I am ever on the lookout for a good discussion topic on the global dairy industry, especially when it involves the fundamental numbers like milk production and price. I therefore couldn’t resist the temptation to delve into the Indian dairy industry when the following article appeared on the news services: “India, the milk bowl of the world”, Rahul Akkara, fnbnews.com, October 31, 2011.

Mr Akkara provides a glowing account of the indian dairy industry and its growth opportunities. The headline and sentence that particularly caught my eye was this:

“Triple production

In the next 10 years, India’s dairy sector is expected to triple its production in view of expanding potential for export to Europe and the West.”

Perhaps I should have twigged when I read that Mr Akkara was Vice President of Marketing with Parag Milk Foods Pvt Ltd. Numbers are however our game and this story deserved investigation.

India lays claim to being the single biggest milk producer in the world. The EU as a whole is larger but this is made up of contributions from the many member states. At last count (2009 – 2010) India produced 112.5 million tonnes of milk. 1 million tonnes is roughly equivalent to 1 billion litres or 2.2 billion pounds. This represents about 16% of total global production. 56% of India’s milk comes from buffaloes and cow’s milk makes up 40% or about 45 million tonnes. The balance comes mainly from goats. Triple this volume would add 225 million tonnes of milk, an increase of more than 30% to the global pool. You can therefore understand why this might generate more than just a passing interest here at Xcheque.com.

One of our principle tenets at Xcheque is: “In the absence of alternatives, history is our best guide to the future”. On applying this principle, history tells us that India has been growing their milk production at an average of 4 % per annum for the past 18 years. That is an impressive statistic. By comparison, since 1995 the growth rate of the next biggest dairy producer, the USA, is 1.5% and the main EU states (the EU15) have grown at an average of 0.3%.

Given India’s historical production growth rate, is triple production in the next 10 years possible or likely? Perhaps the charts below give us a clue.

Figure 1 Historical actual and forecast India milk production under various growth scenarios

Figure 1 shows historical milk production from 1992 as well as the projections to 2021 at various growth scenarios. Continuation of the current historical trend would result in an additional 60 million tonnes – about a 50% increase on current production. To achieve three times the current volume, milk production growth will need to step up to 10% and stay at that level for the entire period. That’s a very big ask, even for a dynamic economy like India.

Figure 2 Milk consumption per person and population projections

The other interesting way to look at this information is to project the milk consumption per person. Figure 2 takes the various growth scenarios projected in figure 1, plus a projection of India’s population growth in the next 10 years, and generates a projection of consumption. Consumption is increasing from 0.26 to 0.35 kg milk / person / day at even the modest projection of 4 % year on year growth. This increases to 0.66 kg milk / person / day at the 10% growth projection.

To put the production growth and consumption questions into perspective, dairy consumption in Western countries is roughly in the range of 0.6 – 1.0 kg milk / person / day. Liquid milk consumption is 0.2 – 0.3 kg / day and the balance is cheese and other dairy products. Given this background there does seem to be room for consumption growth, particularly given the increasing urbanisation and growth of wealth in India. As Mr Akkara points out, there is also a cultural bias to vegetarianism that is driving the demand for dairy products.

With regard to the opportunity for “expanding potential for export to Europe and the West”, I wish India and Mr Akkara good luck. Europe, the USA, Japan and other developed economies have very tight control on dairy imports. It seems unlikely that the dairy import restrictions of the developed world will be relaxed anytime in the near future. Add to that the production growth and export ambitions of Europe and the USA, plus the capability and ambitions of pasture based dairy exporters like New Zealand, and Argentina. In addition India has no real competitive cost advantage in dairy production and probably the reverse is true. India would do better to look to its internal demand and that of its immediate neighbours for the growth opportunity. Of that there seems to be plenty.

So what conclusion should we draw about Mr Akkara’s projections for the Indian dairy industry? In 10 years’ time India will stand at the top of the hill and look back at what has been achieved. I have no doubt that they will continue to grow and develop as a modern nation. In relation to projections of substantial dairy industry growth here are however some very significant howevers.

Like China, India’s huge population means that they have enormous challenges balancing the desires of the few against the needs of the many. Development of more sophisticated dairy industry can’t be at the expense of keeping the population at large fed and generally satisfied. India is also working up against a world with increasingly constrained (and expensive) natural resources. In that context dairy is not exactly a luxury but it is very resource intensive. As popular as dairy products are, there are cheaper, more energy efficient sources of fat, protein, and sugar. This speaks to my general view on market and industry forecasts which is "follow the money".

Before I conclude I should note that I may have misinterpreted the basis of Mr Akkara's projection. If he meant triple the current volume of cows milk that would mean an additional 90 million tonnes (assuming buffalo and goats milk remained static). Even so that projection would require cow's milk production to grow at 10% year on year. That is still a very high rate of continuous growth and would be just about unprecedented by world standards.

On balance it seems to me that it would be too much of a stretch for India to achieve triple its current milk production in 10 years, or for that matter triple the current production of cow's milk. On the contention that India will become a major exporter of dairy goods to Europe and the West? - I'll refer you all the way back to an earlier article on the question of dairy trade.