Packaged milk producers gear up for higher sales

Hike in price of loose milk likely to push up volume of UHT milk

KARACHI: Following the price increase by dairy farmers, manufacturers of ultra-high temperature (UHT) milk, commonly referred to as Tetra Pak milk due to its packaging, may see an increase in their sales, say market experts.

However, despite the increase in volume, their earnings might take a hit if they fail to pass it on to the consumers.

Referring to the recent increase in price of loose unbranded milk, Taurus Securities Head of Research Zeeshan Afzal said the price differential between loose and packed (UHT) milk would shrink, which would increase the overall market size of the packaged dairy.

As a result, Afzal said, makers of packed milk, such as Engro Foods and Nestle Pakistan, would see a rise in their sales. He, however, said the development will also increase their raw material costs and shrink their margins if they failed to increase prices.

“A 15% increase in volumes will be required to compensate for the higher raw milk prices,” Afzal said, estimating every 10% rise in raw dairy prices will result in a decline of six percentage points in gross margins of Engro Foods.



However, Afzal went on to say the UHT milk producers might opt to defer the price hike to secure consumer shift from loose to packed milk because they require a meager 3% to 4% increase in prices to preserve margins.

Earlier this week, milk retailers in Karachi raised prices by Rs10 per litre after an increase in the farm gate prices - the rate at which dairy farmers sell milk to retailers. As a result, the loose unbranded milk, which was selling at Rs84 per litre, was being sold at Rs94 per litre, Rs24 higher than the price set by the local administration.

Explaining the increase, the farmers’ associations said the price had not been increased since 2012, while that of fodder had increased significantly during the time. After the government’s intervention, some retail outlets were sealed by the government while others went on strike causing milk shortage in various parts of city.

Due to milk shortage and reduced price gap between loose and packed milk, many consumers opted for the latter. However, the farmers’ associations and milk retailers reversed their prices after negotiations with the government. According to market sources, it is likely that the committee will increase prices by Rs10.

Any increase in price will cause the raw milk prices to go up, which could be detrimental to the UHT producers unless they increase prices, Afzal said, and reduce margins. In case of Engro Foods, he said, the earnings, which are expected to be Rs1.4 per share for the current quarter, may decline to Rs0.9 per share.

Published in The Express Tribune, September 12^th,  2015.

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