Food inflation for urban India is rising income for rural India: Amul MD
ET Now | Dec 24, 2019, 12.45 PM IST
Amul MD R.S. Sodhi(File photo)
With more organized players coming in, farmers will get better realization. The world over, increase in skimmed milk powder price is a good sign because in the last three years, prices were lower than the cost of production. Now prices are coming up, says RS Sodhi, MD, Amul
. Excerpts from an interview with ETNOW.
What has been the impact of the prolonged monsoon and floods on the profitability of the company and thus far on a yearly basis for you ?
Following the rise in milk prices, a golden phase has come for the Indian milk producers. After a gap of three to four years, farm grade prices are coming equal to what it was in 2014-2015. Definitely, compared to the previous year, the milk prices have increased by 25% to 30%, but last year, prices were the lowest and were unremunerative for dairy farmers. The present price of milk is viable and even profitable for the farmers. You talk about the profitability of the processors, but one should also consider the profitability of the milk producer. Media is talking about food inflation but let me tell you, food inflation for urban India is rising income for rural India.
We talk about how rural demand is not growing. But how will rural demand increase until and unless their income increases ? Now with the increase in not only milk process, but all agriculture produce, rural income is increasing and that should fuel the demand of other FMCG products in rural India.
Milk prices have increased by about 15% from the FY19 bottom. What is the average procurement price currently and do you see more price hikes going forward ?
The average procurement price this year for cow milk is around Rs 31-32 and for the buffalo milk with 7% fat, it is coming around Rs 47-48. In last one year, there have been two price increases of Rs 2 each -- a total of Rs 4/litre. A 4- 5% price hike has happened in all the dairy products’ price -- be it butter, cheese, ice creams or beverages etc. But do not compare to previous year.
Over the last five years, inflation in milk has been less than food inflation. Over last five years, the total increase in milk price was only Rs 8 on Rs 50 -- 10% to 12%. So, there was less than average inflation in milk and milk products price in the last five years. It is not a very high price increase. No doubt, the processors or the companies who are buying milk from the farmers or from the private contractors are adding value and selling it the consumers. Their profitability is definitely under pressure. What profits they were generating last two years will be reduced drastically because they were buying milk at lower than the cost of production. Now price of milk is slightly above the cost of production. So, naturally the margins are squeezed.
Do you see the price hikes aiding the margins for dairy companies ? Or net-net, would it be same because of higher procurement prices ?
Let me tell you whatever price increase is happening to the farmer will not be passed on to the consumers. I will give you an example of milk; milk price to the consumer has increased by around Rs 4/ litre but dry price being paid to the farmers has increased by about Rs 7-8. So this Rs 3 or 4 extra which is being paid to the farmers has gone out of the margins of the dairy processors.
Again, I am repeating that in the last two years, dairy processors were getting more margins which they did not deserve. This year, the margins are reasonable and all the dairy processors have to see that they manage their business within those margins. Take cow milk. If they are paying Rs 31-32-33 for it, the same milk is sold to the consumers in Mumbai at Rs 46, so there is sufficient margin.
Last year, they were buying the same cow milk at Rs 18-21 and selling at Rs 42 and so they had more than Rs 23-24 margin. This year, the margin has been reduced to Rs 13-14 and so the margins are under pressure.
With organised brands entering the previously unorganised market, is this helping organised players gain market share ? We understand that the global SMP prices have increased during that year ?
Definitely more organised players are entering the food and dairy sector. That helps producers as well as consumers because the system becomes more transparent, more efficient and more customer- and producer-friendly.
With more organised players coming in, farmers will get better realisation. The world over, increase in skimmed milk powder price is a good sign because in the last three years, prices were lower than the cost of production. Now prices are coming up.
In India, the cost of skimmed milk powder was Rs 150/kg. This year, it is Rs 300. It has doubled but in 2014, it was Rs 260- 280. So, in the last four or five years, there is not much increase but yes definitely compared to last one year, price has doubled.
More money going to rural India is good for India because more than 70% people are in rural India.
-RS Sodhi
Some private processors had stopped buying fresh milk from the farmers because skimmed milk powder was cheaper. Skimmed milk at Rs 150 a kg means Rs 15 a litre. How can you afford producing milk at Rs 15 a litre? It was a distress sale. You cannot expect the distress sale to continue. Now, it has come to the level where farmers are getting a good price and no doubt consumers are paying 3-4% average increase in price which is reasonable. No doubt, processors who were used to getting more than 100% margin in the last one year will be under pressure.
Global SME prices have also increased. Are you being able to generate profits with such high prices ? What is the SMP production cost at the moment ?
For Amul, the cooperative profit is not a margin. Our margin depends on giving good price to the farmers. Now, the farmer is able to meet their expenses. Cost of production today of a litre of cow milk is Rs 25 to Rs 28, depending on the location, cost of feed, etc. The farmer is getting a price of Rs 30 to Rs 32. So, farmers are making little profit. We are happy farmers are making profits. As a cooperative, we are not interested in making profit, but we want our 36 lakh farmers to make profit.
Gradually, world prices are going up. But world prices are not going the way Indian milk prices are going. We are much higher than world prices and which is good for our farmers and also good for rural economy. More money going to rural India is good for India because more than 70% people are in rural India. So let them also earn. When the average rural Indian income increases, we call it a food inflation. How can you increase the farmers’ income without increasing the price of food? Let us happily give good price for the food.
What percentage of sales come from products other than milk for Amul ? Which would be the fastest growing product outside of traditional dairy ?
As far as Amul is concerned, a little more than 50% sale is from pasteurised milk. The balance is from other products -- baby food, butter, ghee, cheese, ice-cream, beverages and all. Demand or growth this year is coming more from fresh products like milk, curd, buttermilk as well as ice-cream and cheese which is showing. tremendous growth, as is beverages.
A double-digit growth is coming across all categories because in the last three or four years, there is not much increase in prices. Price increase is lower than inflation and that is why demand is increasing for all dairy products. This is not true for Amul. Demand is increasing for all the dairy products.
Food inflation for urban India is rising income for rural India: Amul MD
