Until the cows come home
The subject matter for this write covers a wide spectrum of issues from the systemic flaws in the flow of liquid milk to the modern corporate ethos driven by perpetual profit growth objectives. This is written from an apolitical standpoint to provide a citical analysis of the shift in corporate culture, and the plight of helpless consumer base is lead to believe that the only form of consuming milk is by way of processed powdered milk.
The 2014 budget allocated funds for 20,000 cows. By funding for milking cows, the President got the bull by its horns, to find a permanent solution to the recurrent liquid milk crisis and more importantly sending a strong message to the corporate giants that hold the milk drinkers of Sri Lanka to a ransom.
Dairy industry, as a sector in the global economy views the 20,000 milking cows as mere “production units”. In the meanwhile, in India the cow is made sacred. In one culture the milk cow is deemed to be “production unit” while in another the same milk cow is venerated treated a “deity: economic interest is the driver behind both!
While the cow is sacred so long as it provides milk, no sooner the production drops then they are sent to the slaughter house in jurisdictions where the sacred cow is “legally slaughtered”. As for the milk, a cow produces milk to feed the calf not the humans.However, immediately after birth the cow is separated from the calf and we start milking the cow for human consumption thus depriving the calf of its birth right! Now comes the global milk majors who are nothing more than inanimate corporates stealing the milk that is meant to be feeding the calf and, not stopping at that misleads the consumer with advertising and advocating the consumption of processed powdered milk in the form of Whole Milk Powder (WMP) and Skim Milk Powder (SMP).
The entire process of separating the calf from the mother solely for economic reason as I see it is humanity at a low ebb. Imagine a lactating mother being separated from a new born baby for economic reasons!
The milk cow is a profit centre for the dairy industry. Global milk majors, constantly try to bring down the cost and increase production by introducing unethical yield increasing methods. Profit maximization is the name of the game. Every year, profits are to be increased with the same number of production units or the holy cow. As revealed the means to maximize profits using unconventional and unethical methods lead to the mad cow disease and in recent times a melamine crisis: both were driven by greed and were man-made crisis. It is believed that Sri Lanka is striving to be self-reliant in liquid milk.
Self-reliance is a contingency plan to address supply shock. While self-reliance is not sustainable, as a nation we can have a milk supply in the form of powdered milk for a three month supply. All problems start when policies are drawn to depend on this three month reserve of “powdered milk.” Self-reliance is achieved by means of external support but for a short period. In the case of achieving “self-sufficiency” in liquid milk, powdered milk does not make it to the equation. So, as long as there is this variable – powdered milk -, we will never be able to achieve self-sufficiency in liquid milk. For self-sufficiency in liquid milk to be achieved the foundation is the proper polices, infrastructure and more importantly consumer awareness which has to be in place. There has to be supply side and demand side equilibrium. If you haphazardly develop milk production and in the absence of a consumer base that sees no need for liquid milk in the back drop of strong advertising promoting powdered milk, the dairy industry will come to a grinding halt. Self-sufficiency is hard to achieve but at a national level to be dependent on external supplies for consumption “over-reliance” and no self-reliance is an outright policy flaw that needs to be rectified with changing needs.
It is my safe assumption that the current import of milk powder is the single biggest barrier towards achieving self-sufficiency and our refusal to see and identify the nature and the drivers of the problem.
Fonterra
Fonterra is the lead runner in the global dairy industry. In Sri Lanka, Fonterra has over 60 per cent of the liquid milk market share. What Bata is to footwear, Fonterra is to milk. As a leader in the global diary industry Fonterra controls or influences the price of milk powder. Driven by global demand and increased feeder cost prices in the recent times, milk prices have increased in the recent years. However, Fonterra covers their exposure at the CME (Chicago Mercantile Exchange) or NZX (New Zealand Exchange) by hedging their milk powder prices using futures contracts. In the meanwhile, every time the global price increases, they run to the CAA (Consumer Affairs Authority) and demand a price increase.
In Sri Lanka, in recent times we have run into problems associated with milk. Contaminated milk, artificial product shortages, collusion, and price increases are all too rampant.
Shell Gas – Fonterra – Consumer Affairs Authority
Shell Gas as an energy giant had developed a comprehensive commodity price risk management programme. They were fully covered for spot market price volatility. Yet, every time the spot market price increased, they held the consumers to ransom by demanding a price increase. A recurrent pattern was, CAA initially resists but eventually complies. Until the time Shell left Sri Lanka, they resorted to this practice and repatriated large amounts of foreign exchange in the form of profits.
It’s the same with Fonterra. Fonterra has a well-structured hedging programme in place. Given the recent price volatility of milk (powdered milk) driven by feeder cost, supply shocks, and aggravated by weather conditions the global spot price of milk reached record levels in recent years. In response to the price volatility, multiple exchanges in the world developed milk powder price risk management tools. In 2010 the New Zealand Stock Exchange (the base of Fonterra), introduced WMP (Whole Milk Powder) and SMP(Skim Milk Powder) hedging tools using Futures contracts.
Whole-milk Powder Price Volatility
To expand on the role of SMP in determining the prices, due to low fat content of skim milk, the product has a longer storage life and can be stored for an extended length of time. This helps to manipulate the commodity prices as and when the supplier wants. SMP is a swing product when it comes to determining the prices of milk powder. WMP due to higher fat contend has a shorter storage capability but a higher demand. Due to the combined effects of supply, demand and product quality the price risk is mitigated in the New Zealand Stock Exchange. Even the supply cost are fully hedged in the CME (Chicago Mercantile Exchange) using corn futures contracts.
The milk powder importers as always run to the CAA demanding price increases, knowing it would be granted after the initial period of resistance. The milk powder importers have conditioned the mind of the consumer base that the only form of drinking milk is in the form of powdered milk. This has been further fortified by strong mis-advertising using beauty queens and obese children that by drinking powdered milk one becomes these role models.
Recently a chairman of an industry body claimed that there is no demand for liquid milk in Sri Lanka. I found this to be an outrageous comment coming from an dairy- industry statutory body. If there is no demand for liquid milk in Sri Lanka, then they have to make it their duty to create the demand by educating the consumers.
More importantly, the CAA must stop false and mis-leading advertisements being bombarded. These advertisements are so strong that I wonder if the dairy farmer too would buy powdered milk with the money he gets from the sale of liquid milk.
Fonterra, recently claimed that they do not make enough money in the Sri Lankan market at the current world market high prices. The Sri Lankan dairy industry is assessed to be a US$300 million annually and Fonterra has a market share of 60 per cent of that space.
I review of the 2013 financial performance of the Fonterra International operations reveals the following financials:Net profit for 2013 year end is $ 736 million Asian market contributed 15 per cent towards this profits and this was a 11 per cent growth y.o.y
With such strong financials recorded, Fonterra’s local operators claim the operations in Sri Lanka to be uneconomical: this claim is nothing but amusing to me but will not be so amusing to the consumer who is convinced the only form to drink milk is in powdered form and are made to pay increased prices feeding the bottom lines of an industry giant.
Given their ability to control the prices and with a well-structured hedging programme in place, there was absolutely no need for the recent price increase. Yet this is Sri Lanka where the multinationals call the shots and the poor consumer gets a crappy deal.
The Milk Bar – Relics of a bygone era
I recall how my father one day took me to “Itpas goh rasa” (an outlet that sold exclusively milk based products) well patronized by all the school children in the vicinity. That was the first and the last visit to that outlet and I wonder if that still stands for all the milk bars once run by the Milk Board strategically located in every junction are now, no more. That time, liquor bars were none. Now every time I come to Sri Lanka I see more liquor bars and the milk bars, once a common site, has vanished. They have all been replaced by the liquor bars in response to a growing societal demand. These milk bars were an integral part of the society and contributed to a healthy nation and healthy dietary patterns.
As discussed earlier, the only way to being self-sufficient in milk is by awareness creation and have supportive infrastructure in place. I wonder if we can ever be self-sufficient in milk by having more liquor bars in every corner.
IIn England there is a school milk programme. Promote milk among school children. That in turn supports the community-based dairy farming. Sri Lanka should without any further delay, introduce such a programme, revamp Milco and bring back the milk bars. The school milk programme and the re-introduction of the milk bar will set in motion the long march to self-sufficiency in liquid milk in Sri Lanka.
There must be a dedicated bank to support the dairy sector. Milco can underwrite a bond to fund the initial infrastructure to set up a network of milk bars and introduce a national school milk programme. The same business model as Fonterra community based dairy farming (kiri gammana) must be replicated.
It is all about a shift in the paradigm. The country needs those who can think, lead and implement. We need a few more Gotabayas who got clarity of purpose and who can get things done. Gota has earned a name for what he starts he shall complete. Hand over the Milco to Gota and guaranteed he will make Sri Lanka self-sufficient in milk.
While the presidential initiative is commendable to have allocated funding for milk cows, the president is unable to be milking all these 20,000 production units! Between now and the cows, a lot needs to be done in the form of awareness creation (first ad foremost) to infrastructure development.
Until the cows come home, capacity development is of paramount importance to have sustainable self-sufficiency in the dairy industry in Sri Lanka.
(The writer is an investment advisor now resident in Canada)