Market Opportunities in Indian Dairy Value Chain

Executive Summary November 2009

Table of contents
Executive Summary ................................................................................................... 2 1.1. Analysis of Indian Dairy value Chain for Potential Opportunities................. 2 1.2. Assessment of Victorian Dairy Industry to Qualify Opportunities in India.... 4 1.3. Route to Market............................................................................................ 5

Executive Summary
1.1. Analysis of Indian Dairy value Chain for Potential Opportunities
Dairy industry in India has witnessed a remarkable journey in last few decades. From being a laggard and net importer of dairy products in 1950s and 1960s, India has covered a lot of ground. India now is worlds largest producer of milk (approximately 106 million tonnes annually) and a net exporter of milk products. The credit of this transformation is largely attributed to Operation Flood, a co-operative led movement started in 1970s which took in its fold millions of small holding farmers who joined the three tier co-operative structure and increased Indias milk output at a compounded annual growth rate (CAGR) of 4.7% since 1969, up from a 0.7% CAGR from 1947 to 1969. The three tier structure constitutes village societies, district unions and state federations. Apart from smallholdings and three tier co-operative structure, India dairy industrys uniqueness also emanates from imbalance in the collection and consumption pattern. Milk is predominantly (as high as 98%) collected from millions of smallholding farmers residing in villages and is sold to the urban centres through a complex distribution structure. The processing sector is dominated by co-operatives, though the prominence of private dairy processors is gradually increasing. Apart from this, the unorganised sector (local sweet makers etc) processes a large portion of the total liquid milk output. In fact, the unorganised sector outnumbers the organised sector (both co-operatives and private players combined) in dairy processing capacity in the ratio of 3:2. The consumption pattern of dairy products in India is very different from many western countries, the primary reason being conventional dietary habits of Indian households. Approximately 55-60% of the milk produced is consumed in liquid form. The rest of the milk products consumed are predominantly traditional Indian dairy products like ghee, paneer, chhana, dahi and other traditional sweets. Universal dairy products like cheese, table butter, ice creams are consumed in moderate amounts, even though the growth rate of some of these products are healthy. In spite of having largest milk production, India is a very minor player in the world dairy trade. Till the 1980s, India had adopted strategies like import-substitution, quantitative restrictions on imports and exports and canalisation. Competition within the organised sector was regulated through licensing provisions, which prohibited new entrants into the milk-processing sector. However, in early 1990s the Government of India introduced major trade policy reforms that favoured increasing privatisation and liberalisation of the economy. The dairy industry was further opened up after India became a member of World Trade Organisation (WTO). In 2000, the Union Government allowed free import and export of most dairy products. India also bound its import tariffs for dairy products at low levels in the Uruguay Round schedules. The import tariffs now range between 30-60% for most products. India has also administered Tariff Rate Quota (TRQ) for key products like milk powder, butter oil, milk food for babies. In recent years, India has maintained a positive trade balance for dairy products. The advantages India leverage are low farm gate prices (due to low milk production costs)

and proximity to milk deficit markets of Asia and Middle East. However, Indias export performance is not up to its potential. The key reasons attributed for its below par export performance are low quality and hygiene standards, lack of experience in marketing dairy products in international markets, and significant increase in consumption of milk and milk products in domestic market leading to limited surplus of exports. The government of India has expressed strong interest in maintaining self sufficiency in dairy and other agricultural products. However, there has been a steady increase in import of dairy products to India after trade liberalisation. The key items imported to India are butter oil, whey products, cheese, and milk powders. The key nations that export dairy products to India are Denmark, Nepal, USA, France, Netherlands and Italy. Many dairy products from other major milk producing nations face non-tariff barriers in India. In past few years, India has been able to achieve a fair degree of self sufficiency in all aspects of the dairy value chain. Indian dairy industrys uniqueness has also called for many distinctive requirements and ingenious solutions that one normally doesnt find in other large dairy producing nations. The following are the potential opportunity areas of trade / business across Indias dairy value chain. These opportunities emanate from the issues and gaps witnessed by Indian dairy industry and its stake holders. Breeding

High quality imported bovine semen (particularly for Holstein-Friesian and Jersey varieties)

Feed and nutrition

Low cost supplementary feed and concentrates that can justify the economics of milk production by small farmers. Low cost feed supplements like protein feed and urea molasses block. Feed block making machines.

Healthcare and herd management

Low cost dairy extension services (feed and nutrition, healthcare and vaccination, artificial insemination, total healthcare management, record keeping etc) at farmers doorsteps. Sophisticated diagnostic kits for diseases like Brucellosis, Tuberculosis, Paratuberculosis, and Elisa test etc Preventive health products teeth dips, dry cow formulations, milk replacers Machines for manure and fodder management

Milk production, storage and transport

Low cost hygienic milk collection equipment to be used by small holding dairy farmers. Clean-in-place (CIP) systems, small automatic milk collection machines can be purchased for a community of farmers and used collectively. This will address one of the biggest issues in Indian dairy industry, i.e. unhygienic milk collection practice.

Processing

Packaging equipment for products like butter, cheese, UHT (Ultra High Temperature) milk, aseptic filling. Most of the capital intensive dairy processing equipment like self cleaning cream separators, homogenisers, continuous butter and cheese making machine, pasteuriser plates, large scale ice cream freezers, ammonia compressors etc Resource efficient processing equipment to suit Indian conditions Imported second hand dairy processing equipment Industrial production of traditional Indian dairy products and sweets

Marketing, distribution and retail

Low cost packaging technology to suit Indian conditions Sensors and automation equipment for fleet and cold storage management

1.2. Assessment of Victorian Dairy Industry to Qualify Opportunities in India

Dairying is a well-established industry across the temperate and some subtropical areas of Australia. With annual turnover of just under A$ 5,125 million, Victoria dominates the dairy industry in Australia. Victorian dairy players contribute to over 65% of fresh milk and 75% of manufactured dairy products in the country. Over 50% of the Victorias processed dairy products are exported. Victoria's dairy industry is internationally competitive because its low input costs pasture-based systems and clean green (environmental) image. The dairy farm sector is dominated by owner-operated farms consisting of more than 98% of total dairy farms. Over the years the number of dairy farms in Victoria has come down substantially, which led to an increase in average herd size. Improvements in herd genetics, pasture management practices and supplementary feeding regimes have seen the average yield per cow increase substantially in last two decades. Unlike many other states in Australia, drinking milk constitutes only a small percentage (usually less than 10%) of the total milk produced in Victoria. Cheese is the largest category of processed dairy product. The predominant variety of cheese is cheddar. When the ability of Victorian dairy industry was evaluated against the opportunities available in Indian dairy industry, the following outcome emerges: The equipment / machinery / technology areas (e.g. packaging equipment, capital intensive dairy processing equipment, diagnostics kits for bovine diseases etc) does not provide great trade opportunities. Victorian dairy players themselves are importers of these equipment / machinery / technology. The second hand equipment market however provides possible trade opportunities, even though the demand for the same is presently low. Products on the other hand show greater trade potential. Both commodity (SMP, WMP, butter oil etc) and specialty (specialty cheese, ice creams, flavoured yogurts

etc) dairy products are moderately attractive. Bovine semen export is another opportunity area, though the requirement is intermittent. Victorian dairy players have high ability to serve these demands from India. However, they will have to deal with trade barriers and regulatory requirements. Cattle feed products have low attractiveness due to low price points and highly distributed consumer base. Nonetheless, Victorian players have moderate capability to meet cattle feed products requirements from India. Services like dairy extension also require low price points and ability to cater to distributed consumer base. Moreover, it requires knowledge on local conditions. Victorian players are moderately placed to meet these requirements, preferably collaborating with Indian partners.

The analysis qualifies six potential areas of opportunity for Victorian players in Indian market. They are: Universal dairy products - commodity (e.g. SMP, WMP, butter oil, table butter, cheese spread etc): The outlook for this is stable and improving. Victorian players can leverage seasonal demand-supply imbalance in India and price differential between domestic (Indian) and imported products. Universal dairy products - specialty (e.g. specialty cheese, premium ice cream, flavoured yogurts etc): The outlook for this is improving. Increasing affluence, growing middle class that has exposure to world gourmet food will help improve the consumption of specialty dairy products. Bovine semen - particularly Holstein-Friesian and Jersey varieties: The outlook for this is stable and fluctuating. This is a restricted item and its occasional imports would be based on specific circumstances only. Second hand capital intensive processing equipment: The outlook for this is improving. Many of private players have small to medium capacity processing plants and are willing to purchase imported second hand equipment to reduce capital investment and stay competitive. Cattle feed including UMMB licks and Bypass Protein Feed: The outlook for this is stable. There is no structural change in smallholding dairy industry in India. Thus it is unlikely that small farmers will alter economics of milk production for greater consumption of cattle feed supplied by private players. Dairy extension services: The outlook for this is stable and improving. There is a strong need for door step dairy extension service at affordable price. With awareness increasing, farmers in relatively affluent states are willing to explore the benefits of dairy extension service. However, the estimated market size for cattle feed in India is very low (approximately A$ 2 million) to remain attractive for Victorian players.

1.3. Route to Market

The options available to go to market in India for the qualified opportunity areas for Victorian dairy players are summarised below: Universal dairy products commodity: Forming partnership (Joint Ventures) with Indian partners is a preferred and a safer route to market. Sufficient due diligence, prudent selection of business partner and aligning strategic objectives will be key to a successful partnership. Other options include setting up Indian subsidiaries and taking up strategic stakes in Indian dairy processors.

Universal dairy products specialty: The most preferred route for specialty dairy products to enter Indian market is through importers / distributors, as the quantity of exports are small and the market is still in the nascent stage. Creation of subsidiaries or Joint Ventures should be considered when the Victorian players reach a critical mass of exports to India and after they have gained significant knowledge about the dynamics of Indian market and its players. Second hand dairy equipment: The most suitable route to market is interactions with second hand equipment dealer to identify business opportunities. Dairy extension service and bovine semen: The ideal route to market will be to keep the channels of communication open with various organisations (including private dairy farms and government approved agencies) and supply bovine semen as per their requirement. Victorian players can also explore possibilities of joining hands with private dairies which run their own collection network for venturing into dairy extension services. Many of the private dairies provide basic extension services to farmers at village level. A list of key players in Indian dairy industry and contact details of their executives has been provided to Victorian Government Business Office (VGBO) by PwC. This list can be obtained from the VGBO on special request.