Module 10. System of milk procurement and processing, pricing and marketing of milk and milk products
Lesson 24
PRICING OF MILK AND MILK PRODUCTS
24.1 Introduction
Milk prices are generally determined by the forces of demand, supply and the price policy. The milk price, both production and selling, varies from region to region and from state to state commensurate with the production pattern and seasonal as well as regional variations in the country. The lean and flush season production ratio varies as high as 30: 70. As stated earlier, both the milk producers & the consumers’ price difference are equally high between the milk surplus region/ states to the milk deficient region/ states in the country. In India, ghee, milk powder and especially skimmed milk powder are the major price drivers.
24.2 Role of Milk and Dairy Products
The milk and dairy products have a prominent place in the global food products market. Due to factors like rising concerns about vegetarianism, health advantages of milk and dairy products over non-vegetarian foods, and ecological balance, the use of milk and dairy products is increasing globally. This has resulted in increased worldwide production of milk. Countries like India, Ukraine, and Brazil are emerging as leading exporters of nonfat dry milk product category. The milk and dairy products market of the world is poised for long-term growth due to recovery in world dairy prices. The projected rise in the prices for most of the dairy products is an important factor driving the growth of the global milk and dairy products market. However, extreme volatility in prices can also hamper the industry's growth. Also rising prices of milk and dairy products are a potential pressure point for food inflation. Government of India’s data on wholesale price inflation pegs the annual jump in milk and dairy at 13.4% in December 2010 from 6-7% in the previous year (DNA, 9 Feb 2010). India is the world's largest milk producer with more than 112.5 million tones of production but drought conditions, tighter feed and water availability have resulted only in a moderate growth in output whereas the demand has continued to rise due to shifting food patterns. The price of milk and milk-based products in India surges on the back of a variety of natural and human factors, including a shortage during monsoon months. In a year period of 2010, prices of milk had increased by about 25-30 per cent and further rise in rates had an adverse impact on food inflation, which rose to 9.8 per cent in the mid of 2011 (Indian Express, 28 Aug 2011).
It has been observed that between 2005-06 to 2010-11, the prices of essential commodities have gone up by nearly 72 per cent. Prices of milk and milk products have also witnessed a sharp increase. On the contrary, the per-capita income of an average Indian in the metros has gone up by 38 per cent. Once milk prices go up, the prices for milk-based products like butter and cheese also go up. The prices further impacted by the festivals season which sees a spike in the demand and consumption of milk based products, especially sweets. Over the years, milk procurement costs have increased significantly, as costs of all major inputs for milk production have increased. Other input costs like packaging material and transportation have also increased. Major players in dairy processing industry say that, though they have been revising prices over the past two years to counter the increasing costs, the rise in MRP (Maximum Retail Price) has not been adequate to cover the rise in cost of milk production. In order to partially recover the costs and sustain operations for the rest of the year, they are forced to revise the price of some of the milk variants.
24.3 Pricing of Milk and Milk Product
Indian dairy sector has made remarkable progress over the last few decades. The co-operative movement, especially Operation Flood, has been an important driver of this progress and has played an important role in facilitating the participation of smallholders in this expanding sector. Despite three decades of cooperative movement in India, however, a large proportion of milk and milk products in India continues to be marketed through the ‘informal or unorganized sector’. Although the share of organized market has steadily increased over the last three decades, the informal sector comprising middlemen, private milk traders and direct sale from producer to consumer, still accounts for nearly 80 percent of marketed milk and milk products in the country. Trends indicate that, the informal sector will continue to play its dominant role in milk marketing in the foreseeable future. Further, nearly 85 percent of all the milk that enters the national exchange economy finds its way into the urban areas. It is therefore the urban demand that is the main source of cash for rural milk producers.
It is estimated that of the 3700 cities and towns in India, only 778 are served by an organized milk distribution network. Only 15% of the milk marketed is packed, of which 94% is in pouches. The informal market thrives on poor willingness of consumers to pay the extra costs of formal processing and packaging. The informal market usually does not incur those costs and hence the market margins between farmer and consumer could remain smaller. This also implies that the informal market agents can afford to offer higher prices to farmers and lower retail prices to consumers.
24.4 Two-Axis Price Policy
The determination of price of milk in an informal market is purely qualitative and depends partly on local demand and partly on the presence of organized buyer in the region. On the contrary, in organized sector, milk receives price on the basis of some specified quantitative parameters. These parameters usually constitute percentage of Fat, Solid-not-Fat and Protein in milk. In India, double axis or two-axis system of milk pricing is commonly followed in organized milk market, which was first recommended by Royal Commission on Agriculture, constituted in 1919 by Government of India and re-suggested by Milk Pricing Committee in 1972. The two axis pricing policy on the basis of fat contents and SNF for fixation of procurement prices of milk has been considered scientifically rational. The minimum SNF content desired for cow milk is fixed at 8.5% and that for buffalo milk is 9% for accepting milk at the collection centres of these dairies and the price is mainly determined by the percentage fat content of the milk. Incentives for better quality milk and penalties for not meeting minimum acceptable standards are prevalent in the organized dairy sector in India.
The important problem in milk procurement pricing using this system is two sources of milk viz. cow and buffalo milk. This problem has arisen due to the Fat and SNF contents in the cow and buffalo milk, buffalo milk contains more fat percentage whereas cow milk contains low fat and the price of buffalo milk is always higher than that of cow milk. Most dairy plants have some kind of a purchasing policy, which have some kind of relationship to what the plants get from the sale of their milk product. Different State Governments has adopted different methods of payments and prices. Some pay less for cow milk, some pay the same purchase price for both milk and take a calculated risk that some adulteration of buffalo milk may be passed on as cow milk. Product factories generally pay strictly on the basis of fat.
Consumer preferences reveal that the market for value added milk products is small and most buyers are unwilling to pay for processing of any kind. Formal processes not only spend on quality control, packaging and transportation but also on trade taxes and are thus able to market to a niche segment only with their relatively high price. Liquid milk accounts for more than 80% of the total value of milk production. A variety of milk products (ghee, butter and cream being the important ones) that are produced, partly due to economic considerations and mainly to utilize the unsold milk. They, generally, are ill-equipped for the purpose and report difficulties in marketing the by-products. Therefore, the prices of milk products are spatially discriminated to capture considerable share in the consumers payment.
Indian Society of Agribusiness Professionals in its comparative analysis of the producer’s share in consumer’s rupee across different marketing channels reports that the producer gets maximum share (82-100%) when they directly sell to the consumer. However, direct sales are not always feasible for small farmers as some of them are locked by the middlemen who offer them credit for the purchase of inputs and animals. Even in high production areas such as Haryana, sales to a marketing agent/middleman are one of the common disposal mechanisms. At an aggregate, the producers get lowest remuneration when they sell the milk to the cooperatives (50-75%). For example, in the early 1990s, Orissa Milk Federation(OMFED) offered lowest price compared to any other channel in Orissa, the price realized by farmers from informal sector was Rs. 9.5 to Rs. 10 per litre, whereas cooperatives paid between Rs. 8.00 and Rs. 8.50. Further, the middlemen who bought from them made instant cash payments whereas it took 12-15 days to realize payments from the cooperative system.
Conclusions
We often complaints about the rise in prices of milk and milk products. It is not right to single out only the prices of milk and milk products in isolation. The rise in prices of milk and its products has to be compared with the rise in prices of other products. It is also imperative to consider the models that will include input prices, technology and government policies rather than only considering two axis pricing policy, in milk procurement price determination. Due to composition of cow and buffalo milk there are two prices and also there are inter-state and inter-regional differences in produces’ as well as consumers’ prices of milk and milk products. It is, therefore, important to understand the dynamics of various marketing channels, including buying and selling behavior of buyers and sellers, price movement and the ability of different market agents in reaching out to the producers as well as consumers. In order to ensure adequate supply of milk and milk products for consumers at reasonable prices, there is a need to examine the impact of important milk marketing channels in terms of economic efficiency so as to be able to work out strategies and policy measures to improve the overall pricing mechanism for milk and milk products.
Selected references
Government of India 2011. Milk and milk products. Sector specific information, Minstry of Food Processing Industries, Panchsheel Bhavan, August Kranti Marg, New Delhi.
Hemme, T., Garcia, O. and Saha, A. 2003. A review of milk production in India with particular emphasis on small-scale producers. Pro-poor Livestock Policy Initiative, FAO Animal Production and Health Division, Vaile delle Terme di Caracalla, 00100 Rome Italy.
Indian Society of Agribusiness Professionals 2008. Milk marketing in India: A review paper on the role and performance of informal sector, Pro-poor Livestock Policy Facility (South Asia Hub), Capitalization of Livestock Programe, Experiences in India (CALPI). Retrived from: http://www.intercooperation.org.in/km/pdf/Documentation/Traditional/Informal%20milkmarket%20Desk%20study%20(Amit).pdf
Koli, P. A. and Pandit, S. B. 1987. Growth and economic significance of milk co-operatives in Kolhapur District, http://hdl.handle.net/2009/4131
Saravanakumar, V. and Jain, D.K. 2009. Evolving milk pricing model for agribusiness centers: An econometric approach. Agricultural Economics Research Review, Vol. 22, 155-160.
Technology park 2009. Milk and dairy products in India-production, consumption and exports. Hindustan Studies and Infolitics, Second Edition. http://www.technologypark.com/marketplace/reports/hs_milk report09.htm.
Ghule, A. K. 2010. Economics of milk production and its disposal pattern on commercial dairy farms in Ahmednagar district of Maharashtra. M. V. Sc Thesis, NDRI (Deemed University), Karnal, Haryana.