DEPARTMENT OF BIOTECHNOLOGY AND BIOINFORMATICS. PADMASHREE dR. d.y.pATIL uNIVERSITY

DAIRY INDUSTRY

AN INDUSTRY ANALYSIS

NEHA SRIVASTAVA(BBT-2-08047) AAKANSHA ROBERTS(BBT-2-080 )

9/19/2011

This document is typically a report of Dairy industry analysis done in partial fulfillment of academic project assigned. (session-2011-2012)

INTRODUCTION

AN OVERVIEW OF DAIRY INDUSTRYDairy industry represents a major segment of the food industry. Every individual consumes dairy products daily in various forms like curd, cheese, milk, and their increased attention towards health and nutrition has increased the demand of dairy products. The dairy farming has been transformed from traditional farming to advanced farming where more tools and equipments are used to fulfill the increasing demand of the customers and has enabled the manufacturers to present the dairy products in different forms like condensed milk, powdered milk, homogenized milk, and pasteurized milk.

THE GLOBAL DAIRY MARKETINTRODUCTION:

There is a great deal of variation in the pattern of dairy production worldwide. Many countries which are large producers consume most of this internally, while others (in particular New Zealand), export a large percentage of their production. Internal consumption is often in the form of liquid milk, while the bulk of international trade is in processed dairy products such as milk powder.

Worldwide, the largest producer is India, the largest exporter is New Zealand and the largest importer

is Japan

World production

Rank Country Production (109kg/y)

1  India 114.4

2  United States 79.3

3  Pakistan 35.2 (needs validation)

4  China 32.5

5  Germany 28.5

6  Russia 28.5

7  Brazil 26.2

8  France 24.2

9  New Zealand 17.3

10  United Kingdom 13.9

11  Ukraine 12.2

12  Poland 12

13  Netherlands 11.5

14  Italy 11.0

15  Turkey 10.6

16  Mexico 10.2

17  Australia 9.6

18  Egypt 8.7

19  Argentina 8.5

20  Canada 8.1

FACT AND FIGURES:

The global dairy market was valued at about 276 billion euros in 2010, corresponding to 207 million tons of dairy products.

On a value basis, milk (white+flavored) is the biggest category (39%), followed by cheese (30%) and yogurt and similar products (19%). On a volume basis, milk is still the top category (72%), but in this case yogurt is next (14%), followed by cheese (7%).

Within the dairy market, liquid and powdered milk had the lowest growth rate. Flavored milk and yogurt were the most dynamic categories, with substantial growth rates over the five-year period being analyzed.

As shown in the chart below, the most important geographic macroareas for dairy products are Western Europe and Asia, which together account for about 50% of the total dairy market.

More specifically, while Western Europe and North America are more mature markets with limited growth (2005-2010 CAGR of 0.6% and 0.7%, respectively), Asia is growing at the fastest rate (2005-2010 CAGR of more than 6.5%), showing that it is a dynamic market in the diary segment as well. The Middle East and Africa are also growing markets (2005-2010 CAGR of more than 6%).

Overall, the position of private labels in the dairy market is substantially stable, accounting for about 16% of total turnover. However, they have a much stronger position in the markets for staple goods, such as liquid milk (pasteurized and UHT, with a 23% share) and cheese (17.3% share).

In the liquid milk category, in the Parmalat Group´s target markets, the market share of private labels is 12.6% in Canada, 45% in Australia and 15.4% for fresh milk and 14.6% for UHT milk in Italy.

The emergence of the private labels is typical of the more developed markets, where they have become established and are eroding the market share of brand products.

Whats hot whats not in Global Dairy Industry?

An overview of the global dairy market and the trends that are transforming it

Innovation remains the lifeblood of increasingly saturated markets. And despite the global recession in 2008, there was a lot of movement in the dairy market. As would be expected, Western Europe led the way with 4,161 new dairy product launches in 2009, but there was also healthy innovation across many other regions, with 2,110 launches in Eastern Europe, 1150 in Asia, 1114 in Northern America and 892 in Latin America. Even smaller dairy markets such as the Middle East and Africa showed that innovation is alive and well, with 384 products launched in Africa and 351 launches in the Middle East.[1]

Drinking milk growth in Asia

Asia Pacific is the largest drinking milk region and also has the most interesting growth prospects. In general, drinking milk products are doing better in emerging than in developed regions, according to Euromonitor. Although it is predicted that there will be an estimated global compound annual growth rate (CAGR) of 1.9% between 2011-2014 in the drinking milk sector, the Asia Pacific region is predicted to have the largest CAGR during this period, with 3.5%. Western Europe is only predicted to have a CAGR of 0.2% in drinking milk, followed by the Middle East and Africa with a CAGR of 2.2%, Eastern Europe with 2.4% and Latin America with 2.8%.

Within the drinking milk category, the largest growth between 2011-2014, according to Euromonitor statistics, will be in soy beverages – with a worldwide CAGR of 4.2%. This is followed by flavoured milk drinks at 3.8% growth, flavoured powder milk drinks at 2.5%, milk at 1.4% and powdered milk at 0.7%. The addition of functional benefits to drinking milk products is vital in maintaining consumer interest in this mature market category.

Yoghurt packs a punch globally

Euromonitor statistics show that Western Europe is the largest market for yoghurt and sour milk drinks, followed by the Asia Pacific region in terms of both value and volume. However, it looks like there will be a power shift soon, with the Asia Pacific region predicted to have a CAGR of 3.9% between 2011-2014 in the mentioned category, as opposed to Western Europe, which is predicted to have a CAGR of just 1% during the same period. Latin America looks set for success in this category too, with a predicted 5.1% value growth, compared to 4.6% for the Middle East and Africa, and 3.6% for Eastern Europe.

Euromonitor also predicts that yoghurt will enjoy far greater global growth than sour milk drinks over the 2011-2014 period. Within the yoghurt category, however, the areas of least absolute value throughout the 2011-2014 period look set to be flavoured and plain spoonable yoghurts, with functional spoonable yoghurts the largest sub-category in terms of both absolute value and CAGR (6.9%) globally.

Trends and consumer interests

As innovation continues to drive growth across the regions, opportunities abound for food and drink producers who are willing to make the most of not only established, but also emerging trends in the dairy sector. Key drivers highlighted by analysts for new product activity in 2010 and beyond[2] include a ‘sense of simplicity’, ‘free from’ products and a continued focus on digestive health and weight management solutions. [3]

With reference to the key trends driving change this year, BENEO’s ingredients can help transform food and drink producers’ product potential. Its prebiotics, rice derivatives and sugar alternatives can be applied to a wide range of applications and offer numerous nutritional benefits. Furthermore, the ingredient supplier is renowned for its ability to provide customers with advice on regulatory affairs, as well as answers to technical questions, qualitative and quantitative market analysis, product development, analysis and optimisation, and marketing support – all according to the highest quality standards.

Digestive health & feeling the benefit

With ‘digestive health’ billed to be the mega-trend of 2010 and ‘feeling the benefit’ the most powerful marketing message[4], it looks like functional ingredients that can deliver ‘felt’ benefits will be highly sought after by dairy food and drink producers. A case in point is that of healthy dairy drinks, which have made up the majority of new product development launches in recent years. [5] In addition, as a functional leader, yoghurt is increasingly being used to communicate on-pack a wide range of claims, from ‘aids digestion’ and ‘maintains digestive balance’ to ‘helps with immunity’ and ‘strengthens bones’.

By incorporating modest amounts of BENEO’s inulin and oligofructose (commercially available as Orafti® inulin and Orafti®oligofructose) into dairy drinks and yoghurts, manufacturers can produce products which offer real benefits to the digestive health of consumers. With a regular intake of inulin and oligofructose (at levels of five grams each day), beneficial bifidobacteria are stimulated and increase in number by as much as five to ten times. The level of harmful organisms such as clostridia in the digestive tract is also reduced, while regularity is improved. Furthermore, the unique and patented form of BENEO’s oligofructose-enriched inulin (commercially available as Orafti®Synergy1) has been proven to improve calcium absorption to increase bone strength.

Weight management

When it comes to weight management, yoghurt and milk drinks are predicted to become of increasing importance. The mantra ‘less is more’ (reduced calories, reduced fat, low sodium and less sugar) will still be the main theme of many new product launches; a good example of this is Danone’s Vitalinea fat free yoghurt, which combines low fat with a satiety message. Milk drinks are also becoming more functional in the area of weight management, with product launches like Slim Fast’s Hunger Shot Strawberry Flavour High Protein & Fibre low fat yoghurt drinks and Candia’s Silhouette Active flavoured low fat milk drink becoming more common.

There are a range of products promoting weight management with the use of BENEO’s inulin and oligofructose. There is mounting scientific evidence to suggest that inulin and oligofructose, as a single ingredient, can decrease energy intake after a meal and beneficially affect sugar and lipid metabolism. BENEO’s isomaltulose (commercially available as Palatinose™) is the one and only

carbohydrate that provides the human body with complete energy over significantly longer periods of time than sucrose while having a minimal effect on blood glucose levels. Thus, since it gives balanced and sustained energy, it can also be regarded as a carbohydrate that provides “slow calories”. It is ideal for use in dairy food and drinks. Moreover, due to its low hygroscopicity, it is also suitable for instant products such as milk powder.

Sense of simplicity

Another trend that looks set to continue is that of ‘all things simple’ and ‘natural’. We are seeing the rise of additive- and preservative-free yoghurts, as well as the continued popularity of all things organic and natural. To ensure that a credible ‘natural’ message is being promoted in association with functional foods and drinks, producers need to choose their ingredients providers with caution. This is why BENEO for example is using only the purest of natural ingredients such as rice, chicory and sugar-beet.

‘Free from’

Although 2009 was seen as the year of ‘free from’, with many new lactose and dairy-free products making it onto major supermarket shelves, the ‘free from’ trend looks as strong as ever in 2010 as the ‘taking things out is beneficial’ message gathers momentum. Alternatives to drinking milk, such as goats’ milk-, soya-, oats- and rice-based products, are thriving and creative mixes of ‘free from’ and ‘health claims’ are also proving popular. An example here is Alpro Soya’s soy drink with inulin, which combines the messages ‘lactose free’ and ‘gut health’ for maximum marketing punch. 

The Manufacturer approach

As demand for functional products has increased over the years, so production and marketing has become more and more complex. Additionally, the current discussion about the impact of regulation shows how complex the interrelation of food and drink, nutrition, legislation and communication to consumers is. This means that reliable advice and sound information are more important than ever. The recently found BENEO-Institute facilitates the access for customers to the latest research in nutritional science, and can obtain advice on claims as well as regulatory matters. Thus, manufacturers are encouraged to take an innovative approach to functional foods.

ASIAN DAIRY SCENE With 60 per cent of the world population, Asia accounts for only 20 per cent of the global milk production. The total world milk production of more than 500 million tonnes for a population of about 4 billion amounts to an average annual per capita availability of 100 kg. The corresponding figure for Asia is only about 27 kg and the consumption is about 30 kg. Some 10 per cent of milk consumed in Asia is imported. In several Asian countries, imports of dairy products, both as finished products in consumer packs and in bulk for recombination into milk, have helped create a dairy market and a milk processing industry. 

INDIA AND DAIRY INDUSTRY

The highest milk producer in the entire globe – India boasts of that status. India is otherwise known as the ‘Oyster’ of the global dairy industry, with opportunities galore to the entrepreneurs globally. Anyone might want to capitalize on the largest and fastest growing milk and mil products' market. The dairy industry in India has been witnessing rapid growth. The liberalized economy provides more opportunities for MNCs and foreign investors to release the full potential of this industry. 

India has vast livestock resources (57 per cent of the world buffalo population and 16per cent of the cattle population) and the dairy sector contributes a major share to theagriculture GDP. Over the years the sector has played a major role in development of millionsof rural households and also in the socio-economic conditions. In the WTO era andglobalization the industry needs appropriate production, marketing and trade policy and itsperiodic revival to keep the pace with the rest of the world and remain competitive to grabopportunity regarding international trade.

HISTORY

The dairying in India is as old as the Indian civilisation! The herbivores milch animals like cattle and buffalo were domesticated as an integral part of our social system. In the Indian culture the cattle is a symbol of purity and motherhood! Though the practice of milch animal rearing and milking continued over the centuries, but no attempt was made to introduce the modern animal husbandry and dairying practices till the then British rulers thought it appropriate to ensure milk supply to their people, especially for the British soldiers. Accordingly, they established military dairy farm in the North of India, in the early part of twentieth century. They imported animals from their country as well as initiated herd improvement programme, in the military dairy farms. 

1. Indian dairy products

(a) Curdled dairy products

Paneer is an unaged, acid-set, non-melting farmer cheese made by curdling heated milk with

lemon juice or other non-rennet food acid, and then removing the whey and pressing the result

into a dry unit.

Chhena is like paneer, except some whey is left and the mixture is beaten thoroughly until it

becomes soft, of smooth consistency, and malleable but firm.

Sandesh is a confection made from chhena mixed with sugar then grilled lightly to caramelize, but

removed from heat and molded into a ball or some shape.

Rasgulla is a confection made from mixture of chhena and semolina rolled into a ball and boiled

in syrup.

(b) Non-curdled dairy products

Khoa or Mawa is made by reducing milk in an open pan over heat.

Peda is a confection made by mixing sugar with khoa and adding flavoring, such as cardamom.

Barfi is a confection made by reducing milk and sugar until it solidifies and adding flavoring, such

as pistachio.

Gulab jamun is a confection made by mixing khoa and sugar, caramelizing it by frying, and

soaking it in syrup containing rosewater.

Kulfi is made from slowly freezing sweetened condensed milk. In comparison to ice cream, kulfi is

not whipped or otherwise aerated.

Ghee is type of clarified butter that is cooked long enough to caramelize the milk sugar

and sterilize the liquid.

(c) Fermented dairy products

Mishti doi is dahi (Indian yogurt) mixed with sugar

Shrikhand is strained yoghurt mixed with sugar, and often flavorings such as cardamom, saffron,

or fruit.

Wheyvit is an alcoholic beverage prepared by fermenting whey with yeast.

(d) Other dairy products

Kheer is made by boiling rice or broken wheat with milk and sugar, and sometimes flavored with

cardamom, raisins, saffron, pistachios, or almonds.

Chhena Murki is made by frying cubes of chhena to burn the outside, then soaking them in syrup

flavored with cardamom.

Pantooa is like gulab jamun, except with some chhena mixed with the usual ingredients

India's Milk Product Mix  

Fluid Milk 46.0%Ghee 27.5%Butter 6.5%Curd 7.0%Khoa (Partially Dehydrated Condensed Milk) 6.5%Milk Powders, including IMF 3.5%Paneer & Chhana (Cottage Cheese) 2.0%Others, including Cream, Ice Cream 1.0%

2.Overview of the Indian Dairy Sector

The country is the largest milk producer all over the world, around 100 million MT Value of output amounted to ` 1179 billion (in 2004-05) (Approximately equals combined output

of paddy and wheat!!) 1/5thof the world bovine population Milch animals (45% indigenous cattle, 55 % buffaloes, and 10% cross bred cows)

Immensely low productivity, around 1000 kg/year (world average 2038 kg/year) Large no. of unproductive animals, low genetic potency, poor nutrition and lack of services are

the main factors for the low productivity There are different regions – developed, average, below average (eastern states of Orissa,

Bihar and NE region) in the dairy industry.

3.Overall Dimensions of the Indian Dairy Industry

Dairying is an important part of the Indian agricultural economy. At the national level, about 17% of the total value of output from agriculture derives from this sector, placing Indian milk sector in first place followed by rice (14.4%) and wheat (8.7%) in 1998-99 (CSO, 2001). From chronic shortages, India has now become the largest producer of milk in the world, with estimated production of about 81 million tons in 2001. This success story of Indian milk production has been written primarily by millions of rural producers, and the major share of credit goes to women dairy farmers. In India, dairying is dominated by smallholder production systems; almost 70% of the milk producers in India are landless small and marginal farmers who own one or two animals. It is well known that the Indian dairy sector has developed in a highly regulated and protectionist economy. However, India initiated major macro-economic reforms in the early 1990s that encourage the liberalization of all sectors of the economy, and the dairy sector was no exception. This was reinforced with the signing of the Uruguay Round Agreement on Agriculture (URAA) in 1994. This increasingly exposed the Indian dairy sector to world dairy markets that have been highly distorted by policies of high tariffs, domestic support, and export subsidies in developed countries. There is likely to be restructuring of the dairy sector around the world, and it would be interesting to examine the likely implications of these changes for the Indian dairy sector under the new economic environment of trade liberalization and globalization.

3.1Contribution to the National Economy (income and employment)

Dairy enterprise is considered a "treasure" of the Indian economy, particularly for rural systems. It provides nutrition, draft animal power, organic manure, supplementary employment, cash income, and a 'cushion' for 'drought proofing' in India (Patel, 1993; Paroda, 1998). The sector involves millions of resource-poor farmers, for whom animal ownership ensures critical livelihood, sustainable farming, and economic stability. Dairying in the recent decades has been considered a vital component in the diversification of Indian agriculture, where crop farming is beset with stagnating growth and low absorption of unskilled agricultural laborers. In order to alleviate the problem of unemployment/under-employment and to maintain domestic tranquility, diversification of crop production into non-crop enterprises like dairy farming is of vital importance (Pandey, 2000; Alagh, 2002).

At the macro-level, the gross domestic product (GDP) from livestock is estimated about Rs. 98,421 crore (current prices), contributing about 22% to the agricultural gross domestic product (GDP) and about 5.5% to the national GDP (CSO, 2001). Among various livestock products, milk constitutes the major share (67%) in value of outputs from the livestock sector and is the single largest commodity contributing to the value of output from agriculture.

The livestock sector alone provides regular employment to 18.4 million people in principal/subsidiary status, constituting about 5% of the total workforce (GOI, 2002). Dairying at the micro-level provides employment and income to more than 70 million farm families directly in India. Studies conducted across the country have indicated that on average, a milch animal provides annual employment ranging from 90 to 150 days depending on the breed and region. Around 10% of agricultural laborers seek gainful employment in dairy farming. It is estimated that each 6-10 kg per day of additional milk processed in India generate one person-day of employment for feeding and health care (National Livestock Policy, 1996; Mishra, 1999). With regard to income, an annual income of Rs. 1,200-10,000 per milch animal is realized, depending on breed and region. Dairying is found to provide about 20% of farm employment and about 30% of family income (Ramasamy, 2000).

3.2Socioeconomic Profile of Dairy Farmers

Indian dairy farming is basically a smallholder production system, characterized by milk production by the masses rather than mass production of milk. More than 80 million households (about 73% of rural households) keep some type of livestock. The base for Indian dairying is provided by millions of landless agricultural laborers and marginal and small farmers who maintain one or two milch animals of low genetic potential for milk production, primarily fed on crop residues and byproducts, and reared with the help of under-employed family members, mostly female workers. Although dairying is becoming more commercialized in some areas, it predominantly remains subsistence farming constituting a complementary/supplementary enterprise to crop farming, with regular sales of surplus production.

Dairy farmers in India are by and large illiterate, resource-poor, and low risk-bearers. They often exhibit a low level of farming innovation; in the majority of cases, they are either non-adapters or late adopters of modern technologies. Their average family size is moderate, around 5 persons. The marketable surplus of milk is about 60% of total milk production.

On marginal farms, it was estimated that the introduction of dairy enterprise increases the average farm income from Rs. 12,801 to Rs. 18,163 showing an increase of 42% per annum. On small farms, a similar trend was observed, with average farm increasing from Rs. 33,301 to Rs. 70,664 (an increase of 112%) resulting from the introduction of dairy (Kalra, et al., 2000). A similar trend was observed in other situations. In a well-planned project on integrated milk and crop production for increased productivity, employment, and farm income in the villages around Karnal, conducted by the National Dairy Research Institute from 1995 onward in 40 villages around Karnal, it was observed that labor absorption of different groups of households due to dairy farming increased differently, with an average increase of 21% in the project area (225 man-equivalent days) over the control area (187 man-equivalent days) (Table 1.2). Not only did dairy enterprise increase income and employment, but it also increased female labor utilization in different groups of rural households. On average, female labor utilization in dairy enterprise was 81 man-equivalent days, or 33% of the total labor employment of 242 man-equivalent days in dairy farming. The share of female labor utilization varied in different groups, being maximum in landless laborers (46%) followed by medium farms (32%) (Singh,et al. 1995). Within dairy operations, 47% of labor is utilized for bringing fodder, 12% for grazing, 10% for chaffing, 15% for feeding, 7% for cleaning, and 10% for milking (Singh and Kairon, 1996).

Owing to their poor financial condition and poor networks of organized financial institutions, farmers more often than not approach private money lenders for credit and enter into some sort of marketing contracts for selling milk, normally to the disadvantage of farmers. On the other hand, regular milk vendors (dudhias) often provide credit at reasonable terms, an important source of financing to small farmers. Village-level extension workers (Gram sevaks), elite farmers of the village, and peer groups are the normal sources of information and modern technology for dairy farmers in the country. Kisan/Dairy melasalso serve as sources of information to the farmers in selected areas.

3.3Livestock Population Trends

India owns one of the largest livestock populations in the world. It accounts for about 57% of the world's buffalo population and 16% of the cattle population (GOI, 2002). Between 1951 and 1992, the period for which data are available from the Livestock Census, the stock of cattle and buffaloes together increased from 198.7 million to 289 million (45.4%). Cattle population grew by about 0.76% per year between 1951 and 1992, while buffalo population almost doubled (2.24% per year) during the same period

(Table 1.3). This trend was uniform during all the inter-census years of this period, and both cattle (1.35%/year) and buffalo stocks (2.39%/year) witnessed a significant acceleration in growth from 1977 to 1982, compared to the previous five years. Between 1956 and 1961, the rate of increase of cattle (2.04%/year) as well as of buffaloes (2.66%/year) was the highest among all the sub-periods

considered. This period also saw increases in agricultural production by increasing crop areas, which in turn required greater animal draft power. Secondly, the farmers saw incentives for increased milk production in the form of rising milk prices. The turning point in the bovine working male population was 1977. The male cattle population declined by over 12 million from 73.22 million to 61.14 million between 1977 and 1982, and the corresponding decline among male buffalo population was over 1.96 million (GOI, 1999). This declining trend, however, is not uniform across the states. Agriculturally progressive states like Punjab, Haryana, Andhra Pradesh, Kerala, Tamil Nadu witnessed a sharp decline in working male numbers due to farm mechanization, while the less progressive states like Assam, Bihar, Madhya Pradesh, Orissa, West Bengal exhibited increasing dependence on work animals.

Growth pattern of livestock population in India: 1951-1992

(Million)

Species 1951 1956 1961 1966 1972 1977 1982 1987 1992Cattle 155.3 158.7 175.6 176.2 178.3 180.0 192.45 199.69 204.58Adult female cattle 54.4 47.3 51.0 51.8 53.4 54.6 59.21 62.07 64.36Buffalo 43.4 44.9 51.2 53.0 57.4 62.0 69.78 75.97 84.21Adult female buffalo 21.0 21.7 24.3 25.4 28.6 31.3 32.5 39.13 43.81Total bovines 198.7 203.6 226.8 229.2 235.7 242.0 262.36 257.82 289.0Total livestock 292.8 306.6 335.4 344.1 353.4 369.0 419.59 445.28 470.86Annual growth rates (%) 1951-56 1956-61 1961-66 1966-72 1972-77 1977-82 1982-87 1987-92Cattle 0.43 2.04 0.07 0.24 0.19 1.35 0.74 0.48Adult female cattle -2.76 1.52 0.31 0.61 0.45 1.63 0.95 0.73Buffalo 0.68 2.66 0.69 1.61 1.55 2.39 1.71 2.08Adult female buffalo 0.66 2.29 0.89 2.40 1.82 0.76 3.78 2.28Total bovines 0.49 2.18 0.21 0.56 0.53 1.63 1.01 0.94Total livestock 0.93 1.81 0.51 0.53 0.87 2.60 1.20 1.12

3.4 Demand for Milk and Milk Products

The demand for livestock products, especially milk and meat, in India has increased considerably in the recent years, and has a strong potential for further growth. Several socioeconomic indicators underlie this trend. The per capita consumption of milk in many parts of the country is low compared to minimum nutritional standards and to that of many developed and developing countries. The demand for milk and dairy products is income-elastic, and growth in per capita income is expected to increase demand for milk and milk products. Empirical evidences show that the composition of the food basket of an average Indian is gradually shifting towards livestock products (Radhakrishan and Ravi, 1990; Kumar, 1998). Other socioeconomic and demographic factors such as urbanization, changing food habits, and lifestyle also reinforce growth in demand for dairy products.

The per capita availability of milk in the country has grown at a rate of 3.02% per annum from 1980-81 to 1990-91, and at 2.19% per annum from 1990-91 to 1998-99, with an average annual growth rate of 2.52% from 1980-81 to 1998-99 (Saxena, 2000). The imports of milk products have declined over the years, while exports have slightly increased. However, net imports of milk equivalent have been very small in relation to total domestic milk production (0.01%). Therefore, domestic consumption of milk has remained more or less equal to the domestic production of milk. Milk consumption varies widely across regions and economic groups, and also between urban and rural households. The changing consumption pattern of milk in the country is presented in Figure 1.2. Liquid milk comprises the largest single share of the dairy product consumption profile. The share of fat-based products like ghee showed a declining share, and that of western products like cheese and ice cream witnessed an increasing trend and is expected to increase further due to changes in food habits, marketing strategies, income levels, changes in demographic factors, etc.

A study conducted by the National Council of Applied Economic Research (NCAER) in dairy cooperative societies in Operation Flood (OF) areas showed that milk consumption levels in OF areas vary across size groups and regions and are substantially higher than the national average (Table 1.7). Between 1988-89 and 1995-96, the per capita consumption of milk increased from 290 gms to 339 gms at the aggregate level. A similar trend was observed for individual zones. The consumption of fluid milk rose sharply in the southern and eastern zones and remained almost constant in the western zone and declined in the northern zone (Shukla and Brahmankar, 1999).

Per capita milk consumption (gm/capita) in Operation Flood Areas: 1995-96

Zone Landless Marginal Small Semi-medium Medium LargeNorth 452 422 515 541 687 678West 212 212 234 236 226 208South 304 271 308 304 300 389East 224 264 239 243 237 245All Zones 318 285 339 348 444 445

Source: Shukla and Brahmankar (1999)

3.5Trends in Production and Productivity of Milk

Milk production in the country was more or less stagnant during the 1950s and 1960s, and annual production growth was negative in many years. Milk production was estimated at about 17 million tons in 1950-51, rising to about 20 million tons in 1960-61 and 22 million tons in 1970-71. The annual compound growth rate during the first decade after independence was about 1.64% and this growth rate declined to 1.15% during the 1960s and the early 1970s. The performance of the Indian dairy sector over the last three decades has been extremely impressive. Milk production in the country has more than tripled to about 81 million tons between 1970-71 and 2000-01, with an average increase of about 4.5% per annum. The giant leap in milk production in the country is striking (Figure 1.3). It can be attributed mainly to increased demand driven by increased population, higher incomes and urbanization, and tight controls on imports of dairy products (Candler and Kumar, 1998). The period was also accompanied by the successful implementation of Operation Flood and other dairy development programs implemented by the State and Central governments, which although large in scale, only directly affected a small proportion of farmers. The growth in milk production during the decade of 1970s was about 4.5%, increasing to about 5.5% in the 1980s (Table 1.9). During the last decade (1990-91 to 2000-01), milk production in India increased at a growth rate of around 4.2%, which is much higher than the global rate of about 1%.

Table. Estimates of milk production and the growth rate of milk production in India: 1950-51 to 2000-01

Year Milk production(Million tons)

Year Milk production(Million tons)

1950-51 17.0 1991-92 55.71955-56 19.0 1992-93 58.01960-61 20.0 1993-94 60.61968-69 21.2 1994-95 64.01973-74 23.2 1995-96 66.21980-81 31.6 1996-97 69.11985-86 44.0 1997-98 70.81986-87 46.1 1998-99 74.71988-89 48.4 1999-00 78.11990-91 53.9 2000-01 81.0Cumulative growth rate (%/annum)

1950-51 to 1960-61 1.641960-61 to 1973-74 1.151973-74 to 1980-81 4.51

1980-81 to 1990-91 5.501990-91 to 2000-01 4.21

Source: Basic Animal Husbandry Statistics 1999, Department of Animal Husbandry and Dairying, Ministry of Agriculture, Government of India

The major milk producing states in the country are Uttar Pradesh, Punjab, Rajasthan, Madhya Pradesh, Maharashtra, Gujarat, Andhra Pradesh, Haryana, Tamil Nadu, and Karnataka, accounting for about three-fourths of total milk production in the country. State-wise shares of Indian milk production for selected years in the 1980-97 period are shown in Table 1.10. Uttar Pradesh is the largest milk producing state, producing about 13.5 million tons of milk, followed by Punjab (7.6 million tons), Rajasthan (6.2 million tons), Maharashtra (5.6 million tons), and Madhya Pradesh (5.4 million tons) in 1998-99 (GOI, 1999). During 1982-83 (TE), the top five milk producing states were Uttar Pradesh (18.5%), Punjab (10.1%), Rajasthan (9.8%), Gujarat (6.8%), and Haryana (6.6%), accounting for more than half of total milk production (Figure 1.4). However, in the triennium ending 1998-99, Gujarat and Haryana lost their position among the top five producers. The top five milk producing states in 1998-99 were Uttar Pradesh (18.1%), Punjab (10.1%), Rajasthan (8.2%), Madhya Pradesh (7.5%), and Maharashtra (7.4%), and these states accounted for about 51% of milk produced in the country. The share of Karnataka, Kerala, Madhya Pradesh, Maharashtra, Tamil Nadu, and West Bengal in total milk production increased between 1980-82 and 1996-98. In contrast, the share of Bihar, Haryana, Rajasthan, Uttar Pradesh, and West Bengal declined during this period.

3.6Trends in Production and Productivity of Milk

Milk production in the country was more or less stagnant during the 1950s and 1960s, and annual production growth was negative in many years. Milk production was estimated at about 17 million tons in 1950-51, rising to about 20 million tons in 1960-61 and 22 million tons in 1970-71. The annual compound growth rate during the first decade after independence was about 1.64% and this growth rate declined to 1.15% during the 1960s and the early 1970s. The performance of the Indian dairy sector over the last three decades has been extremely impressive. Milk production in the country has more than tripled to about 81 million tons between 1970-71 and 2000-01, with an average increase of about 4.5% per annum. The giant leap in milk production in the country is striking (Figure 1.3). It can be attributed mainly to increased demand driven by increased population, higher incomes and urbanization, and tight controls on imports of dairy products (Candler and Kumar, 1998). The period was also accompanied by the successful implementation of Operation Flood and other dairy development programs implemented by the State and Central governments, which although large in scale, only directly affected a small proportion of farmers. The growth in milk production during the decade of 1970s was about 4.5%, increasing to about 5.5% in the 1980s (Table 1.9). During the last decade (1990-91 to 2000-01), milk production in India increased at a growth rate of around 4.2%, which is much higher than the global rate of about 1%.

Table 1.9 Estimates of milk production and the growth rate of milk production in India: 1950-51 to 2000-01

Year Milk production(Million tons)

Year Milk production(Million tons)

1950-51 17.0 1991-92 55.71955-56 19.0 1992-93 58.01960-61 20.0 1993-94 60.61968-69 21.2 1994-95 64.01973-74 23.2 1995-96 66.21980-81 31.6 1996-97 69.11985-86 44.0 1997-98 70.81986-87 46.1 1998-99 74.71988-89 48.4 1999-00 78.11990-91 53.9 2000-01 81.0Cumulative growth rate (%/annum)

1950-51 to 1960-61 1.641960-61 to 1973-74 1.151973-74 to 1980-81 4.511980-81 to 1990-91 5.501990-91 to 2000-01 4.21

Source: Basic Animal Husbandry Statistics 1999, Department of Animal Husbandry and Dairying, Ministry of Agriculture, Government of India

The major milk producing states in the country are Uttar Pradesh, Punjab, Rajasthan, Madhya Pradesh, Maharashtra, Gujarat, Andhra Pradesh, Haryana, Tamil Nadu, and Karnataka, accounting for about three-fourths of total milk production in the country. State-wise shares of Indian milk production for selected years in the 1980-97 period are shown in Table 1.10. Uttar Pradesh is the largest milk producing state, producing about 13.5 million tons of milk, followed by Punjab (7.6 million tons), Rajasthan (6.2 million tons), Maharashtra (5.6 million tons), and Madhya Pradesh (5.4 million tons) in 1998-99 (GOI, 1999). During 1982-83 (TE), the top five milk producing states were Uttar Pradesh (18.5%), Punjab (10.1%), Rajasthan (9.8%), Gujarat (6.8%), and Haryana (6.6%), accounting for more than half of total milk production (Figure 1.4). However, in the triennium ending 1998-99, Gujarat and Haryana lost their position among the top five producers. The top five milk producing states in 1998-99 were Uttar Pradesh (18.1%), Punjab (10.1%), Rajasthan (8.2%), Madhya Pradesh (7.5%), and Maharashtra (7.4%), and these states accounted for about 51% of milk produced in the country. The share of Karnataka, Kerala, Madhya Pradesh, Maharashtra, Tamil Nadu, and West Bengal in total milk production increased between 1980-82 and 1996-98. In contrast, the share of Bihar, Haryana, Rajasthan, Uttar Pradesh, and West Bengal declined during this period.

3.7  Trends in milk production and per capita availability in India; 1950-51 to 2000-01

3.8Outlook for Trade in Indian Dairy Products

India has reformed its trade policy with regard to dairy products with the removal of quantitative restrictions and other NTBs on the imports of milk and dairy products, which can now be freely imported into India. With processed products for which there is direct competition, this policy may

force local products to match imported dairy products both in terms of cost and quality. This change in import policy is in line with India's commitments to the WTO and domestic market reforms.

India is the largest producer of milk in the world but holds a negligible share in world trade. However, India has the potential to become one of the leading players in milk and milk product exports. India is located amidst major milk deficit countries in Asia and Africa. Major importers of milk and dairy products are Bangladesh, China, Hong Kong, Singapore, Thailand, Malaysia, the Philippines, Japan, UAE, Oman, and other gulf countries, all located close to India. On the other hand, there could be competition in domestic markets from subsidized imports of dairy products from developed countries.

Milk production in India is scale-neutral and labor-intensive; therefore, due to cheap labor, costs of milk production are significantly lower in India. There is also a vast market for the export of traditional milk products such as ghee, paneer, shrikhand, rasgolas and other ethnic sweets to the large number of Indians scattered all over the world. In anticipation of export opportunities and in view of the post-WTO scenario, India is gearing up to tackle the demands of the international market. Indian companies are getting ready to meet international standards. However there are certain concerns in export competitiveness such as:

Milk hygiene and quality control

Much of the process and product development in the past has been supply-driven rather than demand-driven. There have been considerable investments in the setting up of large-scale milk processing plants and dairy product manufacturing plants in the cooperative sector located on the periphery of cities. Attention should be paid to improving the quality of milk and maintaining a hygienic and sanitary environment in the processing plants. The immediate priority, therefore, should be to put in place a mechanism for good manufacturing practices and quality control to meet hygienic standards and to produce high-quality dairy products. The planners and policy-makers should take appropriate measures to meet the sanitary and phyto-sanitary specifications prescribed by the World Trade Organization (WTO), which range from the quality assurance of processed dairy products to the health status of livestock. Significant investments must be made in milk procurement, equipment, chilling, and refrigeration facilities. A vigorous training program to educate farmers to understand the importance of milk hygiene and clean milk production, and to adopt proper milk handling and cleaning of tools and devices, should be implemented in rural areas.

Productivity

The productivity of milch animals is of vital importance to dairy farmers because it has direct influence on the costs and returns, and finally the competitiveness, of dairy farming systems. Therefore, in order to have an exportable surplus in the long term and also to maintain cost competitiveness, it is imperative to improve the productivity of milch animals. It should nevertheless be recognized, as discussed earlier, that much of the returns through smallholder dairying come in forms other than milk. A shift towards high milk productivity may require a change in farmer objectives or incentives so that the relative value of the other outputs is lower than it is currently.

Development of value-added products

In the changing world scenario, there is a need to develop value-added dairy products employing modern processing methods and distribution systems, keeping in view the needs of the domestic markets and international trade. The demand pattern is shifting towards high-value products like cheese, butter, and ice cream. There is growing diversity in urban food habits and resulting demand for a variety of new products. The dairy industry should capitalize upon this situation. There is a need for the industry to strengthen the capabilities of research institutes, since it would benefit most from the outcome of research findings.

Brand image and collaborations

Brand image needs to be projected at leading international dairy trade fairs, particularly of those countries to which exports are targeted. Another step may be to encourage technical collaboration and marketing contracts with leading international dairy companies.

3.9 Impacts on Household Nutrition, Women's Income and Employment, and Human Health

The changes in the sector will likely have salubrious effects on household nutrition, women's income and employment, and human health at large. Studies conducted in the field reveal that about 67% of the total marketed surplus of milk comes from marginal and small farmers and landless agriculture laborers. Even though their total milk production is small, some part of it may be sold at the cost of their personal consumption. (distress sale) (is there data on this? Seem quite speculative. In Kenya studies have shown that even where all milk is sold, it is often used to buy other nutrition food in larger quantities, such as beans/legumes). As a result of such distress sales, the reduced milk consumption may sometimes result in malnutrition and affect human health. In other cases, particularly when women control a significant share of the milk income, income from milk sales is used to buy higher quantities of other proteins such as beans and pulses. Overall, the evidence suggests that market-oriented milk production has positive health and nutrition effects in producing households, either directly through milk consumption, or through higher incomes. When the productivity/production of milk increases, consumption will also increase and improve the nutritional status of the households.

Dairying is an activity in which female workers do the majority of work looking after and maintaining animals. Thus, dairy farming provides gainful employment to women in rural areas. In some milk sheds, women's cooperative societies have arisen in which women do all the work (Sundaresan, 1973). Dairying can provide supplementary employment for rural labor and help raise productivity. NDDB's Perspective 2010 seeks enhanced participation of women in cooperatives as members and leaders because they are the major contributors to dairying. The goal is to increase their participation in cooperatives to 50% by the end of decade. To face this challenge, NDDB is assisting the District Unions to incorporate appropriate and effective strategies in their plans to achieve greater participation. The Women's Dairy Cooperatives Leadership Program (WDCLP), assisted by the European Union, is one of the major initiatives to increase the membership of women. The program also helps rural women to organize and run thrift and credit groups and other income-generating activities (NDDB, 2001).

4. Policy Support for Development of Dairy Industry in India

4.1Operation Flood and the National Dairy Development Board (NDDB), 1970 to 1996

Operation Flood:

The world's largest development project, it covers some nine million milk producers. Rural processing capacity of 19.4 million litres per day (mlpd) has been created and 6.7 mlpd equivalent of chilling capacity set up to ensure better quality milk. Milk marketing facilities of 10 mlpd have also been commissioned. 

INTRODUCTION:

Operation Flood was a rural development programme started by India's National Dairy Development Board

(NDDB) in 1970. One of the largest of its kind, the programme objective was to create a

nationwide milk grid.

It resulted in making India the largest producer of milk and milk products, and hence is also called the White

Revolution of India. It also helped reduce malpractices by milk traders and merchants. 

. 

Operation Flood has helped dairy farmers, direct their own development, placing control of the

resources they create in their own hands. A 'National Milk Grid', links milk producers throughout India

with consumers in over 700 towns and cities, reducing seasonal and regional price variations while

ensuring that the producer gets a major share of the price consumers pay.

The bedrock of Operation Flood has been village milk producers' cooperatives, which procure milk

and provide inputs and services, making modern management and technology available to members.

OBJECTIVES

Operation Flood's objectives included :

Increase milk production ("a flood of milk")

Augment rural incomes

Fair prices for consumers

Programme implementation

Gujarat-based co-operation "Anand Milk Union Limited", often called Amul, was the engine behind the

success of the programme, and in turn became a mega company based on the cooperative

approach. Tribhuvandas Patel was the founder Chairman of Amul, while Verghese Kurienwas the

chairman of NDDB at the time when the programme was implemented. Verghese Kurien, who was

then 33, gave the professional management skills and necessary thrust to the cooperative, and is

considered the architect of India's 'White Revolution' (Operation Flood). His work has been

recognised by the award of a Padma Bhushan, the Ramon Magsaysay Award for Community

Leadership, the Carnegie-Wateler World Peace Prize, and the World Food Prize.

Operation Flood was implemented in three phases.

Phase I

Phase I (1970–1980) was financed by the sale of skimmed milk powder and butter oil donated by

the European Union (then the European Economic Community) through the World Food Programme.

NDDB planned the programme and negotiated the details of EEC assistance.

During its first phase, Operation Flood linked 18 of India's premier milksheds with consumers in

India's major metropolitan cities: Delhi, Mumbai, Kolkata and Chennai. Thus establishing mother

dairies in four metros.

Operation flood, also referred to as “White Revolution” is a gigantic project propounded by

Government of India for developing dairy industry in the country. The Operation Flood – 1 originally

meant to be completed in 1975, actually spanned the period of about nine years from 1970–79, at a

total cost of Rs.116 crores.

At start of operation Flood-1 in 1970 certain set of aims were kept in view for the implementation of

the programmes. Improvement by milk marketing the organized dairy sector in the metropolitan cities

Mumbai(then Bombay), Kolkata(then Calcutta), Chennai(then Madras), Delhi. The objectives of

commanding share of milk market and speed up development of dairy animals respectively hinter

lands of rural areas with a view to increase both production and procurement.

Phase II

Operation Flood Phase II (1981–1985) increased the milksheds from 18 to 136; 290 urban markets expanded the outlets for milk. By the end of 1985, a self-sustaining system of 43,000 village cooperatives with 4,250,000 milk producers were covered. Domestic milk powder production increased from 22,000 tons in the pre-project year to 140,000 tons by 1989, all of the increase coming from dairies set up under Operation Flood. In this way EEC gifts and World Bank loan helped promote self-reliance. Direct marketing of milk by producers' cooperatives increased by several million litres a day.

Phase III

Phase III (1985–1996) enabled dairy cooperatives to expand and strengthen the infrastructure

required to procure and market increasing volumes of milk. Veterinary first-aid health care services,

feed and artificial insemination services for cooperative members were extended, along with

intensified member education.

Operation Flood's Phase III consolidated India's dairy cooperative movement, adding 30,000 new

dairy cooperatives to the 42,000 existing societies organized during Phase II. Milksheds peaked to

173 in 1988-89 with the numbers of women members and Women's Dairy Cooperative Societies

increasing significantly.

Phase III gave increased emphasis to research and development in animal health and animal

nutrition. Innovations like vaccine for Theileriosis, bypassing protein feed and urea-molasses mineral

blocks, all contributed to the enhanced productivity of milch animals.

Salient Features of Operation Flood

Key parameters Operation Flood PhasesPhase I Phase II Phase III*

Date of start July 1, 1970 April 1, 1981 April 1, 1987Date of ending March 31, 1981 March 31, 1985 April 30, 1996Investment (Rs crore) 116.50 277.20 137.95No. of milksheds 39 136 170No of DCSs set up 13,270 34,523 72,744No of members(lakh) 17.5 36.3 93.0Average milk procurement(mkgpd)

2.56 5.78 11.0

Liquid milk marketing (llpd)

27.8 50.0 100.0

Processing capacity Rural dairies (llpd) Metro dairies (llpd)

45.4 29.0 88.0 35.0 192.0 72.8

Milk drying capacity (MTPD)

340.0 507.0 990.0

Technical inputsNo. of AI centers No. of AI done/year Cattle feed capacity ('000 MTDP)

4,868820,782

1.65

7,8021329,455

3.29

10,9153943,890

4.80

States covered Andhra Pradesh, Bihar, Delhi, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttar Pradesh, and West Bengal

Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttar Pradesh, West Bengal, Andaman & Nicobar, Pondicheri, and Delhi

Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu, Uttar Pradesh, West Bengal, Pondicheri and Delhi

*: Includes progress during April 1985 to March 1987, a period during which activities were funded by the NDDB (Rs. 209.0 crore)

Far reaching consequencesThe year 1995-96 marked the termination of Operation Flood III, funded by a World Bank loan, EEC food aid and internal resources of NDDB. At the conclusion of Operation Flood III, 72,744 DCSs in 170 milksheds of the country, having a total membership of 93.14 lakh had been organized. The targets set have either been effectively achieved or exceeded. However, procurement targets could not be reached as private agencies started procuring milk from the cooperative villages, following the new delicensing policy under the Government's program of economic liberalization.

The conditions for long-term growth in procurement have been created. An assured market and remunerative producer prices for raw milk, technical input services including AI, balanced cattle feed and emergency veterinary health services have all contributed to sustained increases in milk production. Three state-of-the-art dairies designed to produce quality products for both the domestic and export markets have been commissioned.

While the demand for milk was rising under Operation Flood the total cattle population remained more or less static. If milk production had to be increased

The buffalo and milk breeds of cattle had to be upgraded

Non-descript cows had to be crossbred with exotic semen to increase their milk production to make them more efficient converters of feed.

PITFALLS OF OPERATION FLOOD

Limited Sources of Finance: Limited sources of finance available to these cooperatives also hinder the smooth functioning of many dairy cooperatives. The cooperatives cannot raise equity from the market, and have to depend either on their own retained earnings or on equity from member farmers. Both these sources are woefully inadequate for meeting the financial needs for technological upgradation and innovation, and thus the cooperatives have to resort to government loans and grants. This in turn makes them an easy prey for government interference in decision-making.

Politicization of Cooperatives: Politicization of cooperatives has caused a plethora of problems. Overstaffing, low capacity utilization, weak market orientation and poor financial controls have become the norm rather than exception in case if most Indian dairy cooperatives. Appointment of bureaucrats as managers of the cooperatives has been the case in Madhya Pradesh, Orissa and Uttar Pradesh.

These bureaucrats do not have the professional skills required to manage such producer cooperatives. Consequently, under such bureaucratic heads, the cooperatives fail to respond to neither the needs of the producer farmers, nor the needs of the industry.

Government dictated input-output pricing: In case of most cooperatives the state government fixes the minimum producer price. For instance in Maharashtra and Punjab, the State Government fixes the selling price of milk to government dairies. The selling price is determined by the government through on the spot interventions in case of Andhra Pradesh and Karnataka. This has caused inevitable distortions in the pricing of processed dairy products, and has adversely affected the financial health of the cooperatives.

Operation Flood Successful in Limited States Only: The success of dairy cooperatives has been largely confined to a few states in India such as Gujarat, Punjab, Andhra Pradesh and Rajasthan, where brands like Amul, Verka, Vijaya and Saras have become household names. However, a large number of dairy cooperatives, unions and federations are defunct and are not able to create value for their members. Cooperatives in Uttar Pradesh (Parag Dairy), Kerala (Milma), and Madhya Pradesh (Uttam Dairy) are largely loss-making. A lot needs to be done to strengthen such non-performing cooperatives.

Excessive Government Interference in Decision-Making: Excessive government interventions in the cooperatives due to vested political interests have led to massive politicization of dairy cooperatives. These cooperatives have a very large rural base, with millions of farmers as members, and they could play a major role during political elections. With electoral forces, and not market forces guiding the decision-making of the cooperatives, most cooperatives have become agencies for implementing the populist policies of the government, and thus unprofitable and unviable business units

Summary

Dr. Verghese Kurien had contributed towards the success of White revolutionFrom the outset,

Operation Flood was conceived and implemented as much more than a dairy programme. Rather,

dairying was seen as an instrument of development, generating employment and regular incomes for

millions of rural people.

A World Bank Report 1997 says:

Operation Flood can be viewed as a twenty year experiment confirming the Rural

Development Vision

4.2 De-licensing (1991) and Milk and Milk Products Order (MMPO), 1992

Post 1991, milk processing in large-scale plants was de-licensed and opened for domestic and private players to participate. The Indian Dairy sector, at the time of liberalisation, was replete with many inefficient, obsolete and sub-scale units, which faced direct threat from domestic and foreign competition. Keeping in mind the employment and livelihoods contribution of these small and cottage dairy processing units, the Government of India announced the Milk and Milk Products Order (MMPO) in 1992, under the provisions of the Essential Commodities Act, 1955.

The operation of MMPO was largely limited to registration of dairy firms in the organised sector, though as a policy, it had three major objectives: 1. Augment the supply of milk in milk deficient regions of the country, and ensure a certain minimum quality standard. 2. Inspection and certification of dairy units for quality control, health and hygiene. 3.Maintain a database on the status of the organised dairy sector in the country

MMPO required that the large-scale processing units having capacity of more than 10,000 lpd or 500 tonnes milk solids a year could operate only after a license from the government. It is ironical that the government which liberalized the economy did not allow the dairy companies to operate without government licenses and permits!

Licenses for milk processing capacities above 75000 lpd were only granted by the Central Government, while permission for capacities below 75000 lpd but more than 10000 lpd was granted by the state governments. For capacities below 10000 lpd no license was needed. The granting of government licenses was a political exercise, not in sync with the market demands but directed by the vested interests of the political power-groups and farmer unions. Government granted Licenses based on its calculations of the difference between the marketable surpluses in different areas, while keeping in mind the processing capacity already installed. This did not permit healthy competition to develop the dairy sector, and many small, sub-optimal, sub-standard and inefficient dairy plants got indirect protection and respite from the growing competition. Rampant corruption also made the license system difficult to deal with for new start-up enterprises. Clearly, the MMPO was a disincentive to larger capacities, which could show greater economies of scale. Large-scale plants necessarily require backward integration and substantial extension work for ensuring stable procurement base of milk. As a result these large-scale units are most likely to help increase milk yields and, in turn the output of processed dairy products. MMPO encouraged companies to by-pass regulation, resort to sub-optimal units and poaching of milk from the cooperatives. However, keeping in mind the growing pressure of competition from global players in the dairy sector, the tightening of the WTO Agreements, and the anomalies in the license structure, the government made an amendment in the MMPO (1992). The amendment allowed the dairy players to setup dairy processing units wherever and whenever they felt like. In other words, licenses need not be taken now for setting up dairy units. However, these dairy plants have to still seek government registration for purposes of ensuring sanitary and hygienic conditions and quality of products. In order to check red-tapism and bureaucratic delays, the registration procedure has to be completed within 45 days by statute.

In a nutshell, the salient amendments in the MMPO in 1999 are as follows: The provision of assigning milk sheds has been done away with, giving full flexibility and freedom of choice to private enterprises and dairy cooperatives to procure and market milk in any region of the country. Food Processing Five Sectors Project 9 India Development Foundation The registration under MMPO-92 will now not be for capacity installation, but only for sanitary and hygiene conditions, quality and food safety. The provision of inspection of dairy plants has been made more flexible. The provision to grant registration in 90 days has now been reduced to 45 days.

4.3 Abolition of Quantitative Restrictions (QR) in Dairy Imports, 2001Dairy imports became liberal after the Quantitative Restrictions on such imports were done away with in 2001. The Government of India, in an agreement with the Government of United States, removed QR from a plethora of dairy products. Table 5 highlights the trend in milk and milk products imports over the last few years, and a percentage of dairy imports in the total agriculture imports in the country.

The dairy imports were particularly high in the year 2003-04. This was on account of dip in domestic milk production, and a subsequent dip in the production of milk powder. Milk powder production declined by 10.9% on a year-to-year basis in 2003-04.

Total milk powder production during April to September 2003 dropped by 12.7%. The below-normal rainfall over the past three years had resulted in insufficient calving. Given this crisis, many cooperatives for instance, in Maharashtra sought help from the NDDB seeking around 1400 MT of skimmed milk powder. It was also reported that in Gujarat, procurement from 12 milk sheds declined by 9.6% to 4505.3 thousand kgs per day as against 4986 thousand kgs per day in the same period in the previous year.. In wake of the above crisis of fall in milk production and procurement from major milk sheds in the country, the Union Government allowed the NDDB to import 6000 tonnes of milk powder to ease the supply shortage. Many states had openly objected to this decision of the Central Government. For instance, Punjab – one of the largest milk producing states – had raised objections citing that such imports would reduce milk prices, adversely affect farmers’ interests and result in large-scale killing of unproductive animals! However, states like Maharashtra cleared a proposal by the State Cabinet to increase the procurement price of milk from dairy cooperatives by Re. 1 per litre in order to increaseprocurement from the village cooperatives. What comes as a surprise is that the cooperatives had to wait for a government clearance to increase procurement prices! Rather than politics, it should have been the market that should have decided when and by how much to increase the procurement price.

5. REGULATORY BODIES

5.1 INDIAN DAIRY ASSOCIATION:

INTRODUCTION

Established in 1948, Indian Dairy Association (IDA) is the apex body of the dairy industry in India. The members are from the cooperatives, MNCs, corporate bodies, private institutions, educational institutions, government and public sector units. IDA functions very closely with the dairy producers, professionals & planners, scientists & educationists, institutions and organisations associated with the development of dairying in India. 

HISTORY:The IDA since has a history of around six decades now, it has had the privilege of being headed by several Presidents and some of them were of national and international fame. The luminaries like Sardar Datar Singh, Dr. K.C. Sen, Dr. Z.R. Kothawalla, Dr. D.N. Khurody, Dr. V. Kurien, Dr. P. Bhattacharya were the past presidents of the IDA.

ROLE: IDA has been providing a common forum to knit the dairy fraternity together and thus, over the years, it has emerged as the reigning czarina of information. The Association is managed by an apex policy making body called the Central Executive Committee (CEC). The CEC is headed by President and supported by two Vice-Presidents and 19 Executive Committee Members. 

The ongoing  CEC is spearheaded  under the dynamic leadership of Dr. N.R. Bhasin, IDA has emerged as a platform for assimilation and dissemination of knowledge, as an important tool for policy making in the dairy sector, in India! Besides, the IDA, in the recent time, has also succeeded to focus itself at the national and international fora. 

The IDA organises seminars, symposia and exhibitions on a wide range of topics catering to various segments of professionals, scientists, institutions and organisations associated with the development of dairying in India. 

HEAD QAURTERS:

The IDA's Head Quarter is in Delhi and the zonal branches are in Bangalore, Kolkata, Mumbai and Delhi. It has State Chapters at Gujarat (Anand), Kerala (Thrissur), Rajasthan (Jaipur), Punjab (Chandigarh), Bihar (Patna) and Uttarakhand (Dehradun).

5.2 The National Dairy Development Board (NDDB)  

It was founded in 1965 to replace exploitation with empowerment, tradition with modernity, stagnation

with growth, transforming dairying into an instrument for the development of India's rural people.

NDDB began its operations with the mission of making dairying a vehicle to a better future for millions

of grassroots milk producers. The mission achieved thrust and direction with the launching of

”Operation Flood", a programme extending over 26 years and which used World Bank loan to finance

India's emergence as the world's largest milk producing nation.   Operation Flood's third phase was

completed in 1996 and has to its credit a number of significant achievements.

As on March 2006, India’s 117,575 village dairy cooperatives federated into 170 milk unions, and 15

federations procured on an average 21.5 million litres of milk every day. 12.4 million farmers are

presently members of village dairy cooperatives.

Since its inception, the Dairy Board has planned and spearheaded India's dairy programmes by

placing dairy development in the hands of milk producers and the professionals they employ to

manage their cooperatives.  In addition, NDDB also promotes other commodity-based cooperatives,

allied industries and veterinary biologicals on an intensive and nation-wide basis.

In short, NDDB, as a multi-sector and multi-location statutory body, has been involved in planning,

implementation, financing and supporting farmer owned, professionally managed agricultural

enterprises.  It has vast experiences in supporting smallholder organisations and facilitating their

access to markets and an excellent capacity in research, training and professional and management

service

INDUSTRY INFRASTRUCTURE

Strengthening Dairy Farming Infrastructure

INDIA - The Indian Animal Husbandry Department is to implement a Rs. 50 million project to encourage farmers to strengthen and upgrade existing infrastructure to make dairy farming commercially viable. 

In the initial phase, 40 dairy farms will be modernised with mechanised equipment as part of the project, according to a report in The Hindu.

The department said it will to create a network of scientifically managed model demonstration units for hygienic milk production and better livestock management, according to the report.

By making funds more easily available, the project will promote large-scale commercial livestock farming by adopting advanced technology.

1.Industry Structure – Liquid Milk and Milk Products

A total of 45.7 million tonnes of milk was processed into milk products in the year 2000-01, out of which the share of the organised sector (including all cooperatives) was an abysmal 10%. On the other hand, 38.9 million tonnes of liquid milk was produced in India in 2000-01, out of which only 15.4% was processed, and the rest was sold unprocessed

In both the above categories we clearly see that the industry is dominated by small, informal and unorganized dairy units. In the absence of adequate integration and economies of scale, most of the milk and milk products are either sold unprocessed, or processed locally into low value-added products. Such products in absence of hygiene, quality and safety are unable to command premium prices from the consumers.

Few reasons why the informal sector is able to survive and compete in the market with organised dairy players are as follows.

First, the informal milk vendors (colloquially referred to as dudhias) are able to work with very low levels of investments. Thus despite low volumes, they are able to compete with the organised players. They procure milk daily from the farmers, and supply within hours to the nearby consumption centres (urban areas), and thus do not have to invest heavily in chilling and pasteurizing units, unlike the case with organised players.

Second, most of the small, informal milk vendors have very small operating cycles, and are able to turn their stocks daily and recover their money from the business. In such a scenario, they are in a position to pay higher prices to farmers than most cooperatives and are able to procure milk from the members of base.

Third, the concept of pasteurized milk has not yet taken off well with most middle-class Indian households, which still feel that fresh milk from the local milk vendors (dudhias) is the best and themost nutritious. The misconception that pasteurization kills not only the germs, but also the nutritive value of milk has made the acceptance of pasteurized milk rather difficult in many small towns in the country. It is in these small towns that most informal milk vendors have a flourishing business as they are able to encash on the misconceptions of the consumers.

Finally, in products like paneer (cottage cheese), the entire market is almost dominated by informal players as they are able to service the market far better than any organised player. Cost effectiveness and freshness are the two most important drivers in sale of cottage cheese. The informal milk vendorswith their small markets and fast operating cycles are clearly able to outsmart the organised players in the industry. The branded frozen cottage cheese hygienically tinned and canned is still not very popular primarily due to the notion of “freshness” that dawns heavy on the psyche of the buyers. It isonly in product categories like table butter, milk powder and ghee that the organised players are ableto gain a substantial market share because such products do not fall under the “fresh food” category.

2.Changes in the Incentive Structure of the Indian Dairy Industry

Governments' protectionist policies affect the prices received by producers, and the impact of such policy measures is reflected in the gap between domestic prices and the world price of a commodity. This gap shows the level of protection for the producers. It is well known that Indian agricultural policies have been strongly influenced by the need to achieve self-sufficiency in foodgrains since the

1960s, and in the dairy sector since the early 1970s. The import and export of dairy products was restricted through various non-tariff measures (NTBs) like quantitative restrictions (QRs) and canalization until the early 1990s. Competition within the country was also restricted through industrial licensing by restricting the entry of the formal private sector, including multi-national companies (MNCs), in the milk processing and the product manufacturing sector. Cooperatives were given preferential treatment for setting up milk processing plants. However, since the early 1990s, India has embarked upon a more liberal policy framework, which was reinforced with India becoming member of the WTO, exposing the Indian dairy sector to the world markets.

A comparison of nominal protection coefficients (NPCs) for the 1975-2000 period shows that the level of NPCs (at the official exchange rate) for major dairy products, namely skim milk powder (SMP), butter, butter oil and recombined milk, were well above unity for the average 26-year period of 1975-2000, and remained above unity even if estimates are considered at the shadow exchange rate (Figures 1.7-1.10). The trend in the estimates of incentive indicators is declining and estimates are much lower in the 1990s than the average of the entire period. This temporal behavior of NPCs is somewhat similar for all products. It is high during the late 1970s, declines during the early 1980s, again rises in the mid-1980s, and then gradually falls, and tends to approach unity and even goes below unity in the 1990s. It is important to note that the level of protection during the second half of the 1990s is only one-fifth of the level of protection during the second half of the 1970s. The gradual reductions in NPCs, especially after the second half of the 1980s, have been largely due to an improvement in world prices, and partially due to the falling exchange rate of the rupee. These results of NPCs indicate that India has not been an efficient import substituter of dairy products, if one compares Indian dairy prices with the world prices. However, the reason for this largely can be ascribed to the nature of world prices of dairy products, which have been highly distorted by the large export subsidies of the EU and the US. For example, the average export price (FOB) of SMP was about US$ 1,444 per ton in 1999; and the EU and the US paid about US$ 867 and US$ 950 per ton, respectively, as subsidies on SMP exports, more than 60% of the world prices (Sharma, 2001). There was some decline in the export subsidy to comply with commitments made under WTO, but the export subsidy as a percentage of world market prices showed an upward trend (Figure1. 11). If international prices were not artificially depressed by the policies of the EU and the USA, protection levels for Indian dairy products would have been much lower and even less than unity in most of the years. The estimates of NPCs at distortion-free prices (Netherlands domestic prices) are significantly lower, and even less than unity, in most of the cases for all dairy products considered in the study.

3.Impact of Likely Changes on the Structure of the Production and Processing Sectors

As discussed earlier, the majority of livestock in India is still kept by smallholders and is mainly fed on crop by-products. Most milk is consumed, sold locally, or sold to informal traders, with only a relatively small share passing into the formal organized milk marketing channels. In the formal channels, the entry of the private sector including multinational companies (MNCs) was restricted in milk processing and product manufacturing through the Industrial Licensing Act regime up to the early 1990s and through MMPO until March 2002. However, as we enter the new millennium, many changes are expected in the production and processing sectors as the formal sector's share grows in response to changes in demand, consumer tastes, and consumers' willingness to pay for quality. The projected impact of these changes on the structure of dairy production and processing are:

Increase in crossbred population and herd size

The figures given in earlier sections clearly reveal that the population of crossbred high-yielding animals is increasing at a faster rate than local cattle. If this trend continues, milk production will increase significantly. The studies have also revealed that as production of milk increases, the marketed surplus of milk also increases. The higher the procurement, the lower the cost of producing the product, which will make the product competitive and remunerative. With the entry of the private sector into milk processing, the average herd size may go up because the private sector would like to reduce transaction costs in milk procurement, and therefore may promote large dairy farms.

Clean milk production

To compete in the world market as well as the domestic market, and to meet international quality standards, it is highly desirable to produce clean milk under hygienic conditions, which considerably increases the shelf life of the product.

4.Increase in scale and scope of operations in the milk processing sector

It is expected that with the opening up of the milk processing sector to private companies, the dairy industry will undergo major changes in terms of scale of operations and scope of production. In order to achieve economies of scale, existing plants will expand their capacity and large new plants will be set up in the processing sector. The dairy sector will link and converge with other food and fibre sectors. Information technology and biotechnology will become an integral part of the value chain. The product mix will also undergo some changes responding to changes in lifestyle, income levels, food habits, convenience, etc. These changes will, however, be determined by changes in demand for products linked to the formal sector.

5.structural Changes in Milk Production, Procurement and Marketing

With the growth in demand and production, the protectionist policies of the 1970s and 1980s, followed by the economic policies of trade liberalization during the 1990s, the Indian dairy sector witnessed some marginal structural changes in milk production, processing, and marketing.

Among milch cattle, the population of low-yielding nondescript milch cattle showed a considerable decline, while the population of crossbred milch cattle exhibited a sharp increase, indicating farmers' preference for crossbreds for milk production. The marked shift in the sex composition of both the breeds of cattle in favor of females highlighted the declining importance of draft animals and the increased importance given to milk production. By and large, buffaloes continued to be the predominant milch animals contributing to milk production in India. The northern and western parts of the country have a predominance of buffaloes in milk production, while the eastern and southern parts are predominantly cow-milk-producing regions. In the southern region and parts of northern India, the crossbred population is on a steady rise, contributing to milk production.

With regard to management practices, owing to diminishing common property resources and pastures, the grazing of animals is on the decline and stall-feeding is on the rise. With regard to reproductive management, natural services are declining and artificial insemination is becoming popular in cattle and buffaloes. Along with rural dairy farming, urban and peri-urban dairy farming is being taken up to cater to urban milk demand through the informal market. The urban and peri-urban dairy farming involves rearing of crossbred cows and high-yielding buffaloes maintained on purchased feeds and fodders in stall-fed conditions, and following most of the modern dairy farming practices. This sub-sector has been contributing to milk production in selected areas of the country. But growing environmental concerns and health consciousness might impose checks on their extension and intensification and need to be investigated thoroughly.

In the formal sector, the industrial structure that emerged as a result of Operation Flood involved an organized sector consisting of dairy cooperatives, government milk schemes, and formal private processors. The informal sector, largely untouched, continued to be composed of small traders (dudhias, local halwais), urban milk producers, and intra-village trade directly from producers to consumers. Although dairy cooperatives comprise the single largest formal organization in terms of market share, they are engaged in active competition with the informal sector in small towns and peri-urban villages and with some private companies in urban milk centers. The share of the organized sector in total milk procurement has increased over a period of time and is further expected to rise in the new economic environment of liberalization and globalization. The repeal of industrial licensing under new economic policy provided opportunity for private entrepreneurs and multinational companies to invest in new processing capacities.

The share of organized sector in total milk procurement has increased from 3.68% in 1961 to about 10-12% in the mid-1990s (Table 1.11). These estimates are not very reliable, due to poor information for the unorganized sector and those plants below 10,000 litres per day capacity. Within the organized sector, the share of cooperatives is higher than private companies. The total milk procured by the cooperative sector has increased from 2,562 thousand kg per day in 1980-81 to 16,504 thousand kg per day in 2000-01 (Figure 1.13). The share of the western region was highest (47.85%) followed by

southern region (3.75%) and lowest in the eastern region (3.89%). Among the states, the procurement by cooperatives is highest in Gujarat (4567 thousand kg/day) followed by Maharashtra (2,979 thousand kg/day), and low in the eastern states like Bihar (330 thousand kg), Orissa (94 thousand kg), and West Bengal (204 thousand kg). The number of dairy cooperative societies has also increased significantly from 13,284 in 1980-81 to 96,206 in 2000-01 (Figure 1.14). The number of farmer members has risen from 1.7 million to 10.7 million during the same period (Figure 1.15). The Anand pattern multi-tier cooperatives have strong backward linkages with the farmers and collect milk from rural producers through village dairy cooperative societies (Figure 1.16). The majority of private processors depend on contractors (through informal or formal contracts) and traders to procure milk from farmers . The private sector has the advantage of flexibility in pricing and in business policy decisions.

National milk procurement by Operation Flood and other organized and informal sectors in India

(million tons and%)

1972 1980-81 1988-89 1994-95 1995-96 2000-01p

Milk production 23.00 31.60 53.70 64.10 66.10 81.00Organized sector 1.30

(5.55)3.10

(9.93)5.80

(10.88)6.40

(10.10)n.a.

(n.a.)n.a.

(n.a.)O-F Cooperatives 0.24

(1.03)1.01

(3.21)3.58

(6.67)3.75

(5.85)4.00

(6.05)6.02

(8.59)Non-OF organized sector 1.04

(4.52)2.12

(6.72)2.46

(4.20)2.63

(4.16)n.a.

(n.a.)n.a.

(n.a.)Share of co- operatives as % of organized sector 18.56 32.33 61.33 58.77 n.a.

(n.a.)n.a.

(n.a.)Handled by informal sector 19.65

(96.30)21.73

(94.44)28.46

(90.07)56.72

(89.88)n.a.

(n.a.)n.a.

(n.a.)

Note: p: provisional figures; Figures in parentheses indicate%ages to total milk production

Source: Candler and Kumar (1998); NDDB (2001)

TRADE IN DAIRY INDUSTRY

Dairy has long been a highly regulated industry in India and in many other countries. However, in the early 1990s, the Indian dairy industry entered a period of domestic and trade policy reforms. Two major policy events - 1991 macro-economic reforms and the 1995 Uruguay Round Agreement (URA) - represented a significant modification of previous policies by opening up markets and limiting government restrictions. Although the extent to which such efforts would be carried forward in future policies (e.g., the next rounds of WTO negotiations) of the developed countries like the EU, USA, Japan, and Canada is uncertain, these changes retain significant potential to influence world dairy trade. The political importance of the dairy sector in most countries has resulted in a plethora of government interventions in dairy production, marketing, and trade. In addition to trade and domestic policy reforms, technological developments in the dairy and food processing industries will take on a greater importance in coming years.

Despite being the largest milk producer in the world, India is a minor player in the global trade of dairy products. The country was primarily an import-dependent country until the early 1970s, and most of the demand-supply gap of liquid milk was met by importing butter/butter oil and milk powders under

food aid programs as gifts. The share of skim milk powder and butter oil imports in total milk throughput declined from about 41% during the mid-1960s to less than 1% during the early 1990s (Figure 1.19). This transition of the Indian dairy industry from a position of net importer to that of surplus was induced by strict import controls, growth in domestic production, and the efforts of Operation Flood and other dairy development programs. India started exporting surplus dairy products such as milk powders, ghee, butter, and cheese in the 1990s, however, the exports are negligible compared to both domestic production and international trade. The exports and imports of most dairy products were regulated through the Agricultural and Processed Food Products Export Development Agency (APEDA) and the National Dairy Development Board (NDDB) until the early 1990s; however, steps to liberalize dairy trade were initiated in the mid-1990s when imports of milk powder and butter oil were de-canalized and de-licensed. In the new Exim policy announced on March 31, 2002, the government removed all restrictions on the import and export of all dairy products (Economic Times, 2002).

Imports of milk powder and butter oil as percentage of milk throughput, 1965-66 to 1993-94

Share of major dairy products in India's exports of dairy products during 2000-01

Trends in imports and exports of dairy products in India: 1990-2000

Commercial imports of dairy commodities were significant until the early 1970s, comprising of about 50% to 60% of throughput, but declined significantly in the 1980s and 1990s. However, the imports of milk powders and butter/butter oil increased substantially in the late 1990s, mainly due to low import duties on these two products as a commitment under the WTO Agreement. India is among the few countries who has low bound rates of duty for major dairy products like milk powders, butter, butter oil,

and cheese (15-40%) as opposed to relatively high tariffs (100-150%) on less sensitive products like milk, cream, butter milk, and yoghurt (Figure 1.22). The small flow of cheap imports in the second half of the 1990s, mainly due to low import tariffs on the milk powders and other major dairy products, may have hurt some segments of the domestic industry, but was negligible in scale compared to the overall domestic market. Although imports of cheese are still low, they grew at a rapid rate during the 1990s.

INVESTMENT IN DAIRY INDUSTRY:

The dairy industry plays an important role in the socio-economic development of India. The dairy industry in India is instrumental in providing cheap nutritional food to the vast population of India and also generates huge employment opportunities for people in rural places.

 The Department of Animal Husbandry, Dairying, and Fisheries, which falls under the central Ministry of Agriculture, is responsible for all the matters relating to dairy development in the country. This department provides advice to the state governments and Union Territories in formulating programmes and policies for dairy development. It also looks after all the matters relating to production and preservation of livestock farms (cattle and sheep). To keep focus on the dairy industry a premier institution known as the National Dairy Development Board was established. This institution is a statutory body that was established in 1987. The main aim to set up the board was to accelerate the pace of dairy development in the country and attract new investments. India is a wonderland for investors looking for investment opportunities in the dairy industry. The dairy industry of India holds great potential for investment and promises high returns to the investors. What does the Indian Dairy Industry has to Offer to Foreign Investors?

India is a land of opportunity for investors looking for new and expanding markets. Dairy food processing holds immense potential for high returns. Growth prospects in the dairy food sector are termed healthy, according to various studies on the subject.

The basic infrastructural elements for a successful enterprise are in place.

Key elements of free market system raw material (milk) availability an established infrastructure of technology supporting manpower

An entrepreneur's participation is likely to provide attractive returns on the investment in a fast growing market such as India, along with an export potential in the Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other countries in the region.

Among several areas of potential participation by NRIs and foreign investors, the following list outlines a few promising opportunities:

Biotechnology:

1. Dairy cattle breeding of the finest buffaloes and hybrid cows

2. Milk yield increase with recombinant somatotropin3. Recombinant chymosin, acceptable to vegetarian consumers4. Dairy cultures, probiotics, dairy biologics, enzymes and coloring materials for food processing5. Fermentation derived foods and industrial products alcohol, citric acid, lysine, flavor

preparations, etc.6. Biopreservative ingredients based on dairy fermentation, viz., Nisin, pediococcin, acidophilin,

bulgarican contained in dairy powders.

Dairy/food processing equipment:Potential exists for manufacturing and marketing of cost competitive food processing machinery of world-class quality.

Food packaging equipment:Opportunities lie in the manufacturing of both machinery and packaging materials that help develop brand loyalty and a clear edge in the marketing of dairy foods.

Distribution channels:For refrigerated and frozen food distribution, a world class cold chain would help in providing quality assurance to the consumers around the region.

Retailing:There is scope for standardizing and upgrading food retailing in major metropolitan cities to meet the shopping needs of a vast middle class. This area includes grocery stores of European and North American quality, warehousing and distribution.

o What Indian Dairy Industry      

Has To Offer       To Foreign Investors?      

Biotechnology Dairy food processing

equipment Food packaging equipment Distribution channels Retailing Product development Ingredient manufacture Technology-driven units Training centres for education

 

Potential for investment in the dairy industry

Some areas of Indian dairy industry can be toned up by the evocation of differentiated technologies and equipment from overseas. These include:

1. Raw milk handling: The raw milk handling needs to be elevated in terms of physicochemical and microbiological properties of the milk in a combined manner. The use of clarification and bactofugation in raw milk processing can aid better the quality of the milk products.

2. Milk processing: Better operational ratios are required to amend the yields and abridge wastage, lessen fat/protein losses during processing, control production costs, save energy and broaden shelf life. The adoption of GMP (Good Manufacturing Practices) and HACCP (Hazard Analysis Critical Control Points) would help produce milk products adapting to the international standards.

3. Packaging: Another area that can be improved is the range of packing machines for the manufacture of butter, cheese and alike. Better packaging can assist in retaining the nutritive

value of products packed and thus broaden the shelf life. A cold chain distribution system is required for proper storage and transfer of dairy products.

4. Value-added products: There's vast scope for value-added products like desserts, puddings, custards, sauces, mousse, stirred yoghurt, nectars and sherbets to capture the dairy market in India.

The Indian dairy industry has aimed at better mananamegemt of the national resources to enhance milk production and upgrade milk processing involving new innovative technologies. Multinational dairy giants can also make their foray in the Indian dairy market in this challenging scenario and create a win-win situation for both. 

SWOT ANALYSIS OF INDIAN DAIRY INDUSTRY

Strengths:

Demand profile: Absolutely optimistic. Margins: Quite reasonable, even on packed liquid milk.

Flexibility of product mix: Tremendous. With balancing equipment, you can keep on adding to your product line.

Availability of raw material: Abundant. Presently, more than 80 per cent of milk produced is flowing into the unorganized sector, which requires proper channelization.

Technical manpower: Professionally-trained, technical human resource pool, built over last 30 years.

Weaknesses:

Perishability: Pasteurization has overcome this weakness partially. UHT gives milk long life. Surely, many new processes will follow to improve milk quality and extend its shelf life.

Lack of control over yield: Theoretically, there is little control over milk yield. However, increased awareness of developments like embryo transplant, artificial insemination and properly managed animal husbandry practices, coupled with higher income to rural milk producers should automatically lead to improvement in milk yields.

Logistics of procurement: Woes of bad roads and inadequate transportation facility make milk procurement problematic. But with the overall economic improvement in India, these problems would also get solved.

Problematic distribution: Yes, all is not well with distribution. But then if ice creams can be sold virtually at every nook and corner, why can’t we sell other dairy products too? Moreover, it is only a matter of time before we see the emergence of a cold chain linking the producer to the refrigerator at the consumer’s home!

Competition: With so many newcomers entering this industry, competition is becoming tougher day by day. But then competition has to be faced as a ground reality. The market is large enough for many to carve out their niche.

Opportunities:

"Failure is never final, and success never ending”. Dr Kurien bears out this statement perfectly. He entered the industry when there were only threats. He met failure head-on, and now he clearly is an example of ‘never ending success’! If dairy entrepreneurs are looking for opportunities in India, the following areas must be tapped:

Value addition: There is a phenomenal scope for innovations in product development, packaging and presentation. Given below are potential areas of value addition:

Steps should be taken to introduce value-added products like shrikhand, ice creams, paneer, khoa, flavored milk, dairy sweets, etc. This will lead to a greaterpresence and flexibility in the market place along with opportunities in the field of brand building.

Addition of cultured products like yoghurt and cheese lend further strength - both in terms of utilization of resources and presence in the market place.

A lateral view opens up opportunities in milk proteins through casein, caseinates and other dietary proteins, further opening up export opportunities.

Yet another aspect can be the addition of infant foods, geriatric foods and nutritionals.

Export potential: Efforts to exploit export potential are already on. Amul is exporting to Bangladesh, Sri Lanka, Nigeria, and the Middle East. Following the new GATT treaty, opportunities will increase tremendously for the export of agri-products in general and dairy products in particular.

Threats:

Milk vendors, the un-organized sector: Today milk vendors are occupying the pride of place in the industry. Organized dissemination of information about the harm that they are doing to producers and consumers should see a steady decline in their importance.

Conclusion of SWOT analysis

The study of this SWOT analysis shows that the ‘strengths’ and ‘opportunities’ far outweigh ‘weaknesses’ and ‘threats’. Strengths and opportunities are fundamental and weaknesses and threats are transitory. Any investment idea can do well only when you have three essential ingredients: entrepreneurship (the ability to take risks), innovative approach (in product lines and marketing) and values (of quality/ethics).

The Indian dairy industry, following its delicensing, has been attracting a large number of entrepreneurs. Their success in dairying depends on factors such as an efficient yet economical procurement network, hygienic and cost-effective processing facilities and innovativeness in the market place. All that needs to be done is: to innovate, convertproducts into commercially exploitable ideas.

MARKETING STRATEGIES OF DAIRY INDUSTRYINTRODUCTION:

Marketing may be defined as "the performance of all business activities involved in the flow of goods and services from the producer to the consumer".

This implies that there are several categories of key players in the marketing chain each with its own vested interests. Consumers want to get what they need at the lowest price possible. producers on the other hand are interested in getting the highest possible return for their milk. Between them, there are market intermediaries or middlemen who perform various marketing functions such as transportation or retailing. Their interest is to make the highest profit possible from their particular business operation.

The milk marketing channel

A study of the milk marketing system in Kenya has shown that there are at least 8 different marketing channels as shown below:

Milk Marketing Channels Number of intermediaries

Producer-consumer 0

Producer-milk hawker-consumer 1

Producer-processor-consumer 1

Producer-processor- retailer-consumer 2

Producer-dairy co-operative -processor- retailer consumer 3

Producer-milk transporter-processor - retailer-consumer 3

Producer-milk trader-processor-retailer-consumer 3

Producer-dairy coop - milk transporter-processor-retailer-consumer 4

The number of intermediaries involved will have a bearing on both producer and consumer milk prices. The shorter the channel the more likely that the consumer prices will be low and the producer will get a higher return

Marketing Channels for Milk and the Role of the Informal Sector

Like nearly all developing countries, India has co-existing "organized" and "unorganized" sectors for the marketing of milk and dairy products. Sometimes called the "informal" sector, the unorganized sector may be more usefully thought of as the traditional milk market sector, comprised of the marketing of raw milk and traditional products such as locally manufactured ghee, fresh cheese, and sweets. The organized or formal sector is relatively new in historical terms, and consists of Western-style dairy processing based on pasteurization, though adapted to the Indian market in terms of products. In some cases the traditional sector is quite well organized, with a complex net of market agents, and shows variation in numbers of and roles of market intermediaries. It may also be relatively formal, in that market agents may pay municipal fees and have vendor licenses, albeit not specifically registered for the dairy trade. The reasons underlying the existence of a large informal or traditional sector are the same as found in other countries: consumers are unwilling to pay the additional costs of pasteurization and packaging, which can raise retail prices by over 100%, and consumers often regard raw milk and traditional products obtained from reliable vendors as of better quality than formally processed dairy products. It should be noted that, unlike some countries, the Indian government has generally adopted a laissez-faire approach to the informal sector, which has allowed it to expand with the growth in demand, and serve both small farmers and resource-poor consumers. It is useful to get an overview of the broad aggregate of this sector and understand the type of "informal sector" which competes with the organized sector (cooperatives and modern-style private factories) in the field of processing, procurement, and marketing of milk and other dairy products. Of the estimated milk production during 1999-2000 of about 78 million tons of milk, the organized sector, primarily through the dairy cooperatives and organized private dairies, handled 10-12% of the total milk production, or 15% of the marketed surplus, and the rest finds its way into India's large, complex, highly differentiated traditional private trade in milk and dairy products (see Figure 1.6). The share of the organized sector in total procurement has increased from about 3.7% in the early 1960s to about 12% in the mid-1990s. There are large regional variations in the types of operators and their operating procedures. Cooperative milk marketing has a relatively strong hold in the states of Gujarat, Rajasthan, Maharashtra, Tamil Nadu, and Karnataka, yet is subservient to unorganized sector. Dairy cooperatives have a particularly low profile in the eastern and northern parts of the country. By and large, the informal sector comprising private milk vendors, traditional dudhias/halwais, and others continues to have the lion's share of the procurement and marketing of milk in India. This situation is unlikely to undergo a major shift, given consumer preferences. The informal sector is a large

employment provider and has traditionally offered a wide range of services to households and institutional consumers. In metro cities - Delhi, Mumbai, Chennai, and Kolkatta- the introduction of bulk vending machines has given a strong advantage to cooperatives. With more focus on global trade and quality standards, the organized sector (cooperatives and the private sector, including multinationals) can be expected to play a greater role than at present. At some point in the future, it might handle about 25-30% of the total milk produced in the country, yet leaving the major share of milk procurement and marketing to the informal sector. This will require an increased willingness by consumers to pay for the additional processing. Hence, the informal sector has a major potential role to play in milk procurement and marketing in India. In recent years, added emphasis has been given to clean milk production and ensuring quality standards as per international norms, which calls for greater responsibility, particularly on the part of informal sector, in meeting the set quality standards.

Figure Relative shares of main milk marketing channels in formal and informal markets in India

As % of marketed surplus of milk:

Formal: 15%; Informal/traditional: 85%

Source: Dairy India (1997)

Marketing and Pricing of Milk and Milk Products

The price of a product in the market is an important factor influencing consumer demand. Hence to be marketable, a dairy product must be competitively priced. This implies that the costs involved in raw material procurement, processing, packaging, storage, marketing and distribution must be kept as low as possible. generally the price of a dairy product will involve the following costs:

a. Cost of raw milk

b. Cost of raw milk collection and transportation

c. Cost of processing

d. Cost of packaging

e. Cost of marketing and distribution

f. Taxes and tariffs

g. Profit margins at each stage of the marketing channel (Collection, Processing and marketing margins)

In order to arrive at a realistic costing of a product, all those elements involved at each stage must be carefully calculated on a unit basis. This is known as Cost Accounting. The table below shows some of the essential cost elements:

Market function Cost element

1. Raw milk procurement Cost of raw milk; labour; materials etc.; collection margin

2. Transportation Transport cost; labour; materials and equipment; transport margin

3. Processing Raw materials; machinery and equipment; labour; packaging; energy; taxes; marketing and distribution; processing margin

4. Marketing and distribution Transport; labour; materials; rent; retail margin

The cost can be broadly categorised as fixed costs and variable costs. Fixed costs include things like depreciation of equipment and buildings while variable cost include direct expenses such as raw material; marketing expenses; overhead costs

Marketing Information System and Research

Information is required at all levels in the marketing channel. Before you decided to process and market any dairy product, it is important to know the potential market for each particular product. This is important to enable the processor to know which types and when, where and how much of each product to manufacture and market. It is very crucial because unless goods can be supplied in the right form, place and times, consumers may not be able to buy. This then requires securing and utilising market information.

Marketing information should address the following:

Area to be covered Price information (Price variations, price for premium quality discount price etc.) Number and type of consumers (market segmentation) Current and future product supply levels

Type and number of competitors

In the absence of comprehensive marketing information system such as is the case in many developing countries it may be necessary for each individual processor or through their organisation to organise the gathering and dissemination of such information. Short market survey and/or Consumer studies are useful tool for gathering such information.

Feasibility Study for Milk Marketing and Processing

Before one decides to invest in the business of milk marketing and/or processing one should carry out a feasibility study to establish the economic viability of the planned business. this should include a realistic business plan.

The essential elements of a feasibility study should include:

Establish the amount of milk produced, both in the morning and evening, at the proposed site, throughout the year

Identify the current market outlets available for milk products in the area Determine the average fresh milk and various milk products prices being charged by local

producers. Test various product samples for taste to determine acceptable products being produced in

the proposed area Locate sources of energy (fuel-wood, charcoal, electricity, etc. and water) Determine the capital investment required (be sure to include land, building, equipment and

power). Draw up a clear business plan that will establish the viability of the proposed milk marketing

or processing enterprise.

REGULATORY BODIES

Regulatory Environment in the Dairy Processing Sector in IndiaThe Indian processed dairy industry has grown and diversified enormously in the last few years. To ensure the proper development and growth of this industrial sector, the Government of India has instituted various laws and Regulations. The various regulations that govern the dairy processing industry can broadly be classified into:

Compulsory Legislation

Prevention of Food Adulteration Act, 1954

This Act is the basic statute that is intended to protect thecommon consumer against the supply of adulterated food. This specifies different standards for various food articles. The standards are in terms of minimum quality levels intended for ensuring safety in the consumption of these food items and for safeguarding against harmful impurities and adulteration. The Central Committee for Food Standards, under the Directorate General of Health Services, Ministry of Health and Family Welfare, is responsible for the operation of this Act. The provisions of the Act are mandatory and contravention of the rules can lead to both fines and imprisonment.

Milk and Milk Product Order (MMPO) 1992

The Milk and Milk Product Order (MMPO), 1992, issued on June 9, 1992 seeks to ensure the supply of liquid milk, an essential commodity, to consumers by regulating its processing and distribution.

Within eight years of its operation, the Central/State Registering Authorities have till December 2000 registered 666 units with a total processing capacity of 65.8 million litres per day (mlpd).

Salient Features of the MMPO Order include the following:

– Registrations for units handling up to 75,000 litres of milk per day are granted by the State Governments and units with more than 75,000 litres per day capacity are registered by the Central Registering Authority.

– The Certificate also specifies the milkshed area, which, under the order is defined as a geographical area demarcated by the Registering Authority for the collection of milk by the registered unit.

– Maintenance of specified hygienic conditions in the premises where milk and milk products are handled, processed, manufactured or stored.2 0 Technology Export Potential of Milk and Dairy Sector

The collection, transportation and processing of milk normally centres around the operations of a processing plant.The region from which the marketable surplus of milk production finds its way to a processing plant is called a ‘milkshed’. The concept of milkshed areas is pivotal to the MMPO. For an orderly development of the dairy industry, a proper assignment/allocation of milkshed is critical.

Standards on Weights and Measures (Packaged Commodities) Rules, 1977

These Rules lay down certain obligatory conditions for all commodities that are packed form, with respect to declarations on quantities contained. These Rules are operated by the Directorate of Weights and Measures, under the Ministry of Food and Civil Supplies.

a) Voluntary Standards

There are two organizations that deal with voluntary standardization and certification systems in the food sector. The Bureau of Indian Standards looks after standardization of processed foods and standardization of raw agricultural produce is under the purview of the Directorate of Marketing and Inspection.

b) Bureau of Indian Standards (BIS)

The activities of BIS are two fold, the formulation of Indian standards in the processed foods sector and the implementation of standards through promotion and through voluntary and third party certification systems. BIS has on record, standards for most of processed foods. In general, these standards cover raw materials permitted and their quality parameters, hygienic conditions under which products are manufactured and packaging and labelling requirements. Manufacturers complying with standards laid down by the BIS can obtain and “ISI” mark that can be exhibited on product packages. BIS has identified certain items like food colours/additives, vanaspati, containers for packing, milk powder and condensed milk, for compulsory certification.

c) Directorate of Marketing and Inspection (DMI)

The DMI enforces the Agricultural Products (Grading and Marketing) Act, 1937. Under this Act, Grade Standards are prescribed for agricultural and allied commodities. These are known as “Agmark” Standards. Grading under the provisions of this Act is voluntary. Manufacturers who comply with standard the laid down by DMI are allowed to use “Agmark” Labels on their products.

Other Government Regulations :

1) Industrial Licence:

No licence is required for setting up a Dairy Project in India. Only a Memorandum has to be submitted to the Secretariat for Industrial Approvals (SIA) and an acknowledgment is to be obtained. However Certificate of Registration is required under the Milk and Milk Products Control Order (MMPO) 1992.

2) Foreign Investment:

Foreign Investment in dairying requires prior approval from the Secretariat of Industrial Approvals, Ministry of Industry, as dairying has not been included in the list of High Priority Industries. Automatic approval will be given upto 51% Foreign Investment in High Priority Industries. In case of other Industries, proposals will be cleared on case to case basis. Government may allow 51% without enforcing the old limit of 40% applicable under Foreign Exchange Regulations Act at its discretion.

RESEARCH AND DEVELOPMENT

The advancements that Dairy Industry has developed till now.

Embryo Transfer (ET) technology allows the multiplication of elite livestock breeds at a much faster rate than any other option available

In the past 30 years, the annual production of compounded feed has gone up to 3 million tonnes from 40,000 tonnes

New types of feeds have been developed, to improve the nutritive value of the traditional cattle diet.

Indigenous remedies, based on herbal and ayurvedic formulations, are also being used extensively for disease control and as feed supplements/additives and as yield boosters.

From an insignificant 200,000 liters per day (lpd) milk processing in 1951, the organized sector is presently handling some 20 million lpd in over 400 dairy plants.

The Government of India, realizing the importance of animal genetic resources, has established the National Bureau of Animal Genetic Resources (NBAGR) at Karnal, Haryana, in 1984.

Outlook for Technological Development and Spin-offs of Other Developments on the Indian Dairy Industry

In light of the fast-changing global trade regime, the outlook for technological development in dairy sector appears to be bright. In order to tap the global dairy market to India's advantage, better scientific management of dairy animals in terms of breeding, feeding, and health care must take place. More concentrated milk production and milk sheds may develop, and efforts for clean milk production and good health care of animals may occupy special significance.

General developments in terms of quality of life, greater literacy, higher per capita income, and more industrialization and employment opportunities will have positive spin-off effects on dairy development. Until now, dairying has been concentrated in rural areas as a supplementary or complementary enterprise, and commercial orientation is missing. With technological development and the evolution of high-yielding crossbred cattle, the outlook is changing. Populations of high-yielding crossbred cows and buffaloes will primarily concentrate in peri-urban and progressive rural areas. Biotechnological applications for enhancing the productivity of milch animals will receive greater importance. Crossbred cow farms in Bikaner and Jodhpur in Rajasthan are being replicated at many other places. The quality of milk produced by these dairy farms is being utilized in the production of various indigenous milk products likeRasogulla, Gulab Jamun, Raj Bhog, Chum-Chum etc. These products, produced in a large number of milk product factories located in the area, are being exported to various parts of India and even to countries like Nepal and Bangladesh.

The Indian dairy industry will focus on value creation through an integrated approach to the market and the development of a range of products and production methods. This will involve a focus on market trends, competitiveness, technological clustering, spin-off industries, convergence of technologies and markets, and sustainability issues. The strategic objectives will be to provide range of products, suited to the increasing and changing structure of demand, which enhance health and well-being. New product innovations will be required that respond to changes in food habits, lifestyle, and design; as will sustainable dairy production systems (socially, economically, and environmentally); food safety and quality; market access; animal health and welfare issues; and a focus on vertical integration of the value chain

ENVIRONMENT AND DAIRY INDUSTRY

Issues, Constraints and Policy Strategies for Environmentally Sustainable Growth in the Indian Dairy Sector

There is a range of ways in which the dairy sector contributes to changes in the global environment, such as contributions to greenhouse gas emissions (e.g., methane and nitrous oxide), effects on biodiversity, etc. Massive demand of the growing urban populations for milk and dairy products often causes environmental degradation when mixed farming systems decline and traditional farming is disrupted. The population explosion combined with poverty leads to poor management of livestock, which damages natural resources further. Overgrazing and deforestation due to ranching have degraded extensive land areas and adversely influenced biodiversity in many parts of the world. High animal concentrations in and around urban centers pollute the land and water through wastes from animal rearing and processing-related activities. Rising human needs for milk and other livestock products have placed the environment in conflict with livestock.

In the traditional smallholder dairy production system, a diverse and wide variety of feed resources such as crop residues, agro-industrial wastes and by-products, and pasturelands are used. The scope for increasing the conventional feed resources is limited, and grazing lands are being converted into croplands to grow food crops. The indigenous breeds of dairy animals, developed to cope with difficult environments and climatic stress, cannot match the demands for higher production. Therefore, the policy of the government has been to introduce exotic breeds to achieve higher productivity in a short time. More external market-purchased inputs are needed to obtain higher returns from high-yielding

animals, and milk production is becoming increasingly crop-based. Increased attention to the livestock-environment interaction is thus of critical significance for sustaining the resource base.

Pollution from livestock systems can affect water supplies, the atmosphere, and the food chain directly, by the transmission of toxins and diseases through animal products. It is not surprising that developed countries are experiencing serious problems of livestock pollution, while in developing countries, pollution is less of a problem because of the small units, low stocking rates, and subsistence nature of production systems. In developed countries, nutrients are generally in oversupply; but in most areas of developing countries there exist chronic nutrient and energy shortages. The resulting strong demand for fuel and manure turns the wastes into valuable assets like dung cake and manure. However, pollution of the food chain is a major issue and nutrients, feed additives, hormones, and veterinary drugs used in excessive quantities can contaminate the food chain. Even when wastes are collected and utilized, significant leaching into air, water, and the ground occurs. Pollution of the environment from ammonia volatilization from intensive dairy production systems can add to nitrate pollution of water supplies and may contribute to the problem of acid rain. Methane release from ruminants is also a potential factor in global warming. Dust within livestock buildings and feed preparation areas can cause respiratory problems for livestock and humans, and it can also be the carrier of disease organisms and toxic substances. Gaseous emissions and odors are of concern to the neighbouring populace.

Pollution problems mainly arise through the increased intensity of production, and the reversal of this trend could combat this. However, this may be unrealistic in the face of increasing demand for livestock products. Recycling of animal wastes and wastes in the processing sector through technical innovations could markedly help pollution control. One method of controlling pollution from livestock systems is through legislation. The principle of "polluter pays" is now widely accepted, with a mechanism for imposition of financial penalties for any breach of law. The laws must set detailed standards for permitted pollution levels of a wide range of substances, and must include specifications for buildings and equipment with respect to waste disposal and contaminants. However, more important is the implementation of these rules and regulations, which is missing.

Impact of Rural and Peri-Urban Dairy Production Systems on Human Health and the Environment

The rapidly increasing demand for dairy products in urban areas has given rise to haphazard growth of production centers in peri-urban areas that are essentially detached from their supporting land base. This has led to animal concentrations that are out of proportion with the feed supply capacity of the local land and waste disposal facilities. Foul odors usually emanate from animal wastes, if not treated or disposed of properly, leading to air pollution. Animal wastes also contaminate soil and groundwater.

Traditionally, milk production activities in India have been closely integrated with crop production. However, environmental problems escalate with the scale and intensity of operations, ranging from the least worrisome in traditional systems to highly threatening in large-scale farms. Pollution problems in rural areas are internalized, as the small amount of waste produced is utilized in the form of fuel and/or organic manure to improve the soil fertility for crop and fodder cultivation. In industrial production systems, a huge quantity of waste is generated that is generally not treated before disposal. It would not only require careful planning but also large capital investment to create the necessary infrastructure for waste treatment and economic disposal.

Establishment of commercial dairy farms adjoining urban areas may create several social problems. The growth stimulus coming from strong demand for livestock products is not transmitted to the rural areas, where it could encourage broader development and more equitable wealth distribution. Small producers find it difficult to compete with large commercial units. Milk production in rural areas generates supplementary income and employment opportunities, which are adversely affected by the growth of peri-urban dairy farms. Notwithstanding constraints and threats posed by the growth of peri-urban dairy production centers, there are many qualitative and quantitative benefits of this structural change in that huge dietary improvements are observed from the regular and cheap supply of high quality milk and dairy products to urban people. In addition, benefits include the generation of employment and the provision of a profitable business to people engaged in the profession.

The threats, weaknesses, strengths, and opportunities associated with peri-urban dairy farms calls for a comprehensive analysis and subsequent actions to be taken by planners and policy-makers. Recently, the Government of India decided to relocate dairy farms from the urban centers (Delhi) to rural areas to alleviate the problem of environmental pollution and waste disposal. However, weak infrastructure and processing facilities, poor hygienic conditions, and lack of regulatory mechanisms in rural areas are limiting factors for the orderly growth of dairy industry

QUALITY CONTROL

Milk testing and quality control is an essential component of any milk processing industry whether small, medium or large scale. Milk being made up of 87% water is prone to adulteration by unscrupulous middlemen and unfaithful farm workers. Moreover, its high nutritive value makes it an ideal medium for the rapid multiplication of bacteria, particularly under unhygienic production and storage at ambient temperatures. We know that, in order for any processor to make good dairy products, good quality raw materials are essential. A milk processor or handler will only be assured of the quality of raw milk if certain basic quality tests are carried out at various stages of transportation of milk from the producer to the processor and finally to the consumer.

WHAT IS MILK QUALITY CONTROL?

Milk quality control is the use of approved tests to ensure the application of approved practices, standards and regulations concerning the milk and milk products. The tests are designed to ensure that milk products meet accepted standards for CHEMICAL COMPOSITION AND PURITY AS WELL AS LEVELS OF DIFFERENT MICRO-ORGANISMS.

WHY HAVE MILK QUALITY CONTROL?

Testing milk and milk products for quality and monitoring that MILK PRODUCTS, PROCESSORS and MARKETING AGENCIES adhere to accepted codes of practices costs money.

The reasons are:

i)To the Milk Producer.

The milk producer expects a fair price in accordance with the quality of milk she/he produces.

ii) The Milk Processor.

The milk processor who pays the producer must assure himself/herself that the milk received for processing is of normal composition and is suitable for processing into various dairy products.

iii) The Consumer.

The consumer expects to pay a fair price for milk and milk products of acceptable to excellent quality.

iv) The Public and Government Agencies.

These have to ensure that the health and nutritional status of the people is protected from consumption of contaminated and sub-standard foodstuffs and that prices paid are fair to the milk producers, the milk processor and the final consumer.

All the above-is only possible through institution of a workable quality testing and assurance system conforms to national or internationally acceptable standards.

FUTURE SCENARIO

2016: Possible production scenarios for the U.S. dairy industry

Jim Austin, Business Strategist & Dairy Industry Consultant, forProgressive Dairyman

Every industry faces periods of growth and contraction. Less frequent are those instances of fundamental change: airline deregulation, hospital DRGs, Japanese automobile manufacturing in the U.S. and more recently the decline in urban home values. Oftentimes, as with U.S. manufacturing of Japanese cars , the beginnings of these tectonic shifts may be hard to discern. Other times, such as the 1973/74 oil embargo, the impacts are sharp, highly visible and wrenching.

The U.S. dairy industry is facing significant challenges. In the past, when production increased and consumer demand did not at least keep pace with such growth, whole-sale prices fell, often sharply. Today herd populations, milk per cow and milk prices are all increasing faster than per capita milk consumption – which, given past relationships, would appear to be unsustainable. Counterbalancing these historic trends are increasing milk-derived exports, greater by-product (such as cheese, yogurt and whey) production and rapidly increasing input costs.

So the question remains: Are we entering a new period of market dynamics for dairy, or simply experiencing a short reprieve before the fundamentals “kick back in”? While not definitive, at a recent industry meeting of major producers, nearly 40 percent indicated they expected a “dairy depression” within the next five years.

The typical way to deal with such uncertainty is to focus on what one knows: current operations and “looking to the past” for indications of the future. Thus the increasing sophistication – especially in managing operations – typical of most dairy operations today. The problem comes when the changes experienced are totally new, unexpected or arising with such rapidity and force that the past is of little guide to the future. In such instances, new tools and frameworks are required.

Scenario planning is aptly suited for such analyses as it does not start from today and project forward. Rather, scenario planning seeks to develop several reasonable but sufficiently varied “stories” of the future, thereby “bracketing” the range of possible eventualities. From these futures, we ask, “What will it take to succeed across scenarios?” Because even in the worst situation someone wins. What are the likely changes or building blocks we must invest in today to prosper tomorrow? In this way we negate “narrow frames” – assuming that by changing only a few variables one can encompass rapidly changing futures – as well as the tendency to project past trends forward as somehow indicative of all the complexities that truly dynamic systems can create.

Four scenarios of the U.S. dairy industry in 2016This project began in 2006 with a series of workshops attended by more than 100 dairy producers (large and small), manufacturers, veterinarians and various government and educational stakeholders. The workshops developed a draft set of future scenarios that were then refined in subsequent industry conferences and meetings. We adopted 2016 as being far enough from the present to enable significant changes, but not so distant as to be tangential to current dairy operations.

As a first step, we gathered a long list of potential future “forces” or “value drivers” that had been or were likely to be critical in supporting the growth and profitability of this market. We then split these forces into trends versus uncertainties, as shown below. Assumptions about how various uncertainties play out is what differentiates the scenarios.

Scenario A: Dairy DepressionTo create the actual scenarios, we crossed two summary uncertainties – impact of technology and consumer attitude/perception – to create the 2 X 2 matrix shown in Figure 1. Each axis represents an uncertainty range. After ascertaining the plausibility of each combination (i.e., matrix cells), we explored what the future might look like in each cell when considering the remaining uncertainties, all against the common backdrop of the main trends identified earlier. The range of individual uncertainties, as well as the varied interplay across these uncertainties, is what drives the distinctions between scenarios. While 2016 will not look exactly like one of these four scenarios, the wide range depicted here will likely capture the potential dairy industry environments that could plausibly face industry players then. Against these scenarios, readers should test their own views and business assumptions for future success.

Scenario A: Dairy DepressionDairy products have become passé. Lack of innovation and poor consumer demand pushed the U.S. dairy industry to the brink of financial disaster. Demand is down as other beverages such as calcium-fortified drinks are stealing market share. Within a commodity market, low-cost global competitors are competing aggressively in the U.S. Given a depressed economy and low milk prices, the dairy industry does not have the capital to reinvest in facilities and technology. This has dampened innovation further, deepening a long-term cycle of decline.

Highlights• Negative consumer attitudes about dairy products

• Lack of innovation

• Little investment in the industry

• Depressed dairy economy makes it hard to attract skilled labor

• More restrictive regulation for local producers

• More open to international markets and foreign competition.

Drivers: How we got here

Rising public distrustThere is broad public distrust of the safety of all technologies, as well as specific concerns about the wholesomeness of milk. This has led to declining demand for dairy products.

Restrictive regulationsLocal and state requirements, designed to protect residential neighborhoods from the environmental effects of large farms, have slowed the creation of large-scale dairy operations, similar to the regulation of swine farms in Florida. At the same time, price controls and supports are relaxed.

Agri-terrorismA major agri-terrorism act in the poultry industry has affected the entire agricultural sector. The incident, the poisoning of chickens in a large Pennsylvania farm, resulted in a sharp drop in sales of all large-scale agricultural products. Led by the Department of Homeland Security, the incident also led to tighter restrictions, including employee background checks, reducing the supply of labor and increasing operating costs.

Scenario B: All bagged up and nowhere to goThis is the age of techno-cows and mega dairies. Consolidation leads to a dramatically smaller industry of large producers. New technologies support unprecedented efficiency and productivity.

Highlights• More industry consolidation leads to large-scale, efficient production systems, using new technology

• Cows are producing more and living longer

• Increased R&D leads to increased markets for milk products

• More intrusive federal regulation tied to Homeland Security

• Shortage of skilled labor

• Consumers are skeptical about technology and production.

Drivers: How we got here

Technological breakthroughsInvestments in fighting bioterror and preparing for global pandemics have led to major breakthroughs in animal science. Advances in genetic engineering and automation have led to significant improvements in milk production.

The rise of mega dairiesWhile technological advances have increased efficiency, they have also raised the cost and complexity of participating in the industry. Immigration restrictions have limited access to cheap unskilled labor, putting small farms at a further disadvantage. This has led to rapid industry consolidation and the emergence of mega dairies. The efficiency of large producers and new technologies have driven down milk prices to decade lows: $12.05 per hundredweight.

Public backlashIncreased public attention with farm consolidation and mega dairy farming practices has naturally led to the identification of new problems, including questions about the long-term health effects of dairy

products. PETA gains its first seat in Congress. The industry has become much more susceptible to fads and targeted (online) protests.

Scenario C: American GothicAmerica is in love with the farm and dairy products. Technology has only made moderate advances, and dairy products still have a very basic and wholesome image. Continued studies about the health benefits of dairy have led to increasing demand which sustains higher milk prices. However, consumers are very concerned about the application of technology to farming; organics are the fastest growing segment. Higher input costs, more stringent environmental regulations and renewed calls for “small is beautiful” have reduced industry profit margins, especially among large-scale producers. Farming may be returning to its traditional, family roots.

Highlights• Consumer desire for simpler, more traditional farming leads to decreased investment in technology

• Consumer demand for dairy products remains strong with confirmation of health benefits

• Consolidation increases as some states aim to offset declining margins

• Increased demand and low stocks lead to lower import barriers.

Drivers: How we got here

Declining technology investmentsWith several recent new television shows on the glories of small farms, as well as the rising environmental concerns spearheaded by former Vice President Al Gore’s book on global warming, An Inconvenient Truth, the public wants – and is willing to pay for – organic, smaller-lot, specialty products. Stock market shares in Whole Foods are booming.

Dairy consumption increasesWhile consumers are wary of technology, they are positive about dairy. A series of studies in The New England Journal of Medicine and Lancet have touted the benefits of dairy in preventing not only osteoporosis, but also heart disease and even some forms of cancer. Product and marketing innovations, from packaging to new products, has also helped increase demand. This public interest and government regulations sustain higher prices: milk rises to $26.00 per hundredweight.

Increased global competitionUnder pressure from the WTO, global trade restrictions are relaxing, making it easier for international competitors to enter the United States. While technologies for improving production may lag, advances in transportation and processing make it easier for distant markets to compete. Supportive domestic regulations, particularly those related to pricing, have helped to keep the increased competition from eroding pricing and this has allowed U.S. firms to compete at home even as they concede overseas markets.

Scenario D: Field of dreamsIt is a bold new world in the dairy industry. Consumer acceptance and rapid scientific advances have led to fundamental breakthroughs in genetic engineering and other areas. Genetic selection helps reduce health problems and improve production. The industry has become high-tech, with tremendous improvements in both quality and efficiency. The majority of farm by-products are used for energy generation (on the farm and supporting local power grids). Consumers are expanding milk consumption, driven by the proliferation of new products, leading to higher prices. Aging boomers look to dairy for its health benefits; youth have (re) discovered dairy milk as “cool.” In this “field of dreams,” if you build it, they will come.

Highlights• Consumption is up across all age groups

• Animal health and welfare issues have diminished

• Quality, accountability and health benefits are positively perceived

• Environmental safety – manure becomes a valuable commodity with the rise of affordable, efficient renewable energy systems

• Production costs decrease by improved technology (feed, health management).

Drivers: How we got here

“Got Milk” Consumers have an insatiable appetite for dairy products. The combination of aging baby boomers’ concern for calcium intake and youthful attraction to new milk drinks and dairy products has revitalized the category. Like the growth of bottled water or coffee drinks, what were once seen as commodity products have become a growth segment. There are also specialized products and nutraceuticals. A hot category is “super-kid” milk, designed to stimulate physical and mental development, which was adopted as the standard for U.S. school lunch programs. Public awareness campaigns for milk have been discontinued as unnecessary: everyone has “got milk.”

Healthy economyThe overall U.S. economy is booming, creating a positive environment for new product investments, new business growth and consumer spending. While interest rates have continued to creep up and oil prices remain high, the overall economy remains strong. Energy costs remain a critical concern but new technologies to harness energy from manure and other waste products creates new revenue streams for dairy farms while addressing environmental concerns. Milk prices have reached record highs of $26 per hundredweight.

Increased funding for researchGiven the strong demand for dairy products and public support for technology, public and private funds are readily available for dairy-related research. The industry is now seen as a critical driver of growth that should be protected and supported by the government and a significant source of opportunity for private investors.

Industry ImplicationsIn looking forward, dairy producers should review several implications from our project.

First, the rationale for believing that the past growth and success of U.S. dairy operations will continue into the near future may be compelling, but far from guaranteed. The year 2016 could be very different from today.

Second, most dairy producers that we surveyed will admit they “are most prepared for Field of Dreams or possibly American Gothic ... but these may be the least likely of the four scenarios to occur in the future.”

With the potential for major change, and the impending collision of opposing forces, dairy leaders must assess what it will take to succeed across the multiple scenarios presented, and not simply in those “we hope will happen.” Running harder, becoming more efficient, for example, may be a necessary but not sufficient criteria for success.

Some of the strategies dairy producers should investigate – sooner rather than later – are:

• Develop new partnerships with government (local, state and federal) as well as suppliers (for access to latest technology, advice and perspective).

• Seek latest technologies if only to maintain import barriers through low-cost/high-quality operations.

• Look for business diversification opportunities – new geographies (including international) and new, related businesses (such as expanded livestock management, agri-tourism, or specialty production).

• Investigate the opportunities for relocating production to low-cost, accessible markets (Argentina, Brazil, China and Russia/E. Europe in descending order).

Future success will go to those dairy leaders who embrace the future, squarely facing future challenges and opportunities, not turned around, looking only to the past, bemoaning the rapidly passing “good old days.” PD

Executive Summary

Milk production is the most important agricultural activity in the Indian agricultural sector. At the national level, around 17% of the total value of agricultural production is derived from this sector. Its importance is further highlighted if the closely linked other livestock (meat, poultry, wool and hair, etc.) sub-sectors (accounting for a further 8.3%) are also taken into consideration. The milk sector generates a high proportion of agricultural output, especially in the northern and western parts of the country.

Milk production in the country was stagnant during the 1950s and 1960s and per capita availability declined. However, with the implementation of the Operation Flood (OF) Program in 1970 and other dairy development programs implemented by the State and Central governments, increased demand driven by increased population, higher incomes and urbanization, and with tight controls on imports of dairy products, milk output increased substantially in the country. This evolution was accompanied by an even more marked improvement in milk yields. India has emerged today as the largest milk producer in the world, surpassing 80 million tones, and this success story of Indian milk production has been written primarily by millions of smallholder producers. The OF program was instrumental in creating strong linkages among millions of smallholder producers and urban consumers. Prior to OF, the link between the producer and consumer was completely missing. It is well known that all this happened under highly regulated domestic markets, where commercial imports and exports of almost all dairy products had been banned for most of the time, and processing activity had been controlled through licensing which favored cooperatives over private entrepreneurs. However, termination of licensing requirements for setting up milk processing and product manufacturing under the MMPO in 2002 made India's dairy industry arguably one of the most deregulated industries in the world. The unmanaged deregulation of the dairy industry combined with a rapid increase in demand (domestic as well as global) for milk and dairy products, and distortions in the world dairy markets, it is widely believed, would lead to economic and social problems. These developments (domestic and international) would influence the scale of operation in dairy sector and may lead to social-health-environmental problems. Milk production certainly would become concentrated on large farms and in peri-urban or urban areas as a result of deregulation, which could have major implications for smallholder dairy producers and larger goals of employment-led economic growth, poverty alleviation, and environmental sustainability.

Like nearly all developing countries, India exhibits co-existing "organized" and "unorganized/informal" sectors for marketing of milk and dairy products. The organized or formal sector is relatively new in historical terms, and consists of Western-style dairy processing based on pasteurization, although adapted to the Indian market in terms of products. In some cases the traditional sector is quite well organized, with a complex net of market agents, with a variation in numbers of and roles of market intermediaries. The reasons underlying the existence of a large informal or traditional sector are the same as found in other countries: consumers are unwilling to pay the additional costs of pasteurization and packaging, and consumers often regard raw milk and traditional products obtained from reliable vendors as of better quality than formally processed dairy products. The dairy cooperatives comprise the single largest formal organization in terms of market share, and its share in total milk procurement has increased over a period of time and is further expected to rise in the future. However, the informal sector may still play an important role in the Indian dairy sector. The repeal of industrial licensing under new economic policy provided the opportunity for private entrepreneurs and multinational companies to invest in new processing capacities, which may lead to some structural changes in the production sector whereby the private entrepreneurs would try to reduce transaction costs and may promote large commercial dairy farms.

Commercial imports of dairy products were substantial until the early 1970s, but declined significantly in the 1980s and 1990s. However, the imports of milk powders and butter/butter oil increased substantially in the late 1990s, mainly due to low import duties on these two products as a commitment under the WTO Agreement. India has also started exporting small quantities of dairy products during the last decade, but its exports are still in their infancy. However, India has the potential to become one of the leading players in milk and milk product exports, because India is located amidst major milk deficit countries in Asia and Africa; also, the cost of milk production in India is one of the lowest due to cheap labor and traditional feeding systems. Despite these positive factors, there is a long way to go in order to improve the quality of Indian milk and milk products. In order to become globally competitive, significant investment has to be made in the supply chain of milk procurement, processing, and marketing. Also, training has to be given to the farmers and processors

to improve the quality of milk and dairy products to bring them up to international standards. Animal welfare, which includes establishing norms for animal protection on the farm, during transport, and at the time of slaughter, is not currently covered under the WTO, but these issues are coming under increasing public scrutiny. Therefore, attention should be given by national authorities to reducing negative effects of commercialization of livestock farming and trade on the welfare of the animals.

Seasonality in milk production is well known in the Indian dairy sector and is more pronounced for buffaloes. Such fluctuations in supply and demand result in fluctuations in prices (producer and consumer), thus subjecting milk producers and consumers to large variations in prices during a year. The procurement prices are marginally higher during the lean season compared with the flush period. The WPI of milk relative to the WPI of food articles and all commodities decreased during 1990s, which indicates increased production of milk and/or imports of dairy products in the post-reforms era. Milk prices relative to milk input prices such as oil cakes, fodder, and cattle feed show that input prices have increased faster than milk prices in the 1990s. These trends in input prices indicate that increased milk production should come from productivity enhancement; otherwise, increases in costs will make milk and dairy products costly and unaffordable to the masses.

Of all the agricultural products, dairy product prices are the most distorted by domestic and export subsidies in developed countries, especially the European Union and the USA. World dairy product prices were expected to increase as a result of lowered market intervention in the forms of lower export subsidies and support prices and less public stocks in the post-WTO period. Stronger demand for dairy products was expected from a rise in consumer income, as economic growth becomes more broad-based in developing countries; and the gaps between EU and world dairy product prices were expected to shrink. However, world dairy prices witnessed a declining trend in the post-WTO period due to high WTO-compatible export subsidies, large support prices, and other protections. The fall in world prices had an adverse impact on domestic prices in many developing countries, including India.

Diseases, along with the non-availability of feed resources and nutrition, are the most important constraints to milk production. However, with smallholder production systems, the situation is more serious because of inadequate knowledge and access to appropriate corrective measures and resources. In India, the government, cooperatives, the private sector, and a few non-governmental organizations (NGOs) provide veterinary services and artificial insemination facilities to the dairy farmers. However, it is well known that the quality of the veterinary services provided by public sector institutions is poor, and that institutions providing these services are highly inefficient. Therefore, there is a need to restructure and reorient the livestock health and breeding services and extension services providing institutions to make the Indian dairy sector globally competitive.

In the light of the fast-changing global trade regime, the outlook for technological development in the Indian dairy sector appears to be bright. In order to tap the global dairy market to India's advantage, more scientific management of dairy animals in terms of breeding, feeding, health care, and management needs to take place. More concentrated milk production and milk sheds may develop. Efforts for clean milk production and animal health and welfare issues will occupy special significance. The Indian dairy industry will focus on value creation through an integrated approach to the market and the development of a range of value-added products and production and processing methods. The strategic objectives will be to provide a range of products that enhance health and well-being; new product innovations that respond to changes in food habits, lifestyle, and design; sustainable dairy production systems (socially, economically, and environmentally); food safety and quality; market access; and improved animal health and welfare, with a focus on vertical integration of the value chain.

The increase in demand for dairy products will put increasing pressure on dairy production systems. Traditional breeds and feeding practices are likely to give way to high-yielding breeds, intensification of production systems, increased disease risks, pollution and animal health issues, and a greater reliance on feeds and concentrates. Currently, Indian dairy farming is dependent on crop residues, natural resources, and open grazing as sources of feed; however, expansion of these traditional sources of feeds and fodder to support a large increase in dairy production is unlikely as available grazing areas and other common property resources (CPRs) are shrinking and are already degraded. Therefore, if milk production is to increase, then additional output will have to come from modern systems that are based on stall-feeding and that use more concentrates.

Rising human needs for milk and other livestock products have placed the environment in conflict with livestock. The rapidly increasing demand for dairy products in urban areas has given rise to haphazard growth of production centers in peri-urban and urban areas that are essentially detached from their supporting land base, and often generate a large amount of waste that contaminates the soil and groundwater. Foul odors usually emanate from animal wastes if not treated or disposed of properly, leading to air pollution. Livestock product processing plants release large amounts of waste into the environment, polluting land and surface waters as well as posing a serious human health risk. Because of weak infrastructure such as rural roads and communication, processing plants operate in urban areas where discharge of waste material is uncontrollable. Pollution of the food chain is also a major issue, and pesticides, nutrients, feed additives, hormones, and veterinary drugs used in excessive quantities can contaminate the food chain.

As discussed in the main report, the study is based on numerous official documents, newspaper and journal articles, and several interviews that were conducted with various stakeholders in the Indian dairy sector. The interviews were conducted on a 'not for attribution' basis to encourage candour, and therefore individual comments are not attributed by name. The goal of this section is by no means to provide an evaluation of livestock industrialization and its implications for social-health-environment issues, and indeed, this method does not lend itself to such a policy exercise. Instead, we hope to shed light on circumstances, actors, and forces that guided reforms in this sector in a particular direction, and by so doing, improve understanding how international and domestic forces influence the scale of operations in milk production, processing, and marketing in India and how these changes influence the attainment of social-health-environment (SHE) objectives.