The supply glut that has caused the milk price crash is an opportunity to create a skimmed milk powder buffer stock and incentivise investment in milk products.
Farmers, who had high expectations from the Modi government, are feeling disillusioned today. Not only do prices of several crops remain well below their minimum support prices (MSPs), but now, even milk prices have fallen by 20-30% (Rs 5-10 per litre for cow milk), across several milk-surplus states in western and northern India, ranging from Maharashtra, Gujarat, Rajasthan to Punjab, Haryana and UP. No wonder, farmers were seen spilling milk on roads or distributing free milk to the poor during their 10-day agitation.
This reminds us of the history of Kheda district in Gujarat, where a similar milk crisis happened way back in 1946, and Sardar Vallabhai Patel stepped in to solve the problem of low prices of milk. He gave India, literally, its first and largest milk cooperative (Amul), and in the process emerged as a leader of farmers. A similar situation confronts prime minister Narendra Modi today. If he can find a right solution to their falling milk prices, he will also emerge as an undisputed leader of farmers. This will pay him handsomely in the 2019 parliamentary elections. Remember, India is the largest producer of milk (165.4 MMT in FY17), and its value is more than that of rice and wheat combined! So, it is India’s biggest agri-produce and it is largely grown by small and landless agri-households, employing more than 70% women.
But, before we get into plausible solutions to the falling milk prices in India, let us try to understand what led to this situation. First, the growth in milk production since FY15 has been unprecedented (6.3% per annum during FY 15 to FY17; FY18 figures are not yet finalised), compared to about 4.2% in the three years preceding that (see graph). Additionally, milk output, instead of falling during the lean (summer) season, registered high growth in FY18 vis-à-vis FY17. Notwithstanding doubts that some experts raise about the authenticity of milk production data, the fact that prices are falling significantly clearly reflects that supplies exceed demand. Second, in such a situation of glut, India should have been exporting large quantities of skimmed milk powder (SMP). But, unfortunately, global SMP prices have tumbled from $4,744/tonne in FY14 to $1,925/tonne in FY18, making SMP exports unviable. As a result, India’s SMP exports plummeted from an all time high of 1.24 lakh tonnes in FY14 to just 11,300 tonnes in FY18 (see graph). Not finding a good export outlet has accentuated Inida’s milk price crisis.
Third, the market information today suggests that some large cooperatives (like Amul), or even some large organised private players, with lots of value-added milk products and contracts with farmers, have been able to hold the price line for farmers. But, innumerable small players dabbling in liquid milk and/or SMP have reduced their procurement prices for farmers substantially. Remember, only 21% of India’s milk production gets processed through the organised sector and the rest passes through unorganised small players. And, that is where the crisis is the most intense.
So, what can PM Modi do to tide over the milk price problem for millions of small farmers?
Here are a few proposals
- Create a buffer stock of 2 lakh tonnes of SMP through NDDB. This would imply the withdrawing of 2 million tonnes of liquid milk from the market, improving the market sentiment and upping the price line. At the current market price of about Rs 150/kg, it will cost about Rs 3,000 crore, much less than the package to sugar industry.
- Introduce SMP in futures market platforms. Global SMP prices are not likely to remain depressed for long as, at current prices, even the most efficient New Zealand milk farmers are making losses. As global SMP prices improve, NDDB can sell these stocks at a profit.
- Bring SMP under the Merchandise Exports Incentive Scheme (MEIS). Today, butter and ghee are in that category, but not SMP. This anomaly must go. Through this scheme, incentivise farmers to improve their poor backend infrastructure for the collection and marketing of milk. This would help ramp up organised structures through cooperatives and/or large scale private players in the industry, and it would be WTO-compatible.
- Incentivise investments in value-added products in the organised sector, from curds, buttermilk, cheese, ice creams and even chocolates! Improving the production of more value-added products can help farmers stabilise their milk prices.
- Expand domestic demand for higher milk consumption through concerted campaigns, especially in 115 aspirational districts where malnutrition is high. In fact, in those districts, introduce milk in mid-day meal schemes. Use the SMP buffer to supply large quantities to armed forces, hospitals and other large institutional players.
The bottom line is that India has to work on two fronts simultaneously: One, create demand to match rapidly increasing supplies of milk; two, ensure that its dairy sector develops on globally competitive lines. In order to cut down costs of production, India needs to increase productivity of its milch animals—far below (indigenous cows 2.8 litres, crossbreds 7.5 litres, and buffaloes 5.2 litres per day) the global standards of 20 litres plus/day in most developed countries. Cross-breeding with high productivity animals of foreign breeds and pure indigenous breeds, with sex selection technologies assuring female progenies, is the way forward. The technologies exist, but we need to ramp up our R&D and extension to transform this sector into a vibrant, competitive, and more remunerative sector for farmers. Will PM Modi seize this milky moment? If he does, it will make good economics for farmers and good politics for him.
Ashok Gulati & Ritika Juneja, Gulati is Infosys chair professor for agriculture and Juneja is research assistant at ICRIER.