Jan 12, 2013

When dairy farming becomes unprofitable.


A typical dairy farm in India

Dairy farmers in India are in crisis. High input prices and declining milk prices have pushed them to the wall. But the consumer prices remain firm, showing no signs of declining. 

When NCP leader Praful Patel said in Parliament during the debate on FDI in retail how in Baramati in Maharashtra, agriculture minister Sharad Pawar had ensured that dairy farmers got a minimum prices of Rs 20 per litre for milk, I was amused. This is not a fair price, but a depressed price being paid to farmers. All cooperatives and private plants are paying around the same to mil producers. 

Saddled with huge stocks of skimmed milk powder, and with a weak export demand, the dairy industry is trying to minimise its losses. It is therefore passing on the losses to primary producers. Now such a situation is not peculiar only to India. Let us therefore try to understand how the international community reacted to a dip in prices. 

In 2009, about 20 per cent of 1,800 dairy farms in California, for instance, had shut down unable to survive at times of higher feed and transportation costs. Similarly, in 2009, when international milk prices had dipped to a low, the European Union defied the World Trade Organisation (WTO) and reintroduced milk subsidies. It provided Rs 3,600 crore in subsidies to its dairy farmers to offset the losses incurred. 

While US/EU have always made efforts to rescue their dairy farmers,  I have never understood the rationale of letting domestic dairy farmers shut down when farm prices fall for no fault of theirs. With private and cooperative dairy industry reducing the milk prices to Rs 20.50 a litre, it is certainly uneconomical to maintain a dairy herd. In Punjab, Gujarat, Maharashtra and Rajasthan, quite a large number of dairy farmers have opted out. 

Let us see how Europe coped up with the crisis. In European Union, there are 10 lakh dairy farmers.Collectively, they produce more milk than what is produced in India or for that matter in America. As per WTO norms, EU was supposed to have phased out its burgeoning dairy subsidies. But who cares when it comes to domestic interests. EU reinstated subsidies to support milk production as well as for export when it was hit by economic recession. By doing so it has been able to capture 32 per cent of the global market for dairy products by volume. 

According to the Dairy Farmers of Canada (DFA), EU dairy farmers receive subsidies to the tune of Rs 3.96 lakh crore every year. 

These massive subsidies insure dairy farmers against the volatility of the markets, and at the same time enable them to dump subsidised milk onto developing countries. Looking for an export market, EU is flexing its muscle and under the proposed EU-India Free Trade Agreement (FTA) it wants milk tariffs to be slashed by 90 per cent. EU is seeing India as a big market for its milk and milk products, and all indicators are that India will open up its domestic dairy market for EU imports. 

Lesser number of farms

In America, on the other hand, the number of dairy farms has come down by 61 per cent since 1992, and only 51,480 dairy farms now exist. These farms received subsidies worth Rs 27,500 crore since 2009, which in other words means a third of its milk price is subsidised. These subsidies come under several programmes: milk income loss contract payment; market loss assistance; milk income loss transitional payment; dairy economic loss assistance programme; milk marketing fees; dairy disaster assistance; and dairy indemnity. 

Interestingly, cash subsidies in the US are doled out under Dairy Export Incentive Programme. EU on the other hand subsidises nearly 50 per cent of its dairy exports.

 
Let me also dispel another commonly held notion. In an era of market economy, it is generally believed that American/European farmers are dependent entirely on the private supply chain. It’s not so. After March 2009, EU had restarted buying surplus butter and milk from dairy farmers at an intervention price of Euro 2,218 and Euro 1,698 per tonne, respectively. In America, milk price support programme ensures that the government buys any surplus amount of cheese, butter and non-fat dry milk at a minimum price. In addition, since 2002, it has introduced a programme to distribute cash subsidies to milk producers when prices fall below a set limit. I see no reason why state governments cannot provide such subsidy support to its dairy farmers when prices fall. 

It’s not as if state governments do not have resources. Punjab, for instance, had made available Rs 1250 crore in interest free loan spread over five years and on top of it gave a 15-year tax holiday to steel tycoon Laxmi Mittal for investing in the Bathinda refinery. I see no reason why it cannot rescue small dairy farmers who are gradually sinking. 

Therefore, to begin with, state governments should consider subsidising the cooperatives to raise the milk procurement price to at least Rs 25 per litre. Secondly, it should also reduce the bank interest on loans taken from existing 12.5 per cent to 7 per cent.

The Centre and the state government should consider measures to rescue milk producers before they start giving up the sector leading to serious shortages and forcing India to become an importer of this vital commodity.


Source: Milk crisis looming, Deccan Herald, Jan 5, 2013.
http://www.deccanherald.com/content/303002/milk-crisis-looming.html

2 comments:

Sumit said...

Hi Sir, thanks for the useful article.
could you also throw light on the fact of contrary articles published like " Gujarat women milking millions".
also, I understand the supply of milk in India is still not greater than the demand and the prices have also been increasing. in lieu of this won't dairy be a profitable venture

jai vyas said...

Sir ,
In this context....what is your advice to young entrepreneurs who would like to take a small step or at least are thinking of.....in dairy sector...