Milk processors need to focus on milk sourcing: Rabobank

The organized dairy sector in India has shown strong growth in the face of price increases for dairy products. Further growth in value-added dairy products will compel private milk processors to reinforce upstream linkages in the supply chain to secure additional supplies of quality milk. Rabobank’s latest report, ‘Milking the Chain’, showcasesthe opportunities for private milk processors to develop milk procurement models for the future. The key will be to promote farmer-driven dairy farming, along with downstream companies playing an important role to involve service providers of feed, genetics, healthcare and equipment.

With strong value growth of 15% over the last five years, Indian dairy industry has experienced little impact on demand in spite of increased retail prices for dairy products. Further the growth in traditional market categories such as packed milk and indigenous products (10 to 15%) and that in value-added categories such as cheese and infant milk products (20 to 25%), has created good opportunity for milk processors to expand the product portfolio and geography.

Milk processors need to focus on milk sourcing:

Milk processors need to focus on strengthening own milk sourcing to grow in line with the current demand of the dairy industry. Milk processors with strengths in milk procurement have shown good financials and return on capital employed. One of the factors driving profitability of the private processors is upstream integration with strengths in milk sourcing. Processors who have their own procurement infrastructure and direct access to farmers (Tier I) are able to manage the milk supply well. This is one of the strengthsto help improve realization per litre of raw milk handled.

On the other hand, for processors (Tier II) who have invested in processing, but not in procurement infrastructure, returns are lower.In order to be profitable, there is scope for improvement for Tier I processors to further improve their performance by focusing on milk sourcing. For Tier II processors, it becomes critical to invest in procurement to secure raw milk supplies.

The key challenge for milk processors is securing milk supply. Processors are showing strong demand for good quality raw milk, which is proving increasingly difficult to source.

The Challenges

• Limited potential of small and marginal dairy farmers, who currently contributes 70 to 80% of total milk production, to improve milk production;
• Increasing shortage of land and availability of quality fodder;
• Manufactured cattle feed yet to realise its potential;
• No significant increase in productivity of livestock

Addressing challenges through upstream linkages:

Given the impediments to increasing milk production, private processors have to become actively involved upstream to promote and enhance their milk supply. They need to reduce their dependence on agents and directly engage with dairy farmers to source good quality milk. Private processors also need to engage with service providers of feed, nutrition, genetics and animal healthcare.

According to the report, the organizedprocurement channel which currently contributes 24% of total milk supplies, is expected to reach up to 34%by 2018-19. Access to capital will be driver to support the growth ambitions of private processors.

According to Shiva Mudgil, Senior Industry Analyst, Rabobank, “Large-scale corporate dairy farming is only likely to develop in the long term. In the meantime, medium-scale farming will be essential to secure sufficient milk supplies. Processors will have to play an anchor role for other stakeholders. This will help create integrated dairy companies involved in milk production and in the processing and distribution of dairy products, yielding higher returns in the value chain.”