India Faces Milk Fat Shortage Despite Surplus Milk Powder: A Growing Challenge for the Dairy Industry

India's dairy industry is confronting an unusual supply imbalance: while overall milk production continues to increase, processors are facing a shortage of milk fat even as stocks of skimmed milk powder (SMP) accumulate.

The issue reflects a structural change in the composition of India's milk supply. A declining contribution from buffalo milk, rising demand for genuine dairy fats and increased processing of cow milk are combining to create a mismatch between the availability of fat and solids-not-fat (SNF).

According to an analysis published by The Indian Express, India's milk production has grown at an average annual rate of approximately 3% over the past decade. However, this growth has not translated into a proportionate increase in milk fat availability.

Declining Buffalo Milk Share Changes the Supply Equation

One of the major reasons behind the imbalance is the gradual decline in buffalo milk's contribution to India's total milk production.

Around three decades ago, buffalo milk accounted for approximately 60% of national production. Its share has now fallen to around 45%.

The difference in milk composition is significant:

• Buffalo milk: Approximately 6.5% fat and 9% SNF.
• Cow milk: Approximately 3.5% fat and 8.5% SNF.

As the share of cow milk increases, dairies need to process more milk to obtain the same quantity of fat. However, this also generates larger quantities of non-fat milk solids, which can be converted into SMP.

The result is a growing mismatch: processors need more fat to manufacture butter and ghee, but the associated production process generates additional SMP for which domestic demand is comparatively limited.

Why Is Demand for Dairy Fat Increasing?

The supply imbalance is being intensified by stronger demand for genuine dairy fats.

Regulatory enforcement against adulteration of ghee with vegetable oils, palm fat and other substitutes has encouraged greater reliance on genuine milk fat. Actions by food safety authorities, particularly following the Tirupati laddu controversy in 2024, have added pressure to the supply of organised dairy fats.

Tax changes have also supported consumption. GST rates on butter, ghee and cheese were reduced from 12% to 5%, while the rate on ice cream fell from 18% to 5% and paneer from 5% to nil in September 2025.

These changes have improved price accessibility for consumers and supported demand for dairy products.

The export of milk fats has added another dimension. India exported 56,578.64 tonnes of ghee, butter and anhydrous milk fat in 2024–25, followed by 37,167.33 tonnes in 2025–26, according to figures cited in The Indian Express. These shipments contributed to pressure on domestic fat availability.

Butter Prices Rise Faster Than SMP

The divergence between milk fat and SMP prices provides a clear indication of the market imbalance.

Between October 2023 and October 2026, average ex-dairy butter prices increased by approximately 54.3%, from ₹348 to ₹537 per kg. In comparison, SMP prices rose by around 18%, from ₹250 to ₹295 per kg.

This gap suggests that the market is placing a substantially higher premium on milk fat than on non-fat milk solids.

Recent retail price revisions also reflect the pressure. Amul increased the price of its cow ghee, while the Karnataka Milk Federation revised the price of its one-litre Nandini ghee pack from ₹715 to ₹850.

For dairy processors, the challenge is not simply producing more milk. It is securing sufficient fat-rich raw material while managing the growing volume of SMP generated during processing.

What Can the Dairy Industry Do?

Industry experts and analysts point towards changes in milk procurement and animal breeding strategies rather than focusing exclusively on increasing total milk output.

Potential measures include:

1. Strengthening buffalo breeding programmes: Improving buffalo populations and productivity could help increase the availability of naturally higher-fat milk.
2. Improving dairy genetics: Targeted breeding and better animal management can improve milk composition and productivity.
3. Component-based milk procurement: Farmgate pricing systems that reward farmers for higher fat content could encourage production of milk with better processing value.
4. Developing markets for SMP: Expanding demand for milk proteins, lactose and other milk-derived ingredients could help processors manage surplus non-fat solids.

The objective is to improve the balance between fat and SNF in the milk supply, rather than relying solely on higher production volumes.

A Strategic Shift in India's Dairy Growth Priorities

India's position as the world's largest milk producer remains a major strength. However, the emerging fat shortage highlights an important limitation of measuring dairy-sector growth only through total milk production.

For cooperatives and private processors, milk composition increasingly matters as much as procurement volume. The economics of butter, ghee, SMP and other dairy ingredients will depend on how effectively the industry manages the balance between milk fat and non-fat solids.

The bigger question for India's dairy sector is no longer just how to produce more milk, but how to produce milk with the right composition to meet changing consumer and industrial demand.

Source: Read full story here 14 Nov, 2026 Edited and Reported by

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