India is poised for a second White Revolution in the era of reforms. If the tips from EU nations are any indication, Indian dairy farmers are bound to reap rich dividends in the coming years.
Following the European Union nations' decision to cut subsidies to dairy farmers, returns from Indian milk are set to rise soon.
Grabbing the opportunity, companies are lining up with investment in Uttar Pradesh, Punjab and Haryana for processing plants to milk the export market. Global giants such as Group Danone and Fonterra are firmly in India.
The EU decision is bound to push the prices of milk and milk products across the world. India is the world's largest producer of milk. India's share of world trade is tiny but profitability from exports will spurt when the world prices rise.
India mainly exports around 50,000 tonne skim milk powder annually. But with higher returns, it is an opportunity whose time has come. New units to produce SMP are coming up all over northern India, which is the main hub of production.
From 100 kg of milk, a factory gets only 9 kg of SMP. In other words, every unit needs large volumes of milk to sustain itself. So, SMP factories have to woo farmers to ensure sustained supply.
Hearing the news, dairy farmers are now on cloud nine. They have three bidders for the same product: the local milk cooperative, private milk companies, and SMP manufacturers.
Following this competition, the average price of milk has gone up in north India. In Punjab, though Milkfed has increased purchase price from Rs 220/kg fat in November last year to Rs 230-240/kg fat, it has still lost market share.
In Haryana, the Dairy Development Cooperative Federation has announced new schemes, given loans worth Rs 12 crore to its members along with an insurance scheme.
The market will see more action when the MNCs take another look at dairy. As international dairy companies know the value of demand growth and liberalisation around the world, they are repositioning themselves to produce and sell milk and milk products from multiple locations. Some of the most prominent global dairy manufacturers are Nestlé (Switzerland), Kraft Foods (US), Dean Foods (US), Groupe Danone (France), Parmalat (Italy), Sodiaal and Bongrain SA (both France) and Fonterra (New Zealand).
Only 7 per cent of the total milk produced in the world is traded internationally. Dairy policies influence the flow of products globally. The first priority for every country is to ensure adequate supply for its own local markets. So, domestic dairy policies are generally focused on promoting milk production. But in some cases, this leads to surplus production above domestic needs.
Main exporters are countries with low-cost milk and small populations like New Zealand and Australia. Japan, Norway, and Switzerland are high-cost producers because they don't have enough grassing land.
High-cost producing countries have been trying to improve their local dairy industry's performance. To help the cause, they provided farmers subsidies and protection from foreign competition.
The United States, the EU, and Canada all support the price of milk and some dairy products. The EU and Canada limit milk output with milk production quotas.
They also prop up domestic milk prices by removing surplus milk - in the form of dairy products - from the domestic market into the international market.
The present set-up will change now. To keep its commitments under WTO, the EU is stopping its market intervention and export refund programme.
In 2006, export refunds were substantially lower than 2005. Refunds for butter are down 38 per cent, and cheese down 23 per cent. Whole Milk Powder refunds remain at 2005 levels but refunds for SMP have been zero since June 2006.
Compared to 2005, the EU's government-held stocks are down by about 30 per cent for all products, and zero for SMP.
For the global dairy market, what it means is revolution. All the least competitive dairy farmers are being forced to find new business. In case of France, milk price cuts have chopped 30,000 producers in the last five years. The shock has hit French milk producers hard because they were Europe's highest paid.
Germany, Italy, Czech Republic and Poland have decreased output to avoid paying super levies for overshooting their quota.
Output in Ukraine, one of Europe's emerging exporters, is set to fall by 4 per cent in 2006 because import bans by Russia.
In 2006, the EU's share of international dairy trade slumped 29 per cent. It is set to lose its position as the world's largest butter exporter. All put together, the milk production in the enlarged European Union declined by over 1 per cent in 2006. In all likelihood, it will be the same in 2007 also.
