Liquid milk business thrives amidst global price slump

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New Delhi | Published: April 7, 2015 8:59:12 AM

Domestic private dairies, however, are feeling the pinch.

Liquid milk business, mother dairy, amul, skimmed milk powder, Delhi, business newsA dairy procuring cow milk containing 3.5 per cent fat and 8.5 per cent SNF (solids-not-fat) can produce 3.6 kg of ghee and 8.76 kg of SMP from every 100 litres or 103 kg (one litre of milk=1.03 kg).

The crash in global milk product prices may have upset the applecart of domestic private dairies, especially those in the bulk commodity and exports business.

However, it has made branded liquid milk marketing — a low-margin, high-overhead business traditionally monopolised by cooperatives like Amul, Mother Dairy, Nandini and Aavin — a profitable proposition. There is, indeed, money to be made today in selling liquid milk as it is in pouches.

Currently, the big North-based private dairies — VRS Foods, Sterling Agro Industries, Bhole Baba Dairy and SMC Foods — are mainly into manufacturing of products like skimmed milk powder (SMP) and ghee. The same is more or less true with their Maharashtra counterparts — Indapur Dairy, Schreiber Dynamix, Parag Milk Foods and Prabhat Dairy. Ex-factory realisations from SMP and ghee are now ruling around Rs 170 and Rs 260 per kg, respectively, compared with Rs 270 and Rs 310 a year ago.

A dairy procuring cow milk containing 3.5 per cent fat and 8.5 per cent SNF (solids-not-fat) can produce 3.6 kg of ghee and 8.76 kg of SMP from every 100 litres or 103 kg (one litre of milk=1.03 kg). At prevailing prices, the gross revenue from SMP and ghee sales would work out to Rs 2,426 per 100 litres. After deducting processing costs of Rs 250, the dairy’s net realisation would be roughly Rs 2,175 per 100 litres or Rs 21.75 per litre.

The fact that cow milk prices in Maharashtra have dropped to Rs 20-21 per litre at the dairy and Rs 18-19 at the farm-gate — as against their respective levels of Rs 29-30 and Rs 26-27/litre a year ago — shows the extent of pressure. Dairies have passed on their burden to farmers by simply lowering procurement prices.

But there are no such pressures in liquid milk sales. Toned milk with 3 per cent fat and 8.5 per cent SNF is retailing in Delhi and Mumbai at Rs 38 per litre. This price hasn’t changed despite the procurement cost of cow milk (having 0.5 per cent extra fat) at the dairy falling to Rs 20-21/litre.

Even after adding other expenses — Re 1 each towards processing and packaging, 50 paise each for local transport and administration-cum-marketing, and Rs 2 of trade margin — the total cost incurred on sale of toned liquid milk will not exceed Rs 26 per litre. Some dairies in the hinterland may spend an additional Rs 1.5-2/litre or so for transporting milk over 400-500 km. But even after that, there is a profit of Rs 10 from every litre sold.

Despite this obvious profitability, it is only the private dairies in the South — Hatsun Agro, Heritage Foods, Tirumala Milk Products, Dodla Dairy and Creamline Dairy — that have a strong presence in the liquid milk business competing with the entrenched cooperatives. Will this change, now that global SMP and fat prices are destined to remain low, with dismantling of milk production quotas by the European Union and a weak euro only adding to bearish pressures?

“Selling liquid milk can be profitable, but it involves high overheads towards brand-building, marketing and distribution. You need to have sufficient volumes to bring down overhead costs per litre, which takes time. Secondly, you cannot raise retail prices of liquid milk easily, which is not the case with bulk commodities like powder and ghee. But not being under pressure to reduce prices either can be an advantage in the present scenario,” a leading South-based dairy player pointed out.

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