How can India defend against tariff cuts on milk & poultry?

Indian dairy support 10cr+; Not competitive vs developed market peers; Consumption patterns & feed idiosyncrasies help.

The milk and poultry industry supports more than 10 crore households in this country, providing nutrition and excess income to millions of Indians. The fragmented nature of the industry in India increases costs affecting the competitiveness vs imports from other countries where these activities are done on a much larger commercial scale.

In today's post, we look at the importance of milk & poultry for India, discuss the advantages US poultry and dairy have over India, and conclude by looking at how the differences in consumption and feed patterns in the two countries leaves space for some middle ground.

How important is the dairy industry for rural India?

India's dairy industry is in many ways in a league of one. More than 10 cr farmers and small dairy owners supply our milk, and take home close to 75% of the milk's price. On the number of farmers direcly involved we exceed other much larger milk producers by factors of thousands, with Australia and New Zealand having a combined total of less than 20,000 farmers involved in this.

The fragmented nature of Indian farms, and the limited income farmers make off that implies that this is a very important source of income for one very key demographic. If markets were to open up, the price of milk in the country would go down significantly taking millions of these small farmers out of business. This has numerous negatives for us long term, including the lowering of quality of milk, stresses on income and well being of farmers, leading to migration, reduced spend, increased dependence on welfare programs and the like. Needless to say, it is in our best interest to try and protect this industry as we try to gradually make it more competitive.

Can Indian dairy players compete with developed market peers?

The scale at which most of the developed markets is almost unfathomable for India at the moment. The average size of a herd in New Zealand exceeds 400 cows, up from the 300 cow herd size a decade ago. The increased price competitiveness means farmers often have to take up large amounts of debt to expand their farms and create herd sizes at which prices are sustainable.

While this scale affects pollution, the quality of life of the cattle, and the financial stability of the farmer, it provides them with a way to produce extremely large quantities of milk at extremely low prices. The scale benefits start from the low feed cost, and extend all the way to the lower collection cost due to mechanization, and lower supply chain costs due to lower efforts to collect. The combination of these factors vs how things stand in India means that Indian milk would find it hard to be cost-competitive for some time to come. To put a number to the damage possible, will full-scale imports were allowed, Indian farmers would have to slash prices by as much as a third to remain competitive.

What can be a potential solution to help domestic dairy & poultry?

With pressure from the west rising, as they look to enter one of the most attractive consumption markets, India would most likely have to make tradeoffs. The government is trying to tackle this by offering concessions which are strong pain points for the counterparty, like chicken legs, which have very little demand in the US as people prefer breast meat a lot more but can see good demand in India.

On the milk front, India can leverage a lot of the factors that give international milk their cost advantage, by putting restrictions on the feed used to animals to exclude certain items that could prove to be a health risk for our populations, rendering a large part of their current milk unsuitable for trade, and require them to take steps that would increase the price of milk they export.

The government walks a tightrope between international pressure and domestic needs as it looks to finalize the nitty-gritty of this deal. We wish them well in that endeavor!

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.

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