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Milk powder situation in limbo 

21 Aug 2021

By Imesh Ranasinghe  Milk powder has been the hot topic of the country again in recent weeks with milk powder importers demanding a price hike, which eventually led to a milk powder shortage in the market. Among the other products such as rice that have gone missing from shops, milk powder went out of stock as companies have stopped supplying to the markets to avoid losses. Milk powder is considered an essential item in Sri Lanka with price controls imposed by the Government; the price of 1 kg of milk powder (locally manufactured and imported) is priced at Rs. 945 while the 400 g packet is priced at Rs. 380. The last time the price of imported milk powder was increased was in September 2019; this was done through the milk powder price formula that was implemented under the former Government. Accordingly, the price of a 1 kg packet of imported milk powder was increased by Rs. 50, while the price of a 400 g packet was increased by Rs. 20. Also, local milk powder prices were also increased to the above prices in May 2020, following a request made to the state regulator, the Consumer Affairs Authority (CAA). Following this, the milk powder importers requested a price hike from the CAA in June 2020 citing reasons such as the depreciation of the rupee. However, this was not approved by the CAA. Why a price hike now? The milk powder importers seek a price hike for their milk powder as the Global Dairy Trade (GDT) prices for full cream and skimmed milk powder increased between January to March 2021, as there were seasonal reductions in product availability and persistent demand for milk solids from China and Southeast Asia. The dominant involvement of the buyers from China went up until May 2021, lifting the cumulative GDT sales to the region by 23% above the prior season – this was the highest sales volume recorded in the region on the GDT platform since 2012. However, since May, the GDT auction prices of full cream and skimmed milk powder kept dropping till July, and only skimmed milk powder GDT auction prices saw an increase in August. Speaking to us, a senior industry spokesman said that the concession offered by the Government is insufficient considering the needs of the industry. According to him, the decision to reduce the import tax for milk powder by the Cabinet last week only amounts to a Rs. 35 reduction Rs. 15 in import duty, and Rs. 20 in the Ports and Airports Development Levy (PAL), while value-added tax (VAT) is not exempted  He said the industry has been appealing to the Government since March 2021 for the price increase. “A lot of people are asking why the industry can’t hold on for one or two months, but what people do not understand is that we have been losing money since March,” he added. The industry has been requesting a revision of prices or a duty relief or a combination of both since March this year. He said the importers could cover the losses for two or three months but it is impossible for them to go beyond that. “We are not asking to make profits; we are asking the Government and the authorities to actually allow us to break even.” To break even, he added that the industry at least requires a price increase of Rs. 250 for 1 kg of milk powder, which would increase the government-controlled price of 1 kg of milk powder from Rs. 945 to Rs. 1,195. But he said the price increase could be done through a combination of reducing taxes and increasing the price to make up for the remainder. For example, if the VAT is removed, there is a concession of about Rs. 65; it would add up to Rs. 100 with the already reduced taxes. So the Government can increase the price of the 1 kg milk powder packet by just Rs. 150 to achieve the Rs. 250 needed to break even.  Moreover, he said the Government can reimpose the taxes and reduce the prices once the prices in the global market come down, which would be a win-win situation for the industry and the Government. This way, he said, if a packet of 1 kg of milk powder is increased only by Rs. 150, the 400g packet would only increase by something between Rs. 50-60, which will not affect the consumers that much, as they usually buy the small packets. “So, it is better to have that rather than not having stocks. We hope there will be some response from the Government,” he said. Furthermore, he said the consumers must also understand that the milk powder issue is beyond the control of the Government to a certain extent, and is only due to prices in the world market. According to him, the adverse effects of the rupee depreciating against the US dollar had put many milk powder importers under severe stress. Shortage of milk powder in the market The senior industry spokesperson said that the milk powder shortage that the local market currently experiences is a question of survivability, since the more businesses sell milk powder the more they will lose. “So, with whatever we have, we are servicing the market,” he said. Moreover, he said with no cash flow and the businesses in the negatives, the banks will soon stop lending money to businesses. This is the reason, he said, that there is a shortage of milk powder in the market, which the consumers need to understand. With the recent restrictions of imports by the Government to prevent further depreciation of the rupee and save foreign reserves, the Government has not been keen on spending money on imports. However, with milk powder imports, he said, it is not a question of money going out through imports but rather filling the vacuum in the local market. Furthermore, he said imported milk powder is still cheaper than locally produced milk, as a litre of local milk will cost about Rs. 200 while a litre of milk made with importer milk powder will cost only about Rs. 155. 75-80% of the local milk powder demand is supplied via imported milk powder. Imports are mainly sourced from New Zealand and Australia. The local companies can only supply up to 40% of the demand for dairy products in the market. Earlier this year, Agriculture Minister Mahindananda Aluthgamage said that the Government aims to produce at least 80% of the country’s milk consumption locally by 2024. Although successive governments have tried to direct people to fresh milk rather than milk powder, such attempts failed, as the local milk production was not sufficient to achieve that goal. Although fresh milk is considered the most popular beverage across the world, research by the Hector Kobbekaduwa Agrarian Research and Training Institute in 2019 showed that the level of milk consumption in Sri Lanka is considerably low with per capita consumption of fresh and powdered milk at 110.33 ml per month and 341.36 g per month, respectively.  Milk powder price formula While the industry strongly recommends going back to the milk powder price formula in terms of price revisions, as it played a very active role earlier, the Government has chosen not to support the idea. Speaking to us, State Ministry of Co-operative Societies, Marketing Development, and Consumer Protection Secretary K.D.S. Ruwanchandra said that even though the State Ministry has suggested the idea of implementing a price formula to the Government in order to solve the issue, the Government is not supportive of the idea. The pricing formula for imported milk powder was approved by the Cabinet of the former Government in September 2019 to depoliticise prices. The formula was said to be revised every quarter based on global price fluctuations. However, the former Government was able to revise the prices only once under the formula, as the new Government was elected two months later, just before the end of a quarter. “With the formula, when prices go up, we can increase the prices (of milk) and when the prices come down, we can reduce the prices, and the process is very transparent,” the senior industry spokesman commented, saying that such a move will solve the current issue. Other measures by the Government Ministry of Trade Secretary Bhadrani Jayawardena, speaking to The Sunday Morning Business, said that the pricing committee of the CAA submitted recommendations to the Trade Ministry and State MInistry of Consumer Protection following requests made by the milk powder companies to increase prices. Following this, the State Ministry submitted a cabinet paper through the Trade Ministry which received the cabinet approval last week to reduce the import tax for milk powder and added that it was the only decision taken by the Government about the milk powder issue so far. She said that about 100,000 MT of milk products were imported in 2020 at a cost of about Rs. 62 billion while 460-500 million litres of milk are produced locally, which caters to only 20% of the national demand. According to the Central Bank, about 97,000 MT out of the total milk product imports in 2020 were milk and milk cream, and according to the Department of Animal Production and Health, only 414 million litres of milk were produced locally last year. Also, milk products worth Rs. 27 billion were imported during the first five months of 2021, which is only about Rs. 2.5 billion less than in the same period in 2020. State Ministry of Co-operative Societies, Marketing Development, and Consumer Protection Secretary Ruwanchandra said discussions were held with the milk powder importers to hike prices due to the international price hikes. But, he said the milk powder importers have imported quantities required by them in the last few months that would be sufficient to cater to the market for at least three months. “However, we are still considering the concerns of these suppliers. As the initial step, we have already reduced the taxes. We will see how the international prices look in the coming two weeks, and based on that, we will make a decision,” he said.

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