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New Delhi: Milk procurement prices are likely to rise in the fourth quarter of FY22, leading to an increase in costs for dairy companies, according to a report by brokerage ICICI Securities.

“We expect the dairy sector to face both demand-led and cost-push led inflation due to re-opening of schools, HoReCa and increase in festivities--it will likely result in higher demand for milk and with increase in animal feed prices, costs for farmers are likely to inch up," the brokerage said in a note on the dairy sector on Wednesday.

An increase in global skim milk powder prices is likely to push milk prices higher, it said.

Global skimmed milk powder (SMP) prices have inched up by 25% in November from lows of July.

"Higher SMP prices will increase exports and reduce imports, and help to reduce the excess inventory with dairy co-operatives," it added.

Dairy companies have so far benefitted from lower milk procurement prices in the last financial year as well as the first half of FY22.

In fact, milk procurement prices corrected at the start of the pandemic.

“Lower demand and stable supply of milk resulted in milk procurement prices declining by 15% in September 2020 from its peak in December 2019. While milk procurement prices were moving upward slightly, the covid wave-II again impacted milk consumption and prices collapsed. However, with the re-opening of the economy, we expect milk procurement prices to inch upward post the ongoing flush season," the brokerage said in its report.

This is likely to change over the next few months. This is especially true as markets open up, shoring up demand for milk and dairy products.

“While the companies have the option to pass on the increase in input prices via price hikes, we believe the inflationary impact to be relatively high," it added.

Dairy companies were able to generate supernormal profitability due to lower milk procurement prices in FY21 and H1FY22; the brokerage expects profitability margins to moderate in FY23.

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