Budget and Dairy Sector: Doubling of Milk Processing Capacity no Panacea

Finance Minister Nirmala Sitharaman, in her Union Budget speech, has said that the government shall “facilitate” a doubling of India’s annual milk processing capacity from 53.5 million tonnes (mt) to 108 mt by 2025.

Laudable and well-meaning though the intention is, it does not address the real issues and challenges facing our dairy industry, which isn’t about a shortage of capacity. Page 62 of the National Dairy Development Board’s (NDDB) Annual Report for 2018-19 shows the total processing capacity of cooperative dairies at 882.74 lakh litres per day (LLPD), roughly translating into 33 mt. We have no comparable data for organized private sector dairies. But according to an NDDB presentation dated August 26, 2014 (‘Status of Milk Processing Infrastructure of Dairy Cooperatives’), the registered processing capacity of private dairies in 2010-11, at 689 LLPD, was actually higher than the 406 LLPD of cooperatives for that year. Moreover, NDDB’s 2010-11 Annual Report admitted that “the capacity created by them (private dairies) in the last 15 years equals that set up by cooperatives in over 30 years”.

Simply put, if private processing capacity was at 689 LLPD or nearly 26 mt in 2010-11, and even assuming nothing was added subsequently, the total for the organized sector would already be 59 mt. This is more than the 53.5 mt mentioned in the Finance Minister’s budget speech. The only way the numbers can add up is if many private dairies have shut after 2010-11 and their capacity reduced to just over 20 mt.

Either way, I believe that the government’s focus shouldn’t be on creating new milk processing capacity. In 2018-19, procurement by cooperative dairies averaged 507.69 lakh kg per day or 492.90 LLPD (one litre equals 1.03 kg), which is hardly 56% of their existing capacity of 882.74 LLPD. In the private sector, too, several new plants came up during the first 20 years after liberalization, with many of them, especially in North India and Maharashtra, producing commodities such as skimmed milk powder (SMP), casein, ghee and white butter. The crash in global commodity prices after 2014-15, rendering exports uncompetitive, has led to their current operating at 30-40% capacity. The only private dairies doing relatively well are the ones in the South, which are primarily into the marketing of liquid milk, curd, paneer and other branded fresh products. They, in fact, outsell regional cooperatives in this segment.

Rather than targeting a doubling of processing capacity, policymakers should first ask: Why are dairies struggling to optimally run even their existing plants?

The problem, in my view, isn’t with “supply” or raising the share of organized dairies in the processing of surplus milk produced by farmers. Instead, it is with “demand”: the domestic market is simply not growing fast enough. During the five years from 2014-15 to 2018-19, the average annual growth in cooperative milk procurement has been 8.3%. As against this, the corresponding yearly increase in their liquid milk marketing was just 3.8%. Nor are we able to expand the market for exports. On the contrary, India’s SMP shipments fell, from 71,597 tonnes in 2012-13 and 1,29,868 tonnes in 2013-14, to 34,490 tonnes, 15,940 tonnes, 16,100 tonnes and 11,476 tonnes in the subsequent four years. They revived somewhat to 45,082 tonnes in 2018-19, mainly because of government subsidy, without which we were price uncompetitive.

If the problem is demand, not supply, doubling processing capacity will obviously not help and we need to, instead, find a solution for the former. Dairies have, in recent months, raised prices of both products sold by them as well as milk procured from farmers. But this has been an exceptional year of supply disruption resulting from excess and unseasonal rains, preventing proper fodder growth and dry matter accumulation. The industry has to prepare itself for a scenario, where hiking consumer and producer prices year after year will not be easy, unlike the past.

It leaves us, then, with the only viable solution: working with farmers to bring down their cost of producing milk. The present government must be complimented for initiating a scheme to eliminate Foot & Mouth Disease and Brucellosis in cattle by 2025. Both these are highly infectious diseases that cause infertility, abortions and reduced milk yields in animals. The 2020-21 budget has allocated Rs 1,300 crore towards this programme, over and above the Rs 811 crore being spent in the current fiscal. Investment in animal health is necessary to boost productivity and also the export of dairy products.

No less vital to lowering milk production cost is fodder development. India has not leveraged its tropical advantage that allows round-the-year fodder cultivation, which New Zealand or European countries having long winters cannot do. Dry matter yields from forage are only 7-7.5 tonnes per acre in New Zealand, whereas our farmers can harvest 30-35 tonnes of the same from Co-5, a Bajra-Napier hybrid grass bred by the Tamil Nadu Agricultural University. At Hatsun Agro, we have shown that by simply doubling the quantity of this proteinaceous green fodder fed daily to his animal to 40 kg, a farmer would be able to supply it an extra 560 grams of crude protein at Rs 10. That same 560 grams, when given through compound cattle feed or concentrates, will cost Rs 70. A saving of Rs 60 on 12 litres average daily milk yield straightaway reduces milk production cost by Rs 5 per litre.

Is there a better way to enhance the farmer’s income?

The Indian dairy industry’s future lies not in doubling processing capacities, but by making its raw material supplier, the farmer, a cost-efficient and globally competitive producer. Why cannot we think of the dairy farmer as someone who dedicates his land for cultivating perennial high-yielding protein-rich fodder and feeds it to cows that produce 20,000-plus litres of milk per acre — more than twice what his New Zealand counterpart can? The potential to do this is, perhaps, the greatest in Eastern India. Odisha, Bihar, Jharkhand or Chhattisgarh could be developed into export hubs for dairy commodities, while farmers of Gujarat, Maharashtra, Karnataka, Tamil Nadu, Rajasthan and Punjab can continue supplying to the more urbanized markets within the country.

We need a strategy to double the dairy farmer’s income. That should, however, come not from jacking up prices or giving per-litre subsidy, as some state governments have done. The former leads to inflation and the latter to deflation, through dumping by dairies that process milk artificially cheapened using taxpayers’ money. Both are recipes for disaster. The choice must be between inefficiency (whether manifested in inflation or deflation) and achieving genuine cost reduction by investment in fodder development, animal health and innovation. We cannot ride both horses.