Evolution of Dairy Practice in India and Evolving Business Models
Milk is not just any other food in India. It has deep-rooted cultural, historical, and economic significance to the lives of Indians. Milk and Dairying find mention in the mythologies like Bhagavata, Mahabharata, and numerous others. Widely referenced in these scriptures, aspects like Dairying as an occupation, community engagement, trade; Cattle as a source of wealth and their role in agriculture; Milk, its uses and processing to various products are relevant to an extent still today. This socio-cultural connection has played an undeniable role in the evolution and shaping of the dairy industry as it is today. One could imagine the lean value chain that could have existed in the ancient past involving milking animals every day, using milk for own consumption, converting to less perishable forms like curd, butter, and ghee for trading, donating the low-value forms like buttermilk. With the increased adoption of technology and increased efficiencies across the sector, the core of the modern value chain is not very different from the ancient one.
Dairy is one value chain in India that didn’t mimic the western trends straight away but took a head-on approach for solving its unique problems. Almost every aspect of Indian Dairying, be it Animal genetics, Animal Husbandry practices, Fodder and Feed, Processing and Distribution, has unique characteristics and challenges. The early efforts and visionary leadership in steering the value chain in the right path have helped address these challenges and develop an ecosystem that is beneficial to dairy farmers and processors. Vital considerations and approaches in localizing the science, technological or commercial interventions to address unique local problems have contributed to the strong foundations of the value chain. Despite its success factors, the dairy sector still needs to address existing challenges like low genetic potential, supply chain constraints, and emerging challenges like climate change, greenhouse emissions, and threats from new categories like dairy alternatives. In addressing these challenges, many start-ups and existing companies focus on unlocking new opportunities, adopting new business models, and causing readjustments in the value chain organization.
With 199 MMT in 2021, India is the largest producer accounting for approximately 19% of global milk production. India has been the largest milk producer for the last 23 years, despite the poor milk yields among the local milch animals. Almost 95% of the milk producers in the country hold, on average, between 2-5 animals. In comparison, the average herd size in the US is about 180 animals. India’s milk production has been growing at 4.5% in the last 15 years in comparison to 2 % of the US. This increase is attributed to the rise in the number of farms in India. In contrast, the number of farms decreased in the US due to consolidations and increasing farm sizes. One key aspect determining dairy economics is that Dairying in India is practised by smallholder farmers complementary to agriculture. The agricultural waste and by-products always supplement compound feed and In addition, the farmer household’s manpower contribution is also involved. These aspects are always undervalued or ignored when comparing the efficiencies to advanced dairy production systems. Approximately 48% of the milk produced is utilized by the farmer families and sold to the local consumers by smallholder farmers and vendors through unorganized routes. There is a recent trend of an increasing number of medium-sized farms with up to 50 animals. Most new entrants into dairy are focusing on starting medium-sized farms backed by new marketing drives like demand for Desi/ A2/ Organic and by offering value-added products like Paneer and Ghee etc. While some medium farms focus on liquid milk production and supply to large processing companies, integrated farms with small processing units tend to meet urban customer needs through e-commerce and D2C routes. The role and contribution of large organized dairy farms are limited. Improving the genetic potential and productivity of the milch animals is one problem that needs attention for increasing milk production in the future. A drastic increase in the number of animals is impractical and cannot be sustained owing to fodder and feed challenges.
Feed contributes to about 70 % of the cost of milk production in absolute terms for medium-scale farms and small farmers as well. Smallholders’ general feeding practices include feeding the animals with dry and green fodder, supplements like bran, oil cakes, and lesser legumes. With more farms also coming up in the urban/ semi-urban locations, most dairy farmers are dependent on purchasing dry and green fodder along with other supplements. The dependence on compound feed is slowly increasing as free grazing is becoming a declining practice owing to the shrinkage of pasture lands and labour shortage. Large and medium dairy cooperatives/ companies like Amul, Godrej Agrovet, started supplying compound feed manufactured in their feed mills to member farmers. This practice is now followed by many small new-age dairy start-ups as well. Though cattle feed is not a very attractive segment in the past, from the last decade, many independent cattle feed companies, including MNCs like Cargill are focusing heavily on the cattle feed market, which is currently about 15% of the overall animal feed market. Opportunities in cattle feed and nutrition are primed for exploration as addressing the feed shortage, feed quality, and increasing feed conversion efficiency with respect to milk volume is the need of the hour. Technologies for large-scale silage production and processing will become mainstream, with more farmers shifting from conventional feed sources to compound feeds and concentrates. Exploring unconventional agro by-products and bio-mass to be processed to feed also holds promising potential.
The next stage of the dairy value chain, i.e., milk collection and processing, has evolved into a well-developed ecosystem in the organized sector, with most processing capacity coming from the organized segment. While organized dairy processing companies are adept in processing both traditional and modern products, unorganized processors are primarily limited to processing products like curd/yoghurt, traditional sweets, paneer, and ghee, etc. Due to the solid technological foundations laid during the operation flood in the 1970s, the unique challenges were addressed through strong R&D and localization of technologies. In the 1950s, large dairy companies from the west declared that making milk powder from buffalo milk was not feasible. Dr H.M Dalaya worked on the successful optimization of process and equipment design for buffalo milk powder at the Amul plant in 1955, which is considered a golden moment in Indian dairy technology. Localized solutions have helped solve many such challenges in dairy processing, like adopting low-cost LLDPE pouches for milk packing and distribution, technologies for mass production of traditional products like paneer, ghee, traditional sweets etc. After attaining a reasonable scale, dairy processing companies have understood the importance of efficiency and quality rationalization of milk products. The importance of standardizing milk, separating valuable components like milk solids and fat, and converting them to value-added products is quintessential need for profitable dairy processing. Most dairy companies in the cooperative sector like Amul, Mother dairy, State dairies, and significant private dairy companies have developed strong back-end integration models for collecting and processing liquid milk and a wide spectrum of other processed products. Though liquid milk contributes to about 60% of the revenue to large dairies, the lower margins, perishability, and supply chain constraints make it a riskier proposition. Some of the latest dairy processing companies like Milky Mist and Drums Foods have addressed this risk by primarily launching processed and more value-added forms like cheese, paneer, greek-yoghurt, and ice cream. After stabilizing the market, these companies are now expanding their product portfolio, including liquid milk in UHT form. Companies like Milk Mantra and Osam rose to the limelight when they started addressing the market needs in the locations neglected by mainstream dairy companies. These companies have worked in developing a robust local ecosystem where dairy farming was not actively pursued. Start-ups like Sid’s farm, Kairo, and many such companies focus on addressing the issues like adulteration, food safety, and residue issues in milk by working closely with farmers or through their milk production.
Some start-ups are concentrating on serving the niche segments through A2 milk, unprocessed/non-standardized milk, which are primarily marketing fads. The critical issue is in scaling such business models and achieving efficiency in the long term. The chemistry and processing of milk have been well researched and applied in the industry for a very long time. Consumers and processing companies moved from non-standard to standardized forms of milk to address quality issues and increase value realization.
Large dairy companies that are efficient and present across the product segments have reached a glass ceiling and face no significant challenges of processing technologies or efficiencies. These companies have already started diversifying into complementary and related sectors. The dairy value chain itself, compared to others, is better managed and well explored for its potential in the conventional forms. The next level of growth lies in addressing the challenges like climate change, clean-label and contamination-free dairy products, adopting digitalization and automation across the levels of the value chain – from animal management to last-mile milk products distribution. The businesses should be willing to partly shed the conventional approach and be prepared for adopting Dairy 2.0.
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