With dairy accounting for more than 50% of Pakistan’s total liquid consumption, milk prices are without any doubt a national concern.
A very good example is the recent increase in prices of loose milk, which is sold by the informal sector that constitutes 90% of the country’s fresh milk market and remains unregulated.
There are two extreme seasons for milk production namely flush season that usually runs from January through April and lean season which runs through most of the summer.
The flush season sees excess supply of milk, which keeps prices under control or even brings them down. However, it was during that season this year prices of loose milk jumped from Rs80 to Rs90 per kg.
Though the price hike may be justified in the lean season – in which milk supply is reduced by 70%, lack of regulation of the informal sector is a major cause of concern for the consumers.
Source: Canadian 2013 Products & Packages
The prices of milk produced by the formal sector also remain very high, according to the consumers. This sector, however, argues that in fact farm gate prices – the rates at which farmers sell raw milk to dairy companies – are very high in Pakistan.
Annual increase in milk prices over the years has been low compared to prices of meat, rice and vegetables, according to Engro Foods Chief Executive Sarfaraz Rehman.
The prices of animals, feed, land, transportation and labour have all increased significantly in the last few years, he said. “Besides all this, we have too much inefficiency in the supply chain that makes the picture bleak.”
Rising milk prices is not the biggest concern for Engro Foods – one of the two largest producers of full-cream milk in the country.
“Milk usage will not come down. People may cut their clothing budget but they will never stop drinking milk,” Rehman said, when asked how challenging the fast increasing milk prices is for him.
However, he said milk in Pakistan is no longer cheaper compared to regional countries. For instance, milk in Saudi Arabia and other Middle Eastern countries is sold for 5-5.5 riyal (about Rs150) a litre.
This is almost equal the cost of milk produced in Pakistan if the Middle East’s purchasing power parity is taken into account.
According to Rehman, Pakistan has annual tradable milk production of about 20 billion litres, but still the country faces shortage. According to rough estimates, today there is a difference of about 4 billion litres in the demand and supply of milk in the country.
However, he suggested that Pakistan can learn from the experience of regional countries such as Turkey, Iran and China that have significantly reduced milk shortage by importing productive animals and making supply chain efficient.
“Considering the inefficiencies prevailing in the country, it can be safely said we will take a number of years to control milk shortage,” he added.
According to the number of litres handled per year, Engro Foods is already among top five or six milk producers in the world, claimed Rehman.
Over the last eight years, the retail price of full-cream milk of Engro Foods has increased to Rs95 per litre from Rs36 per litre, showing a compound annual growth rate (CAGR) of 12.9%. However, what is interesting to note is that the CAGR of milk that Engro collects from farmers has almost doubled in the eight-year period.
About eight years ago, Engro used to collect milk at Rs8 per litre from the farmers, which has now jumped to Rs50 per litre – a CAGR of 25.74% – meaning that the company is mainly relying on high volumes.
“Processed milk is not a high-margin industry like cosmetics or detergents. Though the fight for better margins is always there, we actually compensate low margins for high volumes,” he said.
Published in The Express Tribune, April 28th, 2014.
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