CRISIL expects milk prices to remain stable over next 12 months
Moneylife Digital Team 22 March 2011

The ratings agency believes that while milk prices should remain stable over the next one year, in the medium term prices could go up due to an increase in demand and higher input costs

Ratings agency CRISIL has said it expects milk prices to rise in the medium term, due to sustained demand-supply mismatch and increasing input costs, this despite the Indian government's recent order banning export of milk powder and casein. The Indian government's order to allow duty-free import of milk powder and butter would help enhance domestic supply over the near term and keep milk prices stable over the next 12 months, the ratings agency said in a report.

"With exports forming less than 5% of the total milk production, and imports comprising a small portion of overall demand, the Indian government's measures will, at best, plug the demand-supply gap over the next 12 months," said Gurpreet Chhatwal, director, CRISIL Ratings.

In February 2011, the government prohibited the export of milk powder and casein, with an aim to contain further price increases and shore up supplies. This constituted 70% of India's dairy product exports, estimated at $144 million in 2009-10. Furthermore, the Indian government has allowed the National Dairy Development Board (NDDB) to import 30,000 tonnes of milk powder and 15,000 tonnes of butter and butter oil at zero duty, which will boost milk supply by up to 0.35 million tonnes.

However, the ratings agency, said, with milk product exports forming around 5% of India's total milk production, and domestic demand for dairy products remaining strong, the demand-supply gap is expected to continue to widen over the medium term. This, along with increasing input (fodder and transportation) costs, will push milk prices up, over the next three to five years, the CRISIL report said.

Manish Kumar Gupta, head, CRISIL Ratings, said, "Milk prices are expected to continue their upward trend over the next three to five years as domestic demand for milk and dairy products is expected to outpace supply."

CRISIL Ratings, a unit of Standard & Poor's, said the impact of the ban on export of milk powder and casein is expected to be minimal on the credit risk profiles of 55 CRISIL-rated dairy players, including co-operative milk federations. This is because a buoyant demand scenario will enable these players to increase their sales in the domestic market, and pass on increases in prices of raw milk.

In addition, flexibility in the production process will enable players in the dairy industry to shift production to milk and milk powder, for which there is a strong demand in the domestic market, rather than also produce casein, which has low demand in the country.

The demand for milk and value-added dairy products in the domestic market has been growing at over 6% to 8% per annum supported by increasing incomes, rising aspirations, and consequent growth in per capita milk consumption. CRISIL, however, said it believes that the growth in milk production will continue to lag at around 4% to 5% per annum over the next five years, despite the government's plan to double India's milk production by 2020, through initiatives such as enhancing milk productivity through genetic improvement of milk animals, increasing availability of fodder, and incentivising farmers. This is mainly because the benefits of India's plans are expected to materialise after three to four years, CRISIL said.

Speaking about the global milk prices, Mr Gupta said, "The global milk prices will remain high because of increasing demand from India and China. Import of milk and milk products will, therefore, not suffice to contain domestic milk prices."

China has become a large importer of milk and milk products, since 2008, because of its growing affluence, increasing per capita milk consumption, and structural issues in milk supply, such as low animal productivity and outbreak of melamine contamination, which has all resulted in lower domestic production. In 2010, global trade in milk and milk products was thin, at 40 million tonnes, that is only 6% of global milk production, and may not be strong enough to absorb increasing import demand from India and China, without putting pressure on international milk prices, the ratings agency said.

Free Helpline
Legal Credit