Why has Amul raised milk prices 12-15% in 12 months?

Some 80 million farmers contribute to the dairy industry and India produces 23% of the world’s milk. But only about a quarter of that is handled by organised industry.
Some 80 million farmers contribute to the dairy industry and India produces 23% of the world’s milk. But only about a quarter of that is handled by organised industry.

Summary

  • The hikes are presumably to cover the higher cost of transport and other inputs. Understanding the value chain of milk helps to understand why Amul and other milk producers have raised prices

A steady rise in the price of milk has caused some disquiet. In the latest of a string of hikes, Amul has raised the price of its various milk categories by 2 a litre or 3 a litre everywhere outside its home state of Gujarat. Other milk producers have followed suit, since the entire packaged milk market benchmarks to Amul’s prices.

Amul has hiked milk prices by an average of 8 a litre in the past 12 months – roughly 12-15% for various categories. The hikes are presumably to cover the higher cost of transport and other inputs. Understanding the value chain of milk helps to understand why Amul and other milk producers have raised prices.

Milk is a necessary good, so demand is relatively less affected by price. Your family’s milk consumption won’t change unless prices change a lot. If they fall, you’ll use the savings to buy something else. If they rise, you will economise elsewhere, rather than cut your milk consumption.

Since demand doesn’t change easily, prices may swing a lot if there’s too little or too much supply. But it’s very unlikely that demand for milk has changed much in the past year, and supply has increased steadily between FY2018 to FY2021, from 198 million tonne to 210 million tonne. Going by anecdotal evidence, production hasn’t fallen in 2022.

India’s per-capita milk consumption is around 425 gm per day, which is higher than the global average of 320 gm. Some 80 million farmers contribute to the dairy industry and India produces 23% of the world’s milk. But only about a quarter of that is handled by organised industry.

Milk production in India has grown at a compound annual growth rate of about 6.2% to 210 million tonnes in 2020-21 from 146 million tonnes in 2014-15. India can’t export liquid milk because it doesn’t meet international food quality standards (though India does export some dairy products). So export demand has not pushed up prices.

So if the supply and demand haven’t shifted much, has it become more expensive to produce and deliver milk? Generic inflation has indeed been high, and it’s useful to look at a few inputs specific to milk.

The White Revolution was built around better nutrition for bovines. Traditionally, cattle were fed hay (dried grass) in winter and in dry seasons. But when India started producing edible oils in quantity, this led to alternative, more nutritious food sources. Seeds like linseed, sunflower seeds, coconuts, olives, soy, flax and peanuts are pressed to produce oil and the residue compacts into a messy cake. Oil cakes are rich in nutrients and excellent food for animals. It is ideal for cattle and buffalo feed but is also fed to other animals such as goats, sheep, pigs and chickens.

Growth in edible oil production was foundational to the White Revolution. Using oilcake instead of hay increased milk yields. However, higher meat consumption may now have led to rising oilcake demand and it may be diverted to feed other animals.

The fifth National Family Health Survey (NFHS-5) indicates more Indians are eating meat, and eating it much more often. The survey indicates this is true across all religions and all states. So oilcake demand and diversion to other animals driving up oilcake prices is a possibility.

Amul sells over 15 million litres of milk a day, apart from other dairy products. It’s the biggest player in the organised dairy market. Other cooperatives elsewhere in the country operate on much the same model as Amul though none has built a brand and distribution network with the same reach. The organised market was worth about 3 trillion in 2022 and is expected to grow quickly since organised players are gaining market share.

About 90% of Amul’s milk is delivered in plastic pouches because it’s the cheapest packing solution. Another popular option is tetrapaks, with glass bottles a distant third. Plastics are produced from petrochemicals, and petrochemicals are produced from fossil fuels (usually natural gas). The cost of plastics shot up last year after the Ukraine war started. The cost of paper has also risen because of complicated geopolitics, including the Ukraine war and an ongoing face-off on trade between the US and China. So all packaging costs have shot up.

Transport is another critical expense that has also risen for the same reason – higher fuel prices. The processing of milk – pasteurisation, fat removal and so on – also requires a fair amount of energy. Those costs may have also risen.

Finally, cooperatives need to ensure that their members are making profits and farmers need to offset generic inflation. All this contributes to upwards pressure on milk prices.

The genius of Verghese Kurien (and the encouragement of Morarji Desai) helped create the Operation Flood model (Manthan is an iconic movie that showcases this). It’s expected that the packaged dairy industry will double its market share in the next five years or so. That would sharply expand urban supply of milk, which in turn could lead to prices flattening or falling.

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