Very Low correlation between milk production and monsoons

Is your breakfast going to get costlier soon? Well, the answer may lie in the start and spread of monsoon in India, which so far has been late and scanty. The price of milk, a key food item and essential ingredient in India’s favourite beverages tea and coffee, is typically determined by supply, which is influenced by the availability and the health of cattle and monsoon. As the price of milk is already rising, there are concerns that milk price inflation may get acute as the beginning of monsoon remains deficient in India so far.

“While we do not model any impact on milk production, we believe any material inflation in food grains will likely result in higher prices of cattle feed and it may impact the margins for the farmers. We believe there exists a potential risk of higher milk procurement prices for dairy companies,” says Aniruddha Joshi, analyst, ICICI Securities.

Steady investments in cattle feed by farmers, which has improved the breed of cattle in India and increased the cattle population, has resulted in rising supply of milk. The cattle population is growing at 1.5 percent per annum. Farmers also tend to invest more in cattle rearing during weak monsoon years as they fear lower agri (farming) income. “Apart from the 1.5 percent cattle population growth, the steady improvement in animal productivity is also resulting in higher milk production,” Joshi adds.

However, milk production has grown every year irrespective of deficient or excess rainfall in the period between FY1992 and FY2022, according to data analysis by ICICI Securities. In fact, production has increased even in those years when monsoon deficiency was higher than 15 percent. “The correlation coefficient between monsoon deficiency and milk production is just 0.17 percent over FY1992-2022,” Joshi adds.

Private forecaster Skymet Weather projects a dismal outlook for the next four weeks, between June 9 and July 6. India Meteorological Department (IMD) also estimates a patchy rain coverage in the week of June 30 to July 6. Since June 1, there has been 54 percent rain deficiency in the country with 53 percent deficiency over the south peninsula, 80 percent deficiency over central India, 10 percent deficiency over northwest India and 53 percent deficiency over east and northeast India.

Milk prices have been on a continual rise since several months, impacting overall retail inflation month-on-month. In May, retail inflation measured as consumer price index (CPI) moderated to 4.25 percent year-on-year but food prices remained elevated. Food price inflation, on the other hand, rose 0.6 percent month-on-month, climbing 3.3 percent. Prices of protein items including pulses, milk, eggs, meat and fish, increased in the month too.

“Milk prices continue to rise due to summer being a lean season for supply and elevated fodder costs,” says Rahul Bajoria, MD and head of EM Asia (ex-China) Economics, Barclays.

Pan-India, wholesale milk prices have increased 10.7 percent year-on-year and 0.8 percent month-on-month in May. Milk prices in south India are up 8.4 percent year-on-year but there is a steady deceleration in milk inflation in the region. It has declined to 8.4 percent in May from 12.8 percent inflation in December last year. Milk inflation in North India continues to remain at an elevated level.

“Food inflation benefitted from a sequential fall in prices of fruits and oils even as prices of eggs, meat, milk, vegetables, and pulses continued to increase partly, reflecting seasonal impact too. Core inflation was broadly unchanged at 5.15 percent though it is likely to inch up marginally over next few prints. Overall, the RBI will see this print favourably as it remains well within its estimates. However, it will remain on an extended pause as it watches for the monsoon outturn and the impact on prices,” says Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

“While the delayed monsoon may not result in immediate correction in milk procurement prices, we model monsoon in Q2FY24 and flush season in Q3FY24 to result in lower milk procurement prices,” Joshi explains.

That probably provides a fillip to dairy-related companies like Heritage Foods and Dodla Dairy. “Considering the strong return ratios and growth potential, we remain positive on the dairy sector. We also expect migration from unorganised to organised sector to steadily generate value,” Joshi says. Higher-than-expected rise in milk prices, delay in price hikes, prolonged weakness in economy and irrational competition may pose a threat to the estimates.