5 mins read . 13 Apr 2023
From the morning cup of hot milk that schoolkids have before leaving home, to the preparation of a vast array of sweets and uses in Hindu rituals, milk is one product that is ubiquitous across every stratum of Indian society. From an economic standpoint, milk is the second-most consumed food product in the nation, with poor families aspiring to use it, and wealthier families seeing it as a status symbol.
But, not all is well on the milk front. Once a land of surplus milk, a demand-supply mismatch for milk has put India in a precarious situation. This has obviously resulted in an inflationary spiral that has been observed in milk prices with a 12% yoy average retail price increase in the last one year. Milk is not just a basic necessity for nutrition, but also can be food inflationary.
As seen in the previous section, milk is an essential commodity, which in turn makes it an extremely inelastic product since a modest rise in price does not impair demand. In the March CPI inflation report, milk inflation has come in at 9.31%. To quote the president of the Indian Dairy Association, R.S. Sodhi, “The balance sheets of dairy companies are under immense pressure due to the rising cost of procurement of milk”.
But, why is this happening? The increase in prices of cereals and rice brans has had an adverse impact on the dairy sector, as these products are used as animal feed. Farmers are getting discouraged by the high prices, and are cutting down on adequate feed for their cattle. That has hit the milk supply, which is reflecting in milk prices rising by 12%-15% during the winter of 2022.
The El Nino effect saw the country receiving discontinuous amounts of rain which augmented the cost of cereals. To be fair, trouble was brewing even before the issue of rising cattle feed prices loomed over the nation. When the pandemic hit India, it brought with it stringent consequences like lockdowns. As a result, the demand for milk and other cross-related products nosedived due to restaurants and sweet shops being shut.
While India accounts for over 25% of the global milk supply, our supply chain is still quite unique. It has a preponderance of milk output coming daily from tens of millions of small cattle-rearing farmers. During a lockdown, the farmers were unable to feed their livestock properly, leading to a long-term impact on milk output. All these factors were responsible for the rampant milk inflation that we see today. Milk inflation has been consistently high this year.
Milk prices are expected to continue their rising trend due to a shortage of milk at present. Also, India is heading into an exceptionally hot summer, when the demand for ice cream and yogurt peaks. As summer subsides, the Hindu festive season will begin around August, where milk-based sweets are an absolute necessity, and that will also put pressure on demand for milk.
It remains to be seen what the government does to mitigate the price pressures. In the April 2023 monetary policy, the RBI paused monetary tightening. Incidentally, Sodhi is taking charge of Reliance Retail food business and his first priority would be to revamp the supply chain management. The milk business is poised for interesting times ahead.