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Home / Economy / The mystery of milk price going up when WPI inflation is down

Milk prices are rising, as producers and marketers pass on higher costs to consumers. Amul and Mother Dairy raised milk prices by 2 each this week, the second such hike this year. Mint explains why milk prices are rising while wholesale price inflation is trending down.

Why are milk prices going up?

For dairy companies and cooperatives, the cost of operation and production of milk has increased. Prices of cattle feed, which includes maize, wheat and soybean, are up 20% over the year. In an already inflationary environment, dairies are compelled to pass on price increases to consumers as procurement prices go up. Amul said that given the rise in input costs, its member unions from where it procures milk have increased farmers’ price in the range of 8-9% year-on-year. Mother Dairy said farm prices of raw milk moved up 10-11% in a five-month period.

Has demand for milk picked up as well?

A better rate of vaccination, resumption of offices, schools and even opening up of channels such as hotels and restaurants have led to higher out-of-home consumption of foods and beverages in the last two to three quarters. This has led to greater demand for milk and other dairy beverages. Analysts at ICICI Securities also cited higher skimmed milk prices in the international markets that they said make exports of the commodity out of India more attractive. A combination of these factors is pushing up milk procurement prices, and leading to higher retail prices.

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But isn’t wholesale inflation cooling down nowadays?

Yes; India’s wholesale price-based inflation eased to 13.93% in July. In fact, WPI inflation in milk eased in July to 5.45% compared  to  6.35%  in  June,  though it remained high compared to February. However, companies also pass on hikes with a lag to lessen the impact on demand. Amul says the increase is less than 4% — below the food inflation rate of 8-9%.

When will milk prices cool down?

Milk procurement is also dependent on the flush season that runs between September to February; this is the peak lactating period for cattle due to better availability of green fodder and water. As a result, the period in general  sees higher  milk production and availability. The onset  of  the  flush  season  could offer some relief to dairy companies in the second half of the current fiscal year, according to the report by ICICI Securities. However, they anticipate dairy companies to raise prices in Q2 of FY23.

What does this mean for consumers?

For households, an  increase   in milk prices obviously means shelling out more money; this in a country that is among largest consumers of milk.  In fact,  by July,  dairy companies had raised milk selling prices by 5-8% in a six-month window. Amul said consumer demand typically sees an impact in the first few days after price hikes are initiated. However, recovery happens gradually. Consequently, higher milk procurement prices could also hurt companies that make bakery products or food items that use milk or milk solids.

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