Dairy at Dilemma:Farmers or Consumers!

There has been a growing demand for dairy products in India, driven by factors such as population growth, rising incomes, urbanization, availability, cold chain penetration and changing dietary preferences. At the same time, the dairy sector in India is facing challenges such as inflationary pressures, demand-supply gaps, rising cost of inputs and lower dairy yields from the cattle. Due to this increase in demand for dairy products and nearly stagnant levels of milk production over the past few years, there has been a tightening of supply and an increase in price.

As the impact of the pandemic receded, the consumer purchase behavior became less conservative, and the overall demand expanded from essentials to accommodate impulse purchases as well. Milk, is a product that ubiquitous in India and caters to all classes and age of consumers. It also carries one of the highest weightages in the food basket for measuring retail inflation.

While the rupturing demand was enough to mask the incremental inflation in milk, FY 2023-24 is sure to face a direct impact on consumer demand. Inflation of milk and milk products closed at a higher rate of inflation as compared to the overall inflation of the country. And there is no respite expected from the increasing prices of dairy products until Q3 of FY 2023-24 due to the impending challenges in supply. It is anticipated that a demand-supply balance would be restored by Q4 this year, as supplies begin to stabilize by Diwali 2023.

The loop of this retail inflation began when farmers couldn't cope with the rising feed prices in the beginning of the pandemic. The erratic climatic conditions impacted the availability of feed and fodder, pushing up input costs and subsequently raw milk prices.

Farmers faced huge losses as the demand had not picked up in the initial phases of the pandemic, yet the cost of production kept soaring high. Such farmers held back from investing in the cattle and hence faced the inability to expand later as the demand grew. Further due to  lumpy disease, induction of new animals suffered due to restrictions in movement. Fodder prices shot up through the roof in 2022, facing an inflation of more than 20% in the last financial year. The supply side pressures further built up as the exports as well as global fat prices catapulted to more than $7,000 in FY2021-22, and further strained the domestic supplies.

Yet another reason for this increasing inflation is the gap in the demand and supply of milk fat. Q3 and Q4 of 2022-23 was a turbulent time for the Indian dairy industry as many players faced a challenge in fulfilling the market demand, especially of fat rich products. Apart from the reduced investment of farmers, the falling contribution of buffaloes in the total cattle population is also a strong reason. The share of buffaloes in the total cattle population of India has reduced from 57% to 46% in the last few years; while the share of cows has increased from 18% to almost 33%.

With so many challenges surrounding the dairy industry in India, it is rumored that the government might be considering importing milk fat and SNF to fulfil the supplydemand gap. This alternative might turn out to be more of a permanent threat rather than a temporary fix. Lowering import duties would open the window for dairy rich countries from the West to dump their surpluses in the Indian subcontinent and leverage the consumer demand with lower prices. From the consumer's point of view what looks like inflation is increasing income from the farmer's point of view. It is an increase in the farmer's compensation that is commensurate with the rising cost of production and an incentive to invest more in production capabilities. Relaxation in the import duties on dairy products would adversely impact the farmers' compensation, and ultimately the indigenous production capacities in India.

With the increasing prices of dairy products, the middleclass consumer is definitely tweaking his consumption. The current milk procurement trends suggest that it won't be until October 2023 that the industry sees a supply augmentation. There is an evident latent demand for dairy products like paneer, ice cream, khoa, beverages, etc. with the spike in retail prices being the only prominent constraint from the consumers' view. The overall inflation for food products is expected to ease off going ahead, but things are not looking up for dairy products. The real challenge now is for the dairy companies to find the right balance between maintaining the farmers' compensation and limiting the impact of increasing prices on the consumers' demand.