Thursday, July 25, 2024

How did India, the world’s largest milk producer, end up having to import it?

India, the world’s largest milk producer, is in the midst of a supply crisis. This has led to rising prices and rising imports, which runs the risk of becoming a serious political controversy besides an economic issue. The Reserve Bank of India’s interest-rate setting committee said on Thursday that one of the things causing high inflation is milk prices.

The cow economy is in a difficult phase owing to a combination of factors. The supply chain of the dairy industry was disrupted by covid (and affected before that, to some extent). In the past six months, an epidemic has hit India’s cattle. This combination has caused supply constraints at a time when demand is expanding strongly.

Milk is a necessary good, so demand is relatively less price-sensitive. The consumption of milk and dairy products doesn’t change much unless prices change a lot or there’s drastic change in the life circumstances of consumers.

India has a young, growing population, which means a steady long-term increase in demand for milk and milk products. Per-capita consumption at 425 gm a day is higher than the global average of 320 gm. Over 80 million farmers contribute to the dairy industry, and India produces 23% of the world’s milk.

In general, milk supply has increased by around 6% a year and this is in step with demand growth. Between 2013-14 and 2019-20, milk production grew from 138 million tonnes to 198 million tonnes, at a compound annual growth rate (CAGR) of just over 6%. Milk prices rose by about 3% a year through that period.

In 2020-21, milk production was at around 208 million tonnes but demand collapsed during the pandemic as life circumstances changed drastically. Lockdowns led to the closure of hotels, restaurants and sweetshops, and cancellation of weddings and so on. Hence, procurement prices also collapsed. This led to a chain of events that contributed to the crunch today. Dairy farmers cut back on herd sizes in 2020 and 2021. Short of cash, they bought less fodder. Calves and cows were underfed.

In 2022 and 2023, demand for dairy has bounced back as the economy has gradually reopened. But supply has not increased much because of the lack of investment during the covid years. In 2022-23, milk production was estimated at 223 million tonnes – almost the same as in 2021-22 (221 million tonnes).

In late 2022, lumpy skin disease infected millions of cattle. This infectious disease causes blisters and reduces milk production. It is often lethal, and is estimated to have killed more than 184,000 cattle. This constrained production even more.

As a result of higher demand and stagnant supply, along with higher cost of fodder and higher transport costs, milk prices have risen by an average of 15% across categories in the past year. Led by Amul, every organised dairy supplier has hiked prices several times.

The inflation in the ‘milk and milk products’ category has been consistently higher than consumer inflation. It was at 9.7% in February 2023, for instance, when the consumer price index (CPI) rose by 6.44%. The spike in milk and milk products has also contributed significantly to CPI inflation since the category has a weightage of 6.61%.

Increasing milk production quickly isn’t possible due to biological constraints. Cows take 15 to 18 months to mature. There’s a gestation period of 9 to 10 months before a calf is born and milk production begins, so cows start producing milk only well into their third year. Buffaloes take even longer, at three to four years before first calving. Underfed calves born during the covid era will also yield less milk. It will take time to increase milk production.

Tackling lumpy skin disease and nipping it in the bud is also culturally problematic. Vaccinations may prove effective but the most effective way to halt an infectious disease in an animal population (such as mad cow disease, swine flu, avian flu, etc) is to cull the affected population. That is a sensitive issue in the case of cattle in India.

Indeed, the dairy industry had started to run into supply-chain issues even prior to covid for related reasons. It is economically rational to sell animals when they are old and unproductive. Dairy farmers elsewhere in the world sell old cattle and use the money to buy economically productive young animals. But the rise of ‘cow vigilantes’ makes this replacement process problematic in India.

Given all this, India is likely to import skimmed milk powder and other dairy products in large quantities through 2023-24. While this is economically rational, it is also politically sensitive. Dairy farmers will lobby against it and politicians such as Sharad Pawar have started raising objections on their behalf. The supply chain will eventually straighten out, given all the imperatives, but policymakers will have to walk a tightrope until it does.

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