Besides the demand-supply mismatch, rising off-take of processed milk from corporate brands has resulted in milk prices spiralling in recent months

Everyone under pressure from spiralling food prices wants to know the reasons for the hikes. Many of them, including the media, are blaming Sharad Pawar, Union agriculture and food supply minister. People feel that whenever Mr Pawar has predicted that prices of something might go up, they have actually gone up within a few days.

The same happened with the prices of milk and dairy products. Last month, Mr Pawar had said that the prices of milk would increase due to scarcity of milk in north India. "There is a gap of 18 lakh tonnes between demand and the current milk supply," he had said.

However, according to analysts, besides the demand-supply mismatch, rising off-take of processed milk from corporate brands, such as Reliance’s 'Life', Nestlé’s 'Pro Heart' and Amul’s 'Taaza' has resulted in milk prices spiralling in recent months. Due to the lower supply of milk, some brands are also under pressure. Mother Dairy, another dairy brand, alone faces a shortage of around 5 lakh-6 lakh litres every day, said a media report.

Spiralling milk prices could be another potential inflation catalyst. "The key drivers of the upturn in inflation so far have been primary articles (cereals, pulses) and manufactured food products (sugar, edible oil cakes). While we have highlighted the risk of higher commodity prices (metals and oils), resulting in inflation edging higher, another potential pressure point is milk and dairy products,” said Rohini Malkani, economist, Citi India, in a report.

The latest wholesale price index (WPI) data pegs inflation in milk products at 13.4% in December 2009, up from the 6%-7% levels a year ago. "Last week’s hike of around 7% in milk prices could further aggravate inflation numbers," she added.

"Amongst the worst-affected dairy products is butter, where prices have doubled. Other impacted products are skimmed & whole milk powder, and cheese. All this is resulting in a knock-on impact across the food chain,” said Ms Malkani.

India is the world's largest milk producer. According to the Food and Agriculture Organisation (FAO) of the United Nations, India produced 108.5 million tonnes of milk last year. This is about a sixth of the world's total milk production.

However, drought conditions coupled with tighter feedstock and water availability have resulted in only a moderate growth in milk output in India, while demand has continued to rise due to shifting food patterns. The situation at the global level is also bleak.

According to the FAO, stock retention, coupled with lower milk output in the EU and the US, is likely to result in global milk production rising by just 1% in 2009 (estimated), to 701 million tonnes, with production growing faster in developing countries than in developed countries. Milk production in 2010 should grow by close to 2%, to a total of 714 million tonnes, the FAO said.

Even the FAO index of dairy product prices has gone up by 65% in January compared to the same period last year. In January, the FAO index of dairy product prices was at 202 compared with 122 a year ago.

In its December ‘Food Outlook’ report, the FAO had said that dairy prices are on the rise again, gaining by 80% since reaching a low in February 2009, with traded milk powders becoming the fastest-rising product. Future prices will depend on whether the EU offloads its large stocks of butter and skimmed milk onto the international market, it added.