Firm milk prices key threat to falling inflation

Even as retail inflation is expected to start easing from April to about 5% if not lower thanks to broad-based fall in prices, elevated milk prices could play spoilsport, with analysts expecting milk inflation to remain near double digits at least through the summer.

Despite India being the largest milk producer since 1998, the commodity has been the second biggest factor after cereals such as rice and wheat in driving up retail inflation in the last fiscal.

Milk has the second highest weight in the food and beverages basket of the consumer price index at 6.61%, a notch lower than cereals and products that have a 9.67% weight.

Retail milk inflation has remained elevated at over 6% since August 2022 and was at 9.24% year-on-year in March this year even as consumer price index (CPI) inflation in the month eased to 5.66%.

Even in terms of wholesale price inflation, milk prices have remained high at 8.48% in March despite the overall inflation trending down to 1.34% in the month, in an indication that retail prices will continue to rise.

After reports of possibility of imports of dairy products such as butter and ghee for improving domestic supplies, the government recently clarified that it is not considering easing of imports of these products as yet. It reckons that extended cooler weather condition in the northern region and setting in of flush season or peaking of production in southern India could increase supplies.

Retail milk inflation has remained elevated at over 6% since August 2022 and was at 9.24% year-on-year in March this year even as consumer price index (CPI) inflation in the month eased to 5.66%.

Even in terms of wholesale price inflation, milk prices have remained high at 8.48% in March despite the overall inflation trending down to 1.34% in the month, in an indication that retail prices will continue to rise.

After reports of possibility of imports of dairy products such as butter and ghee for improving domestic supplies, the government recently clarified that it is not considering easing of imports of these products as yet. It reckons that extended cooler weather condition in the northern region and setting in of flush season or peaking of production in southern India could increase supplies.

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Import tariff on skimmed milk powder (SMP) is prohibitive at 63%. Import of SMP last took place in 2011, thanks to a sharp cut in duties.

The finance ministry attributed the elevated milk inflation to a demand supply mismatch and said it could be one of the factors apart from volatile international crude oil prices and constrained supplies of milk would influence the country’s inflation trajectory.

A combination of high cost of feed and raw material, and supply challenges, lumpy skin disease (LSD) and rising dairy exports has impacted milk production and costs, leading organised players, including Mother Dairy and Amul, to hike milk prices multiple times in the last one year.

“Milk production has been impacted by a lumpy skin disease infecting millions of cattle in late 2022,” the ministry said in the monthly economic review, adding that the vaccination drive against the disease is expected to curb the spread and immune the cattle against the skin disease. “While this would increase milk supply, a general drop in inflation will moderate the fodder and transport costs, thereby lowering milk inflation,” it said.

While pegging retail inflation at 5.2% in FY24, the Reserve Bank of India has noted that milk prices could remain firm due to high input costs and seasonal factors.

For the first time in decades, the country’s milk production is likely to have stagnated in 2022-23 due to LSD in cattle across several states and the lagged effect of Covid-19 in the form of stunting of the animals, a senior official with department of animal husbandry and dairying had said earlier this month. The milk production was estimated at 221 million tonne (MT) in 2021-22.

“CPI data shows that month-on-month milk prices have been rising after December 2020,” said Suman Chowdhury, chief economist and head-research, Acuité Ratings & Research, adding that the domestic supply cannot be increased within a short period and hence, milk inflation may remain firm at high single digit in the near to medium term.

But its weight in the CPI basket is low and it is unlikely to impact overall food inflation and inflation in a big way, he further said, adding that since it is an important item in the Indian food basket and a longer term structural solution needs to be found to boost domestic milk production.

“We do not anticipate any reduction in milk prices till November,” RS Sodhi, president, Indian Dairy Association and ex-managing director of Gujarat Cooperative Milk Marketing Federation also known as Amul, told FE recently. The stability in milk prices is expected only by winter months, he said.

Analysts point out that there has been a demand supply mismatch. Milk and milk products including paneer, curd, butter, cheese, ice cream and ghee are also an everyday food item in all Indian households. With per capita income increasing, the demand for these products has also risen.

Manish Bandlish, managing director, Mother Dairy Fruit and Vegetables, a wholly-owned subsidiary of National Dairy Development Board (NDDB), also of the major milk supplier in the Delhi-NCR region had earlier said that there would not be any respite from high milk prices in the next six to eight months because of sharp spike in the feed and raw material cost.

Industry sources said that feed cost, which has a share of more than 65% in the cost of production of milk, has increased to Rs 20/kg from Rs 8/kg a year ago.

Experts say that a drop in milk production and cattle yield post-Covid was significant. As demand from restaurants, hotels, weddings and sweets shops crashed during the pandemic, prices had collapsed, which had led to dairy companies reducing procurement of milk from farmers.

According to officials, farmers during the pandemic period were paid around Rs 22-23/litre for cow milk and around Rs 32-33/litre for buffalo milk. Several dairy experts say that farmers did not expand the size of their herds to control costs, while they also underfed the cattle.

A calf typically starts producing milk in 24-28 months after birth, while this is higher for buffaloes (36-48 months). “Thus, the underfed and undernourished calves from the Covid period are the milk-producing cows of today. Milk yields have dropped, and dairies have been reporting lower milk procurement throughout the year,” said the note by Emkay Global Financial Services.

Dairy exports have also increased from FY21 to FY22, largely due to soaring international prices, and are on pace to increase further in FY23.