Skimmed Milk Powder (SMP)

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READ ABOUT INDIA’S DAIRY SECTOR: https://www.iasgyan.in/daily-current-affairs/dairy-sector

Context

• With many states enacting stringent anti-slaughter laws, Indian dairy farmers have been facing challenges in disposing of unproductive cattle — the ones that do not give enough milk or happen to be male.
• Now, they have been hit by a new “surplus” problem — of skimmed milk powder (SMP).
• Cooperative and private dairies are holding an estimated 3-3.25 lakh tonnes (lt) of SMP stocks at the start of the production year that runs from July to June.

READ ABOUT INDIA’S DAIRY SECTOR: https://www.iasgyan.in/daily-current-affairs/dairy-sector

What is SMP (Skimmed Milk Powder)?

• SMP is a dairy product derived from milk after separating cream (fat) and drying the skimmed milk.
• Composition of Milk:
• Cow milk: Contains 3.5% fat and 8.5% solids-not-fat (SNF) on average.
• Buffalo milk: Contains 6.5% fat and 9% SNF.
• Perishability of Milk: Milk is highly perishable and cannot be stored for long periods.

Production Process of SMP and Other Dairy Products

• Seasonal Variation:
• Flush Season: Period when cattle and buffaloes produce surplus milk.
• South and Maharashtra: July to December (post southwest monsoon).
• North and Gujarat: September to March (coinciding with buffalo calvings).
• Utilization of Surplus Milk:
• Dairies convert surplus milk into:
• Butter and ghee from cream/fat.
• SMP from SNF.
• Product Output:
• From 100 liters (or 103 kg) of cow milk:
• SMP production: Approximately 8.75 kg (at 8.5% SNF).
• Ghee production: Approximately 3.6 kg (at 3.5% fat).

Role of SMP in Dairy Industry

• Storage and Reconstitution: SMP serves as a storable form of milk solids that can be recombined with water to produce liquid milk during lean seasons.
• Balancing Supply and Demand: Helps manage fluctuations in milk production by providing a stable supply of milk solids throughout the year.

The Problem of Surplus in SMP

• Excess Milk Procurement:
• Dairies often procure more milk than necessary, beyond the normal surplus during flush seasons.
• Resulting in surplus production of SMP and butter/ghee that exceed market demand.

• Annual Production and Utilization:
• India produces 5.5-6 million liters (lt) of SMP annually.
• Approximately 4 million lt are used for recombination during lean seasons.
• The remaining 1.5-2 million lt are consumed by industries producing ice cream, biscuits, chocolates, sweetmeats, baby formula, and other food and industrial products.

• Recent Supply Dynamics (2023-24):
• Abundant milk supplies throughout the year with no significant lean period in 2023-24.
• Contrasted sharply with 2022-23, which faced unprecedented shortages.
• Dairies in Maharashtra recorded high prices for yellow butter (Rs 430-435 per kg) and SMP (Rs 315-320 per kg) in February-March 2023.
• Farmers were incentivized with higher milk prices (Rs 37-38 per liter for cow milk with 3.5% fat and 8.5% SNF), leading to increased production through improved feeding and new animal inductions.

• Impact on SMP Inventory:
• Due to continuous milk availability, only 2.5 million lt of SMP was used for reconstitution during lean summer months (April-June).
• Dairies now face an excess inventory of 3-3.25 million lt of SMP, compared to normal opening stocks of 1.5-1.75 million lt in July.
• With the new flush season starting and expected to peak after September, exacerbating the surplus issue.

Impact of SMP Surplus

• Decline in SMP and Butter Prices:
• Cow SMP prices for dairies have dropped sharply to Rs 200-210 per kg.
• Yellow butter prices have decreased to Rs 335-340 per kg, which translates to approximately Rs 408-415 per kg for ghee (ghee has nearly 100% fat, compared to 82% for butter).
• Market Dynamics of Milk Fat:
• Annual production of milk fat by dairies is 3-3.5 million lt, significantly less than SMP.
• Milk fat has a robust market in India, appealing to both households and industrial consumers.
• Demand spikes during festival months (August to November) increase consumption of mithais (sweets) made from high-fat milk products like ghee, khoa, chenna, and paneer.
• Prospects for Fat vs. SMP Recovery:
• Fat prices are expected to recover more favorably compared to SMP.
• High-fat milk products are essential ingredients in traditional Indian sweets, enhancing market demand, especially during festive periods.

Financial Impact on Dairies

• Revenue Calculation:
• For a dairy producing 8.75 kg of SMP and 3.6 kg of fat/ghee from 100 liters of cow milk:
• Gross revenue at current prices ranges between Rs 3,224-3,333 per kg.
• Deducting Rs 350 for post-procurement expenses (chilling, aggregator/collection agent commission, and transport to the plant).
• Additional Rs 350 for processing and packing costs.
• Net Income for Farmers:
• After deducting expenses, the dairy can pay farmers approximately Rs 2,524-2,633, equivalent to Rs 25.24-26.33 per liter of milk.
• Current Payment to Farmers:
• The actual payments to farmers align closely with these figures due to current market conditions.

Exploring Potential Solutions

• Proposal for Exporting SMP
• Exporting excess SMP stocks is crucial.
• Proposes exporting SMP commercially or as commodity assistance to neighboring countries.
• Challenges with Commercial Export:
• Global SMP prices have significantly declined.
• Current SMP rates at platforms like Global Dairy Trade (New Zealand) are around $2,586 per tonne, down from a peak of $4,599 in April 2022.
• This downturn makes commercial exports financially unviable due to lower returns compared to previous years.
• Trend in Indian SMP Exports:
• India's SMP exports have declined over the years:
• From 1.3 million liters in 2013-14 to 4,800 tonnes in 2023-24.
• Impact on Domestic Market:
• Limited export options contribute to domestic stockpiling issues, exacerbating the surplus SMP problem.

Proposed Solutions and Future Strategies

• Subsidy Proposal for SMP Exports
  • • The government should provide subsidies on SMP exports.
    • This initiative could potentially elevate domestic SMP prices, allowing dairies to offer higher prices to farmers.
• Buffer Stock Proposal
  • • Indian Dairy Association proposes creating a buffer stock of 50,000-100,000 tonnes of SMP.
    • Purpose: To stabilize prices for producers by purchasing powder from dairies and covering storage costs.
    • Long-term benefit: Protecting consumers from potential milk inflation by maintaining stable SMP prices.

• Medium-term Market Development
• Diversifying SMP Constituents:
• Over the medium term, the dairy industry should focus on developing markets for SMP constituents:

• Proteins (casein and whey),
• Carbohydrate (lactose),
• Minerals (calcium, potassium, phosphorous).

• Reasons for Diversification
• Demand Dynamics:
• Increasing demand for milk fat in India drives the need for diversification.
• Dairies produce over 2.4 kg of SMP for every 1 kg of fat extracted.
• Preference for cow rearing due to higher milk yields and earlier calving, despite challenges with unproductive cattle disposal.
• Buffalo Milk Dynamics:
• Producing 1 kg of fat from buffalo milk results in less than 1.4 kg of SMP, influencing production dynamics and market strategy.

READ ABOUT INDIA’S DAIRY SECTOR: https://www.iasgyan.in/daily-current-affairs/dairy-sector

SOURCE: INDIAN EXPRESS