative has to get clearance from the state government. With the vote bank in mind, the government often refuses to permit further price increase. Thus, the cooperatives end up losing more money. Too much of politics thus gets into milk. It would be better to have a policy at the central level to regulate/discourage this practice.
Subsidies also make the management of cooperative organisations lackadaisical, inefficient and function on financially unsound principles. As the cooperatives lose money continuously, they are reluctant to establish new capacities for the additional milk procured. In turn, the private dairy plants are unable to compete with this unfair competition and thus forced not to invest in such states. So ultimately new plant capacities are not generated by either cooperative or corporates. Since the cooperatives cannot procure all the milk from farmers, the private dairies are forced to procure at lower prices. At the end of the day, it is the farmer who suffers. The growth of the private sector processors is thus more commendable today as they fight on an uneven ground with no incentives and also unfair competition.
What is unfortunate, though, is the refusal of our policymakers to acknowledge the contribution of organised private dairies to the recent growth of India’s dairy sector, leave alone incorporate them into the official policymaking framework.
We must express our heartfelt gratitude to Dr Verghese Kurien for the innovative model that he created to network millions of fragmented milk producers and create for them a large dairy market and for having stabilised the price of milk without as much as making hole in the governments pocket through “minimum support price”.
Milk is a source of daily cash for the rural households. Its price is relatively stable and bereft of volatility exhibited by most crops. Milk withstands climatic vagaries and natural setbacks better than agriculture. The challenge ahead is to give remunerative price to the farmer, increase productivity of milking animals, bring down production cost of milk thereby increasing profitability of the farmers and helping them stay in the dairy sector.
India’s ‘dairy vision’ must encompass all stakeholders, including private sector dairies.