New Investor-Driven Dairy Models May Push Cattle Owners Out of Biz

It is more than twelve years since India overtook the US as the world’s largest milk producer. The surge in milk production can be accredited to the establishment of dairy cooperatives under the Operation Flood program. Till recently, dairying in India was considered a success story. However, with the rising price of liquid milk at urban centres, the sector is being viewed with skepticism and alternative models of growth are being pursued.

The thrust of the Indian dairy growth was driven by the objective of making liquid milk available to the population. In the current demand spike, the prices of dairy products have risen due to the change in the food habits of people. The growing demand for pizzas is one example where large quantities of cheese and butter are used. Driven by the financial projections, a large number of entities have jumped into dairying which includes companies with interest in energy and real estate, with politicians not excluded. Overcapitalisation, clubbed with the investor’s expectations, is likely to send prices soaring in the Indian market. Earlier in 1990s, the global logic of dairying financialisation was aggressive local brand gobbling and killing them with global brands or co-branding. Companies, which marketed value-added products worldwide, had no commitment to make available liquid milk to the masses. The brands themselves became valuable financial assets and their value could be boosted through a blend of Wall Street wizardry and aggressive marketing. During this time, Parmalat, a multinational Italian dairy company, collapsed with a $20-billion hole in its accounts in what remains Europe's biggest bankruptcy.

Amusingly, some leading global dairy players who haven’t earlier contributed to India’s milk production growth are now offering help to increase India’s milk production, which is “said to fall short” by 3 million tonne from the projected demand. It would be interesting to note that there is a decrease in milk production in the EU, the US and Latin America. New Zealand’s production costs have tripled in the last decade and it is no longer a low-cost producer. The milk feed price ratio has changed due to maize and soybean price rise. Over the past two years, the average price of milk has doubled internationally. The world average herd size is 2-3 (1-2 in India) and one billion (75 million families in India) people are said to be living on dairy farming.

The financialisation of dairying in India looks inevitable. The dairy models which are pursued by some entities have an overriding dominance of capital in the production and marketing chain. Currently, India produces milk at 58% of the world average cost. The central logic that is suggested in new models has evolved under the influence of investor's expectations which is different from the socio-commercial goals that were earlier pursed. Cashstarved dairy farmers are likely to get increasingly marginalised in the suggested scenario. All seem to be missing the point that the biggest stakeholders in dairy industry are cattle-owners due to the highly perishable nature of the commodity. 40% of the global milk production is still not processed. The dairy industry will face grave supply chain crisis if the marginal and small dairy farmers are isolated in any business model.

Published in The Economic Times

Milk co-ops need Agile bosses

Dairy cooperatives have a lot to do with India emerging as the world's leading milk producer. However, most of the co-operative federations are not professionally managed today. In fact many of them outside Gujarat are now run like `regular' parastatals, invariably headed by career bureaucrats. The alternative does not lie in changing organisational design and the operating system which will undermine the role of co-operatives.

Success in dairy industry shall continue to be in the ability to build a robust procurement network which gives raw material cost advantage along with assurance of regular supply. Large MNCs in India have failed in the dairy sector on this account. “Aarth Shakti” (money power) has not got translated into “Lok Shakti” (people power). Moga (Nestle) and Etwah (Levers) have remained laboratory cases while Anand (Amul) has got replicated. A strong backward integration in the form of cattle-feed supply, vaccination availability, breed improvement programmes and profit-sharing with farmers are some of the things that none of the private sector companies nor the MNC’s have been able to replicate and amplify. Farm gate price paid for milk in India is the highest in the world largely due to a strong co-operative presence. Failure of integrated dairy experiments like “Aarey” has not deterred a non-milk co-operative to branch out in the same direction recently. Also joint ventures and foreign collaboration have become order of the day.

Lately, India is under intense pressure to open up its market in dairy produce, especially cheese, from European nations. The EU is keen to get any market opening abroad in a bid to compensate for the troubles facing milk farmers at home. A few years back there was a sudden interest in advising India how to manage the dairy sector and cooperatives when it was emerging as the world's leading milk producer. No doubt the advice came from a Netherland based entity. The US dairy industry is also itching for access to India and the U.S. government is examing legal alternatives for access.

In Europe, when the entire milk requirement for production of cheese and value added products are satisfied “profit is maximized”, the remainder is processed into butter and SMP (Skimmed Milk powder), often referred to as ‘residual production’. This is distinct from patterns of production that is followed in India where priority is given to production and distribution of liquid milk for masses. In India, SMP is important for curbing excess supply due to strong seasonal fluctuation of milk and reconstituting the same during milk shortages.

The recent incident of protestors vandalizing the tankers of imported milk only demonstrates the lack of understanding by the political class of machinations of the large milk producing nations. It is even more surprising that when a minister promotes private sector dairy in his constituency instead of a co-operative dairy, these protestors don’t even raise an eyelid for the local farmers. Perhaps it is time that India demonstrates that if it can produce 112 MMT (Million MT) of milk (09-10) compared to only 10.40 MMT in 1961, it also knows what the best way to manage a growing dairy industry. For this, Indians need to move from “Me” to “We” mentality.

The dairy sector has assumed critical importance for India as it provides work and income to landless farmers. The ruling dairy and milk managers are yet to demonstrate the leadership quality, passion and logic in negotiations, political acumen and stubbornness that Dr. Verghese Kurien “father of White revolution” had demonstrated. Once confronted abusively about the market share by an arrogant New Zealand High Commissioner, Dr Kurien had fittingly replied “If all of us Indians decide to get together and spit on your country, your country will get drowned in our spit”. Unfortunately, the current breed of milk leaders are more concerned in protecting their own turf by creation of ‘services’ to ensure that they remain at the helm of affairs.

Published in The Economic Times , Aug 09, 2010