Monthly Archives: July 2012

The Myth of Food Inflation – The Reality about Milk

There is a myth that is being perpetuated about the rising food prices which needs a serious reality check. Policy papers, Government reports, policy briefs by international development agencies constantly declare that the rise in per capita income in India has led to a rise in demand for high value products such as milk and milk products. The article in the Hindu Business Line, July 6, 2012 by Sthanu Nair and Leena Mary Eapen has provides valuable insights into this myth but does not speak adequately to the pricing fiasco that is prevalent in the market. Let’s look at the reality on the ground from the supply side as far as milk is concerned. The information provided below are facts based on the writer’s personal work with small and marginal farmers in a rain fed community in Rayalseems. The reason the reality is embedded in small and marginal farmers is because they contribute to 80% of the milk production in this country.

Fact 1: Cost of milk production in rainfed areas by small and marginal farmers can range from Rs. 19 per litre to Rs. 25 per litre depending on asset ownership. Farmers with land and access to water typically incur a lower cost of production than landless farmers with dairy cows.

Fact 2: Those who have exotic crossbred cattle (Holstein Friesian particularly) thrust upon them through Government subsidy and loan programmes (be it through women’s SHGs or other schemes) will incur high medical costs and high resource costs (water, feed, fodder). This is because these cows are not hardy like the native breeds and are susceptible to disease. In addition like the Green Revolution crops they require a lot of water – for drinking, washing and indirectly for green fodder. Small and marginal farmers owning these cattle are entrenched in debt-traps having to continuously service the loans which adds to the cost of milk production. (For more on the saga of exotic breeds and indigenous breeds see:

Fact 3: This summer (2012 summer) the Syndicate of private dairies fixed prices as low as Rs. 16 to 18 per litre for wholesale purchase of milk. The prices were slashed from the winter rates of Rs. 19 to Rs. 21 per litre. The situation for the farmer is exacerbated since summer is when the cost of milk production is even higher due to lack of green fodder and inadequate water. This drives the farmer deeper into debt since the income from the sale of milk is significantly less than the cost of production of milk. The rationale provided by the dairies for the slash in prices in summer was a milk surplus.

Fact 4: Price of pasteurised milk in July in Andhra Pradesh however increased to Rs. 32-34 per litre for toned milk and Rs. 40-42 per litre for whole milk.

Given the facts above, Where is the supply constraint if there is a surplus?

Farmers are producing milk that meets the quality requirements in terms of fat and solids not fat (SNF), volume is being produced on the back of debts by these farmers, retail price of milk is shooting through the roof so Why are farmers and consumers the ones who are being hit?

The reality is that there is no supply constraint but it is the cartel of dairies and skewed Government policies on milk pricing that is placing both the farmer and the consumer in this “pseudo inflation” situation. Unless Government policies crack down heavily on regulation of milk prices people at two ends of the spectrum will continue to suffer – at one end the farmer who is going to run himself / herself to the ground entrenched in debt and at the other end the consumer whose income will never be enough.

The only entity in this that I can see is the winner is the milk processor and the policy makers who are blissfully oblivious of the ground reality.

Truly, if food consumption patterns have shifted and if there is a domestic demand shouldn’t the small and marginal dairy farmers at least be able to make both ends meet? Where is the inclusive growth and development in this scenario?