Price stabilisation: Buffer’s time has come

January 9, 2020

Harish Damodaran | IE

NEW DELHI — Milk is a perishable produce and cannot, hence, be stored as such, unlike wheat, rice, pulses or sugar. It’s only the fat and solids-not-fat (SNF) portions — constituting about 3.5% and 8.5%, respectively by weight of cow milk, while 6.5% and 9% in the case of buffalo milk — that are storable.

Moreover, being produced on a daily basis — again unlike, say, wheat that is harvested just once for consumption through the year — milk doesn’t really need to be stored much. Dairies typically convert its fat into white butter or ghee and the SNF into skimmed milk powder (SMP). Such conversion happens during the “flush” season (October-March), when milk production by buffaloes goes up 50% or more compared to that during the “lean” period (April-September), with this difference at roughly 20% for cow milk. The SMP and butter fat produced from surplus milk received during flush is, in turn, used for reconstitution in the lean summer and monsoon months.

In the past — especially during the Operation Flood period (1970-96) — the National Dairy Development Board (NDDB) operated two schemes. The first one was a National Milk Grid (NMG), which essentially comprised a fleet of over 1,100 insulated rail and road milk tankers. These facilitated the movement of milk, linking major rural milk sheds to urban consuming centres and also smoothening “regional” imbalances in supply and demand.

The second scheme entailed creating storage facilities for SMP and butter, to take care of “seasonal” imbalances and ensure stable year-round supply of milk. The NDDB Act of 1987 mandated this “institution of national importance” with the twin tasks of establishing an NMG, under Section 16 (2) (f) (iii), and building up “a reserve of buffer stock of basic commodities” (Section 16 (2) (r)).

Over the years, however, both these key roles assigned to NDDB have receded into the background. NDDB, to start with, is no longer the force it used to be. Its turnover in 2018-19, at Rs 326.49 crore, was a fraction of the Rs 9,570 crore of Mother Dairy Fruit & Vegetable Private Limited. The latter, a wholly-owned subsidiary company, was merely a “subsidiary unit” of NDDB prior to its corporatisation in 2000. There are many who even refer to NDDB today as a “Mother Dairy Development Board”!

The other reason for NMG and buffer stock operations being practically rendered redundant has to do with supply itself. In the last decade and a half, India has become marginally surplus in milk, with the country even being a net exporter of SMP in most years, barring 2010-11 and 2011-12. The need for an NMG or maintaining a buffer reserve has, therefore, probably not been felt. Regional and seasonal imbalances in milk, if any, have been left entirely to market forces to even out.

That may, however, prove a costly mistake, especially this year, which could see India’s milk production actually fall, perhaps for the first time in recent memory. This is borne out by both cooperative as well as private dairies reporting lower procurement so far in 2019-20 over the last fiscal. In states such as Maharashtra, farmers are now getting Rs 31-32 for a litre of cow milk with 3.5% fat and 8.5% SNF, as against Rs 21-22 a year ago, even as domestic SMP prices have more than doubled to Rs 310-320 per kg over this period.

Ironically, last year at this time, dairies were saddled with huge unsold stocks of powder and fat. Not only were they disposing of SMP at Rs 140-150 per kg, but also defaulting in making payments to farmers or slashing procurement prices and volumes. Some had even made representations to the NDDB as well as the Centre to create a buffer stock of at least 50,000 tonnes of SMP. That request was not acceded to. Instead, the Gujarat and Maharashtra governments extended a subsidy of Rs 50/kg on SMP exports, on top of the Centre’s own 10% incentive under the Merchandise Export from India Scheme.

As a result, around 64,000 tonnes of SMP (including the SMP equivalent of casein, a milk protein) got exported during 2019-10. The cost of it, taking only a Rs 50/kg subsidy on 50,000 tonnes, would have been Rs 250 crore. Had the same 50,000 tonnes been purchased from dairies at Rs 200 per kg — Rs 50 over the then market rate — it would have cost the Centre/NDDB Rs 1,000 crore. That buffer stock created would, however, have been useful in the current year. Not only would it have helped stabilise SMP prices at Rs 250/kg or so, the Centre/NDDB may even have profited by selling the stock at this higher rate.

Unlike in cereals or pulses, buffer stocking operations for milk will not be too costly. India’s annual SMP production of 5,50,000-6,00,000 tonnes is equivalent to 6.5-7 million tonnes (mt) of milk. In other words, hardly 4% of its estimated milk output of 176 mt. But it is the 5,50,000-6,00,000 tonnes of SMP and 3,00,000-3,50,000 tonnes of butterfat produced and stocked by dairies that practically sets the price of milk. When those stocks are in excess or short of the otherwise daily flow of milk from the udders of animals, farmers or consumers pay the price.

Building a 50,000 tonnes buffer of SMP and 30,000 tonnes of butter is an idea from the past that is relevant even in present times. This stock might initially have to be created through imports; India may well turn a net importer this year for the first time since 2011-12. Care must be taken, though, that the sales from it do not end up depressing domestic prices. The purpose of buffer should be price stabilisation, both for the producer and the consumer.

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