Soaring Milk Prices: Your Dairy Bill Will Continue To Pinch As Heatwave Worsens

Prices are likely to remain high at least until the next 'flush' season that begins from October.

<div class="paragraphs"><p>Parag Milk Foods Ltd. (Source: Company website)</p></div>
Parag Milk Foods Ltd. (Source: Company website)

Like many Indians, rising food prices have affected Kamala Devi, a mother of two kids. But one thing that is hurting her budget the most is the soaring milk prices.

Unable to cope with higher food expenses, Devi and her family, who live in southeast Delhi, now only have vegetarian meals. They have even switched to lemon tea to limit daily milk consumption.

"Meat, fish, ghee, butter—we have stopped consuming all these," said the 37-year-old, who works as a human resource professional in a private firm. "But milk is needed for our kids. How can we compromise on that?"

Devi's predicament mirrors the dilemma of many who are cutting down dairy consumption in the world's largest milk-producing nation. According to the latest retail inflation data, the price of milk soared 8.8% year-on-year in January, its fastest pace since April 2020. Retail prices have jumped by up to Rs 12 a litre in a year. The wholesale milk prices, according to the department of consumer prices, hardened further in Feb. both year-on year and sequentially. It rose 10.9% over the previous year, its highest pace since Nov.2014, and 0.5% over January. The southern region has seen the sharpest hike with prices up 10.3% over the last year.

Many Indians have simply stopped buying milk, according to a survey of 10,000 households in 300 urban and rural districts by LocalCircles India Pvt. "Four in 10 households are feeling the pinch of multiple increases in milk prices over the last 12 months."

Why Are Prices Soaring?

"Milk prices have always been cyclical and this situation occurs every three–four years," Indian Dairy Association President R S Sodhi told BQ Prime.

He, however, agreed that the hikes had been steeper this year. "That's because the dairy companies have not taken any significant hikes in the last four to five years."

Sodhi explained that demand destruction was caused when Covid lockdowns led to the closure of hotels, sweet shops and even cancellation of weddings. It impacted farmers as they had to slash the procurement price of milk. This put little money in their hands and it was not adequate to cover the cost of feeding the cattle or maintaining the cows and buffaloes. There were not enough healthy cattle, impacting the overall milk output.

Just as the supply pressure was building up because of unavailability of raw milk, the spread of lumpy skin disease led to cattle deaths and impacted supplies further. At the same time, the lockdowns were gradually lifted, prompting a demand-supply mismatch. That pushed up the milk prices.

"In the last six quarters, the milk procurement price for dairies jumped 45% from Rs 26.5 a litre to Rs 38.4 a litre. That's tremendous," Akshali Shah, executive director of Parag Milk Foods Ltd., told BQ Prime.

Shah said tight global supplies and higher exports exacerbated domestic shortages and, therefore, higher prices prevailed in local markets.

The last time milk prices went up by Rs 8 per litre was in 2013–14. The prices rose by just Rs 10 a litre over almost eight years until February 2022.

Furthermore, the increase in cow prices, a weak flush season, and higher fodder, feed and logistics costs also jacked up the prices. Overall, the input-cost inflation stood as high as 25– 30%, Sodhi said.

"We need to look at the higher milk prices from the farmers' income perspective," he said. "In the last 15 months, the retail prices went up by 14–15%, which is still lower than the input-cost inflation."

However, the price hikes are much higher than the 6–7% overall hikes taken in the last three years. This is bound to hurt demand, but the good thing is that these hikes have stabilised, if not increased, the farmers' income, according to Sodhi.

The Humble Fodder

The problem for milk starts with fodder. At this point, wheat production is forecast to hit a record high this season. Despite that, the domestic prices have stayed elevated.

According to the Ministry of Statistics and Programme Implementation, the average retail cost of wheat is about 19% higher than a year ago, while flour prices have jumped 20%. It percolated to packaged goods like biscuits and bread and even fodder, driving up prices for milk.

Based on the all-India wholesale price index, the annual fodder inflation rate soared to 29% in December.

Emkay Global Financial Services Ltd. analysts Madhavi Arora and Harshal Patel said the potentially adverse climate conditions were posing a fresh threat to India's agriculture output.

"Heat stresses are building up again like last year, putting pressure on the production of rabi crops, including wheat," they said in a joint report that was released last week. "Globally, India's wheat harvest is the biggest after China and a prolonged heatwave could cut production for a second straight year, hurting policy efforts to control domestic prices."

Food Corporation of India's data shows that wheat reserves have shrunk to the lowest level at this point in the year since 2017, highlighting the tight supply status. The government has announced recently the sale of five million tonnes of wheat from reserves to ease wheat prices.

While a warm weather will likely impact wheat yield, a drought, if it occurs, because of the El Nino forecast from June–October, threatens to hit the kharif crop.

"A drought this year is likely to lead to worse price fluctuations, given the already tight supply situation and entrenched price pressures," the analysts said.

This will tighten the fiscal situation further as the hikes in the minimum support price will need to be higher to ensure fair returns to the farm sector. This will reduce the state's ability to procure grains as retail prices, which are currently higher than the MSP, are likely to move higher as well, according to the analysts.

In 2022, a scorching heat wave in March reduced wheat yield in the northern and central states. After consecutive record production, the country produced 106.84 MT of wheat in the 2021–22 crop season—less than the 109.59 MT produced in 2021. Lower production led to unavailability of straws and fodder.

What's In Store?

Most analysts fear that the heatwaves along with the El Nino could possibly worsen an already concerning price situation, but some are optimistic.

Globally, the skimmed milk powder prices have corrected 35% year-on-year in February 2023, according to an ICICI Securities Ltd. report on Tuesday.

"Even after adjusting for benefits of rupee depreciation, we believe the profitability in skimmed milk powder exports is very weak," it said. "Lower exports will likely reduce the mismatch between demand and supply of milk in India."

The brokerage expects milk procurement prices to stabilise in the next two quarters with gradual improvement in the currently inflationary cattle feed prices and the correction in food grain prices. It said the dairy companies might resort to at least one round of price hikes in order to boost profitability, before the input prices start correcting by the third quarter of the next fiscal.

Sodhi, who was previously the managing director of the Gujarat Cooperative Milk Marketing Federation for 12 years, expects milk production to start increasing again with the onset of winter.

He said the winter crop harvest had been good and expects the prices to stabilise after Diwali with good kharif and rabi crops potentially reducing the cost of production. "However, until then the situation looks tight."

Parag Milk's Shah expects the prices to remain high until the next flush season, a period when animals naturally produce more milk because of a favourable climate and with an abundance of fodder post monsoons. It usually starts in September and continues till March.

Mother Dairy Fruit and Vegetable Pvt. Managing Director Manish Bandlish also expects the prices of raw milk to continue to increase till October.

Higher milk prices have also pushed up prices for dairy products like ice cream by 11%, ghee by 18%, butter by 7.5% and curd by 9%.

Bandlish said that milk products like ice creams and lassi have started to see an increase in demand amid rising temperatures. "This summer season looks promising."

Devi, however, has cut down on impulse purchases. "It was my kid's birthday yesterday (Sunday). He wanted to have ice cream, so we bought him a vanilla cup," she said. "We consciously didn't go for a family tub."

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