Milk Dairies are beyond the pale

If milk becomes more expensive soon it will not be because India has a shortage. It’s because only we urban consumers will get less to drink. The large dairies responsible for our supply have got kicked out of the market. We will pay the price of their exit.

Delhi is the perfect example. Uttar Pradesh produces 25% more milk than world’s largest exporter New Zealand, and 2.5 times production in Gujarat. Punjab and Rajasthan each beat Australia. North India produces almost half of India’s 108 million tonnes milk. In the midst of plenty, how can there be a crisis?

Yet Mother Dairy, owned by the venerable National Dairy Development Board, one of the pioneers of India’s ‘white’ revolution and a big daddy of the industry, doesn’t have enough fresh milk. It buys from dairy cooperatives in Rajasthan, Punjab, Haryana, Uttar Pradesh and even Bihar. It doesn’t subsidise consumers and can afford to pay farmers well. Even so, 30% of its milk is a re-mix of skimmed milk powder and fat. In summer, that share reaches half.

In the West and the South, dairies use it as a last resort to shore up supply in the lean summer months. In Delhi, it is Mother Dairy’s lifeline. If competitors such as Amul (or Gujarat Cooperative Milk Marketing Federation) and private players don’t chip in, Delhi would have milk riots.

The crisis of supply is everywhere. Mumbai needs about 5 million litres milk daily. The three aging state-owned dairies supplying it can together handle only 1 million litres. What gives?

One, it is a question of price. Milk is a premium food with many uses. Dairies compete against each other as well as factories that put it to different use. Farmers don’t care who buys. They sell milk to the highest bidder. All across the country, milk is flowing to private industry because they pay significantly better. Instead of running away at the sight of these giants, the private sector is ready to fight.

Even among dairies, not all are equally good customers. Farmers in UP who sell to government cooperatives are geting almost Rs.4/kg less compared to farmers in Gujarat. Consequently, while some, such as Amul in Gujarat, buy a third of the local production, North Indian cooperatives get less than 5%. In UP, they don’t even buy 2%. For farmers, these cooperatives have become customers of the last resort.

Competition for milk is further compounded by demand outpacing supply. Industry data compendium, "Dairy India 2007", says the sector is growing barely 3% annually. Though some 75 million farmers have milch cattle, they sell only one out of every two litres in the pail. Or about 50 million tonnes is available for urban India.

This year, the cost of milk has risen even faster because drought decimated pastures and green fodder, while protein-rich oil cakes fed to cattle became expensive. So farmers raised their asking price.     There was another complication. The price of meat also doubled in the last one year. Farmers that couldn’t feed their buffaloes or didn’t make enough money from the milk sent their animals to the slaughterhouse. A smaller herd means less milk. Prices rose further.

In other words, the milk market is now a complete dog fight. Offer of even a rupee extra per kilo is often enough to break a rival’s deal. Ranged on the one side are dairies. On the other, factories that make everything from ghee, paneer and ice creams to casein for industrial use. With their reluctance to pay more in the North, and tough competition from private factories as well as private dairies, cooperatives onbiously are not able to bid away enough to meet consumer demand.

Two, cooperatives botched their one significant edge over private companies. They made virtually no investment in farmer productivity and profits. Had they been smarter, dairies would have figured that price may be important but in business, relationships are everything. People prefer to deal with people they trust. Loyalty and commitment between a company and its suppliers can tide over the toughest times. Last year’s economic recession definitely taught us that.

Cooperatives by their very definition ought to have had an unbeatable network of loyal member-farmers. Ironically, most private factories can now boast of much better direct farm linkages.

Mother Dairy, for instance, depends mostly on contractors, state-owned cooperatives and even some private players. These intermediaries end up hugely inflating the cost of milk at factory gate, and Mother Dairy's consumers bear the brunt.

Such dependence is also a supply management nightmare. Imagine what would happen if the FCI stopped buying wheat directly from farmers, did not pay more than private traders, and depended wholly on the limited infrastructure of state corporations.

A deadly mix of competition from meat and milk powder, feeble farmer relationships and management complacency has crippled dairy cooperatives.

The crisis in milk is actually no different to the fight over sugarcane between gur kolhus and sugar mill owners. As they grew, mills became complacent. They underestimated the ability of gur kolhus to pay and the farmer’s ability to find alternatives. Farmers took revenge by refusing to plant cane or selling to it gur factories.  Today we have a sugar crisis but ample gur. Rather like the currently abundant casein but shortage of liquid milk.

Given their enormous headstart and a great business model, state-owned dairy giants could have easily engineered India’s second milk revolution and benefited farmers and consumers alike. After all, New Zealand’s Fonterra, the world’s largest dairy company, is a cooperative. Amul is among the world’s top 20 dairy companies. Sure, milk can become more expensive. Just let it be for the right reasons. As a consumer, I don’t want farmers to subsidise my family. But please don’t ask me to subsidise public sector lethargy either.

They say competition and the market are like water. They go where they want. The milk market shows size and experience are no guarantee of corporate survival. Even the biggest names need the will to fight. Dozens of small fry are now eating the big fish