India milk prices to rise despite export ban: CRISIL

MUMBAI, Mar 22 (Commodity Online): CRISIL believes that milk prices in India will continue to rise over the medium term because of sustained demand-supply mismatch and increasing input costs. The Government of India's recent order prohibiting export of milk powder and casein and allowing duty-free import of milk powder and butter will help enhance domestic supply over the near term, and keep milk prices stable over the next 12 months. However, with milk products exports forming around 5 per cent of India's total milk production, and domestic demand for dairy products remaining strong, the demand-supply gap is expected to continue to widen over the medium term. This, along with increasing input (fodder and transportation) costs, will push milk prices up over the next three to five years. The impact of the ban on export of milk powder and casein is expected to be minimal on the credit risk profiles of 55 CRISIL-rated dairy players (including co-operative milk federations). This is because a buoyant demand scenario will enable these players to increase their sales in the domestic market, and pass on increases in the prices of raw milk. In addition, flexibility in the production process will enable players in the dairy industry to shift production to milk and milk powder, which have strong demand in the domestic market, rather than also producing casein, which has low demand in India. In February, to contain further price increases and shore up supplies, GoI prohibited export of milk powder and casein (which form 70 per cent of India's dairy product exports, estimated at USD144 million for 2009-10 [refers to financial year, April 1 to March 31]). Furthermore, GoI has allowed National Dairy Development Board (NDDB) to import 30,000 tonnes of milk powder and15,000 tonnes of butter and butter oil at zero duty, which will boost milk supply by up to 0.35 million tonnes. Says Mr. Gurpreet Chhatwal, Director, CRISIL Ratings, "With exports forming less than 5 per cent of the total milk production, and imports comprising a small portion of overall demand, GoI's measures will, at best, plug the demand-supply gap over the next 12 months."