Milk production in the current fiscal year will plummet 5-6 per cent to nearly 176 million tonnes as compared to the previous year, but milk prices are unlikely to witness any further rise as production is set to rise from this month, according to a report by rating agency CRISIL released on Thursday.
Production of milk is estimated to have been lower by approximately 6 per cent as of December. The flush season, which usually begins in November-December, is said to have shifted by 1-2 months because of the delayed monsoon. So, milk production is expected to pick up from this month, which would limit any further fall this fiscal, said CRISIL analysts, led by Director Hetal Gandhi, in the report.
“In fiscal 2021, milk production is expected to pick up, given abundant water in reservoirs and expectations of a normal monsoon. That should arrest any further rise in milk procurement and retail prices,” the analysts wrote.
Milk prices have started peaking after back-to-back hikes in May and December last year. Amul and Mother Dairy first announced the decision to increase retail prices of milk, and others followed suit immediately.
This was necessitated by a shortfall in milk production around the country since last April. Milk production was initially impacted by high summer temperatures and lower availability of water. Then there were floods in various parts of the country, which led to poor animal health, the CRISIL report said.
Milk procurement prices also rose because of crimped fodder availability in the aftermath of the floods, which left green pastures in many parts of the country waterlogged, apart from damaging crops such as maize and sugarcane, which are used as fodder.
Profitability of dairies to improve
Milk procurement prices are estimated to have risen 19 per cent year-on-year between April and December, 2019, and the inflation is expected to be similar for the full fiscal, at 18-20 per cent.
Milk retail prices, on the other hand, have risen 3-4 per cent over April-December 2019, and are expected to be higher at nearly 5 per cent for fiscal 2020. CRISIL analysts, who interacted with stakeholders, projected that prices of key value-added products such as butter, ghee and skimmed milk powder (SMP) would rise approximately 5 per cent by the end of this fiscal year.
They estimated that the sharp rise in milk procurement costs as compared to retail prices led to a decline of nearly 200 bps in the earnings before interest, tax, depreciation and amortisation (EBITDA) margins of large dairy players in the second and third quarters of the current financial year.
This would result in an EBITDA margin contraction of 150-200 bps on-year in Q4 of fiscal 2020. However, in the first quarter of fiscal 2021, the margin contraction should ease to 50-100 bps as milk procurement prices moderate. With the flush season shifting, milk production should increase between this month and April. That, in turn, would improve availability and thwart a further rise in procurement prices, the CRISIL report said.
According to CRISIL’s projections, closing inventory of skimmed milk poweder at the end of the current fiscal is expected to be on the lower side, despite exports plunging 95 per cent.