ECONOMICS OF DAIRY FARMING

India is world’s largest producer of milk, with a production of around 155 million tonnes per annum, contributing to 20 per cent of the world’s milk output. The dairy sector is one of the fastest growing sectors in India, growing at a CAGR of over 15-20 percent, largely driven by the growth of value added products such as yogurt, cheese, ice-cream etc.

The demand growth in dairy industry has also spurred an interest in dairy farming by entrepreneurs from rural as well as urban India. This blog discusses factors that influence profitability and sustainability of a dairy farm.  These include macro factors such as international and domestic prices of milk, and farm level factors such as size of the dairy farm,its cattle management practices and its marketing strategies.

How are local milk prices linked to international milk prices?

While milk is a perishable commodity mostly sold locally, Skimmed Milk Powder (SMP) is traded in the global market and international prices of SMP influence India’s SMP exports. SMP is a large end user of milk, asalmost 11 tonnes of milk is needed to make 1 tonne of milk powder.  Since SMP has a long shelf life as compared to milk, dairy companies keep their surplus milk stock as SMP, and also use it to manufacture milk based products such as ice-cream and yogurt. Adecline in international prices of SMP reduces the export of SMP from India and therefore increases domestic milk availability. Increased domestic availability can sometimes impact the prices at which dairies procure milk from farmers.

For example, India’s SMP exports declined to 15,930 tonnes (INR 293.01 crore) in 2015-16 from a peak of 1.3 lakh tonnes (valued at INR 2,717.56 crore) in 2013-14 due to a steep decline in global SMP prices. During the same time, milk procurement prices declined by as much as INR 10 per litre in North India and Maharashtra.

As can be seen from Figure 1, the prices of SMP tend to fluctuate, which can lead to volatility in the domestic milk prices as well.

Source: https://www.globaldairytrade.info/en/product-results/skim-milk-powder/

Why is marketing strategy for milk so crucial to the profitability of my milk farm?

Dairy farmerstypically sell their milk to a number of customers including public and private sector dairies milk traders, milk processors and directly to consumers. Dairies are the largest bulk buyers accounting for over 20 per cent of milk procurement. They currentlyprocure the milk at around INR 25-35 per litre across the country and the product is sold at a retail price of INR 35-45 per litre.  However, the retail prices for branded, farm fresh milk are higherINR 60-70 per litre.Over the past decade, there has been a spurt in dairy farms that sell their milk as farm fresh milk, desi cow milk, chemical free milk or A2 milk etc. directly to the customers. Some of these players are shown in Table 1

Table 1: Dairy farms selling branded fresh milk
Company nameProductValue proposition
Vrindavan Milk, BangalorePure Natural cow milk, Desi A2 milkDelivered directly from farm, no chemicals used to inject cows.
Klimom, HyderabadCow milk, A2 milkDelivered in eco-friendly glass bottles within a few hours of milking
Astra Dairy, ChennaiCow milk and dairy productsFrom farm to your home in 12 hours
Pride of cows, Pune (aventure of Parag Milk Products)Pasteurized cow milkFarm to home fresh milk, completely untouched by human hands

As a dairy farmer, you have many choices; you can choose to find an assured market  in a large dairy or milk processing companies, sell  fresh milk under your brand name or sell value added products such as flavoured milk, yogurt etc.Therefore, market related choices should be made first and then you can work backwards to make decisions related to animals, location, investment and farm automation.

What are other profitability drivers?

The success of a dairy farm is aligned with the productivity of its animals and the following elements play an important role in determining a farms profitability:

  1. Milk yield: Milk production over the productive life of the dairy animals is one of the most important drivers of the profitability of a dairy farm. It depends on many factors such as animal’s age at first calving, number of lactations and yield per lactation. Further, milk production can be enhanced by providing adequate amount of green fodder and keeping animals disease free.
  2. Self-sufficiency in Fodder:The cost of feed accounts for majority (about 70%) of the costof running a dairy farm. The fodder can broadly be divided into three parts: Green fodder, Dry Fodder and Concentrated Feed. Of the three, Green fodder, which is needed in large quantities, remains most scarce, due to gradual reduction in the green cover of our landscapes. Further, the fodder prices can be volatile and do not move in line with the milk prices. Therefore, in order to be sustainable, a dairy farm must be self-sufficient to meet its green fodder needs. The fodder requirements for a farm with 20 cows are illustrated in Figure 2.

 

Figure 2: Fodder Requirements of a dairy farm

Since fodder cultivation requires a lot of space, several dairy farmers have now shifted to silage, which refers to green fodder preserved under anaerobic conditions. Silage provides benefits similar to that of fodder but is needed in lesser quantities.  Feeding your animal silage, lowers the area needed for fodder cultivation and frees up the land, which can be used to generate income through cultivation of grain/horticulture crops.

  1. Best practices in animal management: Good farm management practices that improve animal productivity are shown.
Figure 3: Best Dairy management practices

How much investment is required for a dairy farm?

A dairy farm requires investment towards land, construction of shed, milking equipment and purchase of animals.Land and animals are the two largest investment heads.

  • Land: The land is needed for the cattle shed and milking operations and also for growing fodder. Minimum 2-3 acres of land would be required for a 20 animal farm.
  • Animal: The cost of animal depends on its age, milk yield, breed etc. As per NABARD’s dairy entrepreneurship development scheme (DEDS), the cost of 10 animals of desi cows is INR 6 lakh.
  • Civil construction: Shed for animals to provide them protection from heat/rain etc. and storage room for feed and housing for labour if needed
  • Equipment:Milking machines, chaff cutter, tipper for cutting the crop.

As such, the investment in animals should be about INR 12 lakhs for a 20 cow dairy farm. Assuming that investment in animals is about 50% of the cost of the farm (excluding land), the investment in the dairy farm with 20 animals should be about INR 25 lakh.

Why is dairy farming an attractive opportunity?

The Indian dairy market is expected to continue  grow at a rate of over 15%, over the next five years, mostlydue to a growth in the consumption of value added products such as cheese, curd, flavoured milk etc. Anticipating the growth, Indian dairy companies have planned significant investments in capacity expansion as given below in table 2.

Table 2: Capacity expansion plans of Indian Dairy majors
CompanyCapital expenditure plansBrandBudget(INR crore)
Heritage Foods Ltd.Addition in the existing capacities in curd and whey products segmentHeritage70 – 75(for FY18)
Gujarat Cooperative Milk Marketing Federation Ltd (GCMMFL)Additional capacities in cheese and chocolatesAmul3000(Upto 2020)
Kwality Ltd.Additional capacities in value-added product categories like Cheese, Paneer, UHT Milk, Flavoured Milk and Table ButterDairy Best520(forFY18 and up to mid FY19)
Parag Milk Foods Ltd.Expansion and modernization of existing plants and improvement in marketing and distribution infrastructureGo, Gowardhan, Topp Up64.5(for FY18)
Prabhat Dairy Ltd.Upgradation of plant and machineryPrabhat40
Source: Indian Dairy Industry – driven by value added products, a report by CARE Ratings

Also, there have been a number of acquisitions in the dairy sector by large private equity companies, and multinationals   who are acquiring local dairy companies to strengthen their operations in India.

Table 3:Acquisitions in the dairy sector
Acquired CompanyInvesting CompanyYear
Kwality LimitedKKR India(a private equity firm)2016
Tirumala MilkLactalis , a France based multinational dairy corporation2014
Anik IndustriesLactalis2016
Creamline DairyGodrej Agrovet Limited2015
Dairy business of Reliance RetailHeritage foods2017
Source:Indian Dairy Industry – driven by value added products, a report by CARE Ratings and FineTrain research

In order to meet the demand growth of the dairy industry, a strong and sustainable dairy farming sector needs to be developed. Dairy farming is currently dominated by a small farmer who has two animals and uses dairy income to supplement his/her agriculture income.  Given the bright prospects of dairy sector and lack of professionally run dairy farms, there is an opportunity for entrepreneurs who can set up dairy farms with scientific feed management practices. These farms can also forward integrate into manufacturing of milk based products.

How can we help?

We can help you set up a dairy farm or a milk product business through a number of services including:

  • Market feasibility assessment
  • Development of project proposal for loans/credits
  • Technical consultation
  • Project execution support

Call us/reach us

Call us: 800 888 4932

Write to us: bchhatre@finetrain.comadmin@finetrain.com

Visit us: www.finetrain.com

[1] Source: India’s milk production in 2015-16,

[2] Source: Indian Dairy Industry-driven by value added products-by Care Ratings, June 30, 2017

[3] Source: http://indianexpress.com/article/india/india-news- india/global-dairy- price-recovery- to-benefit- indian-
farmers-3019391/

[4] Source: http://indianexpress.com/article/india/india-news- india/why-milk- prices-have- fallen-by- rs-10litre- for-
farmers/

Share This: