A curdling controversy over milk

It was a crisis that seemed to strike from out of the blue. One day, worried housewives in Delhi suddenly discovered that they had an early morning crisis on their hands.

The Mother Dairy booths on which they depended for constant nourishing supplies of milk had started rationing sales. What was worse was that wild rumours began circulating that the shortages would stretch for months.

India is the world's largest milk producer and the White Revolution has been written about in management casebooks.

So, why had the taps at the booths run dry? Was it a shortage triggered by two drought years in a row? Or was a shortage provoked by the battling barons of the milk industry in a bid to settle scores?

On one side, is V Kurien the redoubtable chieftain of the Gujarat Co-operative Milk Marketing Federation, who is still presiding over his fiefdom though he is now 84.

On the other is his one-time protege Amrita Patel, the chairman of the National Dairy Development Board.

Let's start with some background. It might come as news to people outside the milk industry but cows and buffaloes find it tough to cope with India's summer heat. The result is that milk production falls dramatically during the summer months.

So, for instance, if a buffalo gives 1 litre of milk in summer it gives around 3 litres in winter.

Similarly, a cow may give around 1 litre of milk in summer but it will give around 1.5 to 2 litres of milk in winter. In India 60 per cent of the milk produced is from buffaloes and 40 per cent from cows.

How does the milk industry cope with this giant variation? The answer is quite simple: during winter a portion of the milk produced is converted into skimmed milk powder that can then be converted back into milk during the lean summer months.

What went wrong this year? For a start, Mother Dairy which supplies milk to Delhi went on a marketing drive earlier this year that proved a little bit too successful.

By August, when festivals like Raksha Bandhan and Janmashtami came around demand for milk shot up by an unprecedented 20 per cent. From the normal 1.5 million litres demand soared to 1.9 million litres.

In other parts of the country too demand has jumped steeply. In Jaipur city, for instance, demand has risen by 24 per cent during the last year according to the Rajasthan Cooperative Dairy Federation.

In ordinary circumstances Mother Dairy might have been able to cope with this shortfall. But after two drought years the supply of SMP at most of the milk federations around the country has run low.

And plans by the NDDB to import milk powder earlier in the year had not actually taken place.

This is where the fight in the milk industry breaks out into the open. NDDB says it is being arm-twisted into buying milk powder at peak prices by Kurien's GCMMF.

GCMMFcounters by saying that there's no shortage anywhere except in Delhi and that this is entirely due to mismanagement.

Says a GCMMF spokesman: "The mismanagement at Mother Dairy, Delhi should be thoroughly investigated so that such incidences do not occur in future."

Unfortunately, for NDDB and Mother Dairy their shortages come at a time when the international scenario has taken a turn for the worse. In recent years SMP prices have been climbing in the international markets for a variety of reasons.

As a result domestic prices of milk powder have climbed steeply. In August 2001 milk powder was selling for Rs 66.96 a kilo and this rose to Rs 68 in August 2002. But this year it has shot through the roof to Rs 98.25 per kg.

The fact is that the effect of a drought is felt in the dairy industry after a gap of a few years.

So, even though this year's monsoons have been plentiful the buffaloes and cows have been producing less milk and at the co-operative dairies procurement has fallen by 300,000 litres between April and July to 15.2 million litres daily.

The shortfall has come as a time when demand has risen by 1 million litres. The result was a gap of 1.3 million litres daily.

The solution normally would be to convert milk powder into liquid milk. But the co-operative federations have been using stocks up rapidly during recent months.

Consider the figures: Between April and August 2002 there were stocks of about 15,000 tonnes of skimmed milk powder. This year between April and August stocks had fallen to a rock bottom 900 tonnes.

In August NDDB asked for imports of 6,000 tonnes. Says Amrita Patel: "The building up of a strategic reserve is consistent with NDDB's twin objective of upholding producers interests even as it meets consumer needs for liquid milk."

In addition, NDDB has also placed an order for 3,000 tonnes of milk powder from GCMMF. But Kurien also wants NDDB not to import.

Instead, he says it should order the other 6,000 tonnes from GCMMF. GCMMF says it will sell at Rs 94 per kg while international prices are at around Rs 105.

NDDB in turn accuses Kurien of wanting to control imports. Kurien says he has good grounds for opposing imports. He says that imports of SMP by NDDB in 1999-2000 pushed down milk powder prices for the last two years.

"The market price of SMP was even lower than the cost of production during the last two years," he says.

"It is not the import but the timing of import which is very critical to the market prices and the price realised by the milk producer. There is no point in importing milk powder when our peak season of milk production is about to begin. Imports will have a very detrimental effect on the domestic milk production," says Kurien.

The fact is that both sides are manoeuvring for the best deal for their own organisations. NDDB says that Kurien is demanding that it should place its entire order on GCMMF and that he will supply in December/January. But he's also demanding that they should pay at today's prices.

In fact, in May NDDB wrote to GCMMF asking for extra skimmed and liquid milk. GCMMF wrote back saying it was willing to provide both but only if NDDB placed a long-term contract on it.

NDDB argues that buying liquid milk from Gujarat on a long-term basis is uneconomical because of the difficulties in transporting milk for a long distance.

Says R S Sodhi, general manager marketing at GCCMF: "It is market dynamics and price is an outcome of a demand supply situation."

He claims that GCMMF was justified in hiking its SMP prices as it has proof of NDDB buying SMP from private dairies in the north and southern cooperative dairies at Rs 105.

"If we are promising sustained supplies, they have to pay a price for the losses that we have incurred. They were our customers for three decades, shouldn't they have anticipated the demand," he fumes.

NDDB says that GCMMF has taken advantage of the situation and hiked prices. It also says, that despite assuring the entire delivery in September, GCMMF now wants to stagger it till November.

"That's because we have only a week's inventories as we are approaching the flush season," says Kurien.

Adds Sodhi: "We have had to delay our export commitments to Bangladesh, Iraq and Malaysia to supply to NDDB. They wanted deliveries by September end but we did not agree as our inventory depletes by November."

But did NDDB, underestimate demand? Kurien says it did. "This shortage happened since Mother Dairy Delhi had not kept enough inventory of milk powder and failed to anticipate the surge in festival demand. Mother Dairy used to buy 18,000 to 20,000 tonnes of milk powder each year from GCMMF."

Historically, NDDB has been buying from GCMMF as a buffer to tide over the lean months. Last year, it bought around 40 million litres of milk from GCMMF. Then why the shortage now?

"NDDB's Mother Dairy discontinued this purchase from a reliable source like GCMMF," says Kurien.

NDDB defends itself saying it depended on historical projections. It says that in the last five years, on an annualised basis, milk procurement grew by 9 per cent and demand climbed by around 5 per cent.

Based on these figures, Mother Dairy had made projections for this year and had planned for a 10 per cent hike in demand. Instead, there was a sudden 20 per cent jump.

Rewind to last year. Temperatures have been soaring ever since Amul pushed its range of ice creams into Delhi, a predominantly Mother Dairy territory, in January 2002.

Already, in the Rs 600 crore (Rs 6 billion) ice cream market, Amul is selling 30 million tonnes followed by Hindustan Lever's Kwality Wall's at 15 million tonnes and Mother Dairy at 8 million tonnes.

Then, for the past two years, Mother Dairy has been unfurling its national ambitions. After hiring three managers from Hindustan Lever, it began wooing consumers.

So from just dairy products like ice cream, yogurt and lassi, Mother Dairy which has the Safal network also sells peas, rice, fruit drinks, jams and savoury snacks.

With the Rs 7,000 crore (Rs 70 billion) milk cooperative market getting competitive, NDDB also unleashed a multi-pronged action plan with an outlay of Rs 800 crore (Rs 8 billion).

It included using its marketing arm -- Mother Dairy Foods Ltd -- to enter into 51:40 joint venture companies with state coooperative federations to assist them with marketing value-added products and to help them in other ways to become self-reliant enterprises.

Kurien hates this and believes that if the state cooperatives are going to strike any deals, it should be with Amul. The result? An intense slanging match between Kurien and Patel.

Last November, Himmat Singh, additional managing director of Mother Dairy Foods Processing Ltd wrote to GCMMF about how the Northern Regional Milk Federations were receiving large quantities of milk from drought affected areas.

In order to help these federations, he said Mother Dairy would accept more milk from them. "We therefore would find it difficult to accept the milk from GCMMF."

A fortnight later, Singh sent another letter to GCMMF's Sodhi, terminating NDDB's contract with GCMMF.

And GCMMF's retort? "This gives us the impression that this decision of yours does not seem to be reasonable," wrote back Sodhi.

Then a few months ago, Dhara, NDDB's edible oil brand marketed and distributed by GCMMF was abruptly pulled out. And both Mother Dairy and Amul have been announcing new product launches as if they were fighter missiles.

So where does all this lead to? With a good monsoon, milk procurement is expected to soar. But there could still be shortages during the festival season this year.

Even so, the one-upmanship between Patel and Kurien continues. Patel, whose five-year term at NDDB ends on October 1, is believed to be awaiting an extension. And Kurien, say insiders, is keen to see his own man -- GCMMF's managing director B M Vyas -- in the hot seat.

But putting things in perspective was union home minister L K Advani, who was the chief guest at the inauguration of Mother Dairy Gujarat's 200 tonne Gandhinagar plant in May.

With both Kurien and Patel sharing the dais, without taking names, Advani said: "My desire is that you should all work together. That is the future of milk and cooperatives in this country." The rest of his speech was drowned in the 40,000-strong farmer applause.