CONCEPT OF DETERMINATION OF DAIRY MILK PRICE ON THE BASIS OF FAT & SNF% IN INDIA
Post no-635 Dt-09/04/2018
(Compiled & shared by-DR RAJESH KUMAR SINGH, JAMSHEDPUR, JHARKHAND 9431309542, rajeshsinghvet@gmail.com)
Price is one of the most effective means of achieving organizational objectives.Pricing can effectively serve as an instrument of supply and demand management.It has a significant role to develop and influence the structure of any segment of the economy including dairying. Most marketed milk is a joint product of mixed farming. For successful purchase pricing it is necessary that the purchase price should be such that it attracts the inputs required for milk production such as labour and cultivable land for growing fodders. The sufficient conditions for success include the competitiveness of the purchase price i.e. its absolute value v/s other prices offered, timing and reliability of payment.
Milk thus procured is to be utilized in most efficient way in the production of different dairy products according to the consumer demand. The dairy plants have to look after the interests of milk producers as well as the consumers. It demands a rational pricing policy to meet the objectives of serving both these entities and at the same time to see that the plant’s own economic viability and growth prospects are not lost sight of.
The selling price for milk and milk products must be competitive with others selling prices, consistent with the objective of social justice, relative consumer preferences and techno-economics of dairying.
Determination of a pricing structure for milk has not only to be based on the demand-supply equilibrium but also on the compositional quality of milk. The market forces will determine the base price for milk. The dairy plants should decide what price is to be paid to the farmers on the basis of quality of milk. Most dairy plants have some kind of a purchase pricing policy, which has some kind of relationship to what the plants get from the sale of their milk and milk products. In the interest of the organized sector, the milk pricing system has to be such that it becomes instrumental in increasing milk production by ensuring lucrative returns to the milk producers.
A rational pricing structure should ensure that :———-
• Milk production is encouraged.
• The farmers get a fair return.
• Producers should get the incentives to supply better quality and larger quantity of milk.
• It should ensure the maintenance of an even supply of milk throughout the year.
• Consumers should get wholesome milk at reasonable rates.
• An attractive margin of profit to processors of milk and milk products.
A faulty pricing policy can lead to a combination of the following undesirable effects:———–
• Encourage adulteration with water or with fat and solids not fat from non-milk sources.
• Discourage production of one kind of milk while encouraging the production of other kind.
• Encourage mixing of cow milk with buffalo milk or vice versa.
• Encourage malpractices in payment for milk.
The pricing systems that are operative in the country for milk procurement are of the following type:
i. Pricing on Fat Content
Under this system milk is paid on the basis of its fat content alone.———-
• This system discourages adulteration with water or mixing cow and buffalo milk with a view to gain an economic advantage.
• This system involves relatively simple accounting.
• This system encourages partial skimming and adulteration with cheaper fats.
• Production of cow milk is discouraged, as milk is valued only on fat basis,completely disregarding the SNF contents. According to this system, cow milk containing 3.5% fat will be paid at half the rate for buffalo milk containing 7%fat, even though the solids-not-fat (SNF) content of both the milk is nearly the same.
ii. Pricing on the Species Source
Milk pricing is made on the consideration of the species from which milk is drawn i.e. cow or buffalo. Usually a minimum fat standard for the different types of milk is adopted for acceptance or rejection of the product. Milk that meets the minimum fat standards is usually paid a flat price without regard to its compositional quality.Such system provides no incentives for production of richer milk. The producers, therefore, under this system, would not get any extra payment for extra fat in their milk during lean season. Generally in the lean season milk production goes down while fat percentage goes up.
iii. Pricing on the basis of a Minimum Fat Percentage plus Premium for Fat
Under this system a minimum fat standard is laid and a base price is fixed for the minimum fat standard. Fat over and above the minimum standard is paid premium on pro-rata basis. It discourages the production of cow milk.
iv. Pricing on Total Milk Solids
This system is mostly adopted by traditional milk traders. Milk is paid on the basis of yield of Mawa or Khoa.
• Fat & SNF are priced at the same level which in fact is not rational.
• This system discourages the production of high fat milk.
• It encourages partial skimming & adulteration of milk with cheaper non-milk- solids.
v. Two Axis Pricing of Milk
National Commission on Agriculture recommended that dairy industry should adopt two axis pricing policy for milk procurement as it is rationally based on evaluation of both fat and solids-not-fat contents of milk. According to the two-axis pricing policy, the price of milk is calculated by fixing a pre-determined rate for fat and solids-not-fat. In this system fat and SNF are, generally, given equal value and per kg. price for fat and SNF are fixed in that ratio at which these occur naturally i.e. round 2/3 of fat price per kg. for each kilogram of SNF. In actual practice incentive for higher than the minimum SNF and penalty for supplying lower grade of milk by way of deducting the amount at a higher rate otherwise payable for good quality milk is well specified.
This type of raw milk pricing automatically discourages adulteration. This system does not discriminate against the cow or the buffalo milk. To minimize the effect of seasonality on milk procurement seasonal price premium can be paid up to 30% of flush season rate during lean months as it will increase average plant utilization and reduce the cost of processing.
vi. Pricing of Milk Products for Sale
The sale price of milk and its products should be fixed in a manner that would enable the organized dairy industry to pay remunerative price to the milk producers and meet the cost of collection, processing and distribution of milk and milk products.The sale prices should also cover the cost of services rendered in connection with channellizing the inputs for milk production, keep a fair margin of profit and yet make the price of the commodities competitive.
In case of milk schemes sponsored by the Government, the consumer’s price is administered so as to keep it as low as possible. It becomes difficult to pay remunerative price to the producer and thereby induce more production and procurement. Commercial consideration of profit and loss should be the guiding policy to help and develop the dairy industry so that it becomes viable and commercially profitable. However, Govt. may have differential pricing of dual-price policy for milk distributed through milk supply schemes to render assistance to weaker sections of the community.
The only method for maintenance of the competitiveness of consumer price without reducing the remunerative price for producers is to keep marketing cost as low as possible. This can be done by attaining greater efficiency in procurement, processing and distribution of milk and milk products.
The Committee on Pricing of Milk set up by the Government of India detailed the criteria for a rational pricing policy. It recommended that a Milk Pricing Committee should be appointed at (a) each dairy plant, (b) in each state and (c) an inter-state authority should be set up to coordinate the activities of the dairy plants that collect milk from more than one state to fix the producer and consumer prices of milk from time to time. The Milk Pricing Committee of the state and dairy plants should be sensitive to the variations in the prices of various inputs for milk production and the benefits that the farmer can obtain so that milk production is not discouraged by the pricing structure. The committees should also keep in view the interests of the consumers and should critically examine the overhead charges for collection, processing and administration so that the gap between the producer and the consumer price is kept to the minimum.
Pricing Systems——
Since thousands of years milk is being used for infants, young ones and for adult also. Milk has become integral part of food for both vegetarians and non-vegetarians. Therefore prices paid by customers have become economically important. As a result government has also considered prices of milk.
Pricing of milk is always based on its cost price and price paid by the customers. Actually cost of milk is a complex phenomena, as prices of material related to cost differ from period to period and market to market.
Pricing structure should be based on the following principles.
i) Prices should be remunerative to producers.
ii) Prices should be competitive to local market prices
iii) Prices should be discourage adulteration and promote quality consequences.
iv) Prices should be based on milk constituents i.e. FAT and SNF.
v) Prices should consider the range of quantitative variation in above constituents of milk.
Various pricing systems functioning in the country for milk procurement are given below:
Pricing on fat content———
A very large section of dairy industry is buying the milk on fat basis, disregarding the SNF content of milk. This is practiced by most private dairies. The advantage involves discouraging adulteration with water or separated milk or, mixing of cow milk with buffalo milk. A disadvantage of this system is that it discourages production of cow milk. The price paid per kg of fat was Rs. 425/- in 2011.
Pricing on volume or weight——-
This method is also known as flat rate. It saves time and is simple to calculate but encourages adulteration i.e. watering or skimming. It is popular in the unorganized sector.
Pricing on total milk solids———
The traditional milk traders generally price the milk on the basis of total milk solids. They consider the yield of Khoa to be produced from the milk to be purchased. This system encourages partial skimming or adulteration with cheaper non-milk solids.
Pricing on species of milch animal——
In this system, consideration is given to the species of animal from which the milk is obtained i.e. cow or buffalo. Normally buffalo milk fetches more price than cow milk. This system encourages the adulteration of buffalo milk with water or cow milk.
Pricing as per cost of milk production——-
The price should be related to the cost of milk production and ensure a fair margin of profit to the producer. It should take into account the seasonal variation in production and demand.
Pricing according to the use of milk———-
This practice is followed mainly for milk products. Milk procurement for a specialized dairy product such as cheese requires selection of raw milk by avoiding mastitis, colostrum, late lactation, and antibiotic-free milks. The milk should be free from detergents, sanitizers, pesticides, insecticides, aflatoxins, mycotoxins, heavy metals and even off-flavours.
Two-axis pricing of milk——–
Liquid milk plants have a differential pricing system for flush and lean months based on the fat and SNF content of milk, with provision for the payment of a premium for a higher fat and SNF content than the specified standard. According to this pricing policy, the price of milk is calculated by fixing a predetermined rate for fat and SNF. This system discourages adulteration and provides a common pricing approach to both cow and buffalo milk. The requirement by Food Safety and Standards Rules (FSSR) – 2011 (erstwhile PFA) for cow milk is 3.0% – 4.0% fat and 8.5%-9.0% SNF while those for buffalo milk 5.0%-6.0% fat and minimum 9.0% SNF throughout country. This is done with a view to encourage the milk production through high-yielding indigenous and cross breeds and to give adequate incentive for production of cow milk. In this context, National Dairy Development Board (NDDB) has suggested the ‘two-axes milk pricing’ policy.
Two Axes Formula———–
India has been producing large quantities of buffalo milk when compared with any other country. This milk being rich in fat content always attracted good price in comparison to cow milk. The fat portion being visible (giving thickness), separable (yielding cream) and measurable (in percentage) made it easier to decide milk price.
Kilo fat system———-
A system based on ‘kilo fat’ became a practice for purchase of buffalo milk. Under this system, an amount in rupees per kg of fat means an amount payable on that quantum of milk which would yield one kg of fat. For example, when the rate per kg fat is Rs. 425, it means that the said amount will be paid for 16.66 L of buffalo milk with 6% fat (minimum standard):
1 kilo (1000gm) fat ÷ 60 gm/L (6%) = 16.66 L
On this basis, the price per L works out to: Rs 425 ÷ 16.66 = Rs 25.51/ L
If cow milk with 3.5% fat (min standard) were to be purchased under kg fat system, it would fetch Rs 7.70 per L as shown below:
1000 gm ÷ 35 gm/L (3.5%) = 28.57 L
Rs 425 ÷ 28.57 = Rs. 14.87/L
This works out to 58% of the rate paid for buffalo milk, an injustice to cow milk producer.
Double axes pricing————
With a view to pay for buffalo milk and cow milk on the rationale of their two components, viz. fat and SNF, a system was devised called as Double–axis milk pricing. The purchase rate for fat and SNF are determined based on previous experience or ruling market prices/ consumer appreciation for buffalo milk fat (white ghee) vis-à-vis cow milk fat (yellow ghee) and for buffalo milk SNF vis-à-vis cow milk SNF (i.e. SMP). Accordingly, the difference between prices paid for buffalo milk and cow milk is reduced. Suppose the rate of Rs. 425 per kg fat (which can neither be purchased nor it is the selling rate for ghee normally) is translated into Rs. 190 per kg fat and Rs. 158 per kg SNF, then the purchase price for buffalo milk and cow milk is determined as shown below:
Table 6.1 Purchase price for buffalo milk and cow milk
*Calculated in grams per L of milk × price per grams of component.
In this way, the cow milk is paid to the extent of 78% of the rate for buffalo milk. This also matches with 80% TS in cow milk compared to buffalo milk.
Note:
• A ready reckoner can be prepared depending on actual rates decided from season to season. For every 0.1 % increase in fat and SNF, the value per L can be worked out for buffalo/cow milk.
• In above calculation, volume to weight conversion has not been considered. For calculation of kg fat/kg SNF, the milk volume is to be multiplied by specific gravity and the weight thus arrived is multiplied by fat or SNF % and then divided by 100. However, under the Anand Pattern, farmers are paid on volume and the DCS is paid on weight basis. Hence, the above calculations holds good and serves as a guideline to pay the farmers.
• Incentives for quality milk production are sometimes given in form of premium price offered based on microbiological tests such as MBR and Resazurin Reduction.
Understanding the Methods of Milk Pricing——
Milk has two major constituents (FAT and SNF) and the pricing can be based either on FAT alone or both FAT and SNF. The milk pricing structure in the country is based on FAT contents of milk, while this method has provided
justified price for buffalo milk. The cow milk has always been paid low price as the SNF contents of cow milk has never been given into consideration.
Therefore, various methods were based on FAT and SNF. These contents have been assumed to provide justified and remunerative price to cow milk.
Accordingly, three different models of milk pricing are discussed below.
1. Pricing on Pro-rata Fat Basis : ———-
The price of milk is fixed proportional to the fat variation in milk or the price is paid according to the fat percentage present in milk. Guided by the prevailing market forces, the cost of one Kg. of Fat is fixed by the Management and this rate differs from season to season. The formula can be shown as below Formula :
(Kg.Fat Rate) x (% of Fat Content) …… (i)
2. Pricing on Two-axis Basis : ——–
Pricing on pro-rata Basis, no consideration is given to SNF content of milk. Thus, two-axis Formula was used in which both FAT and SNF contents were taken into account. Considering FAT and SNF as two main milk constituents, the milk price was decided by certain market price of Ghee and SMP as if they are purchased individually. This fixing of price on both FAT and SNF basis was called the two-axis pricing.
Hence, in this case, the prices of FAT and SNF in milk were different. Keeping the commercial value of Ghee and Skim Milk Powder in mind, depending upon the predominance of cow or buffalo in the milk shed. The price of milk is fixed by using following formula.
Formula : —–
Price of 100 Kg. = Kg.Fat Rate + Kg.SNF Rate
of Milk x Fat% x SNF % ..(II)
3. Pricing on Equivalent – Fat – Unit (E.F.U.) – Basis : —–
This concept is again a part of two-axis-formula with little change. In this case, the SNF Units were converted into Equivalent Fat Units in proportion to the relative market prices of the two constituents. However to work out the
cost of Equivalent-Fat-Unit, the average Fat % and SNF % in milk received by the plant in previous year was taken as a base. Thus, the SNF valued at 2/3rd price of Fat on Unit Basis.
Further a provisional price of buffalo milk on Kg. Fat Rate Basis was declared. On this basis, the price of cow milk was worked out having different percentage of Fat and SNF. Still as determining SNF % was not practical at field level, a minimum specified SNF limit can be taken for cow milk for price calculation.
Formula : —–
Price of 100 Kg. of Milk = (Equivalent-Fat-Units) x (Rate per E.F.U.).. (III)
Solution :——
For example the average Fat and SNF of buffalo milk in previous year was 6.0% Fat and 9.0% SNF and the present buffalo milk fat is Rs.140/~ Per Kg. Fat. As per Formula (III).
The cost of 100 litres of buffalo milk with 6% Fat and 9% SNF’ will be Rs.140 x 6.00= Rs.840 For 100 Litres
OR
Rs. 8.40 For 1 Litre
Now SNF Units were converted into Fat Units on 2/3rd value basis.
Thus, the total Fat Units in buffalo milk which has 6% Fat and 9% SNF
will be –
= 6.0 + (9.0×2/3)
= 6 + 6 = 12 Equivalent Fat Units.
Rs. 140×12= Rs. 1,480/- For 100 litres
OR
Rs. 14.80 For Litre
In above three methods, the cost of processing, distribution,
procurement was not considered. If those factors were taken into consideration, the producer gets less price for his produce. Also these methods decided the price for milk on the basis of the price of Fat in the market, means at First the
price for Fat was decided in the market by demand and supply equilibrium.
Therefore, we can say that above three methods only consider the demand and supply factors in the market and not the cost of milk production.
Price of Milk For Consumer : —–
1. Price of Milk Paid by Milk Union to Producer
2. Cost of Procurement :
i) Commission For Dairy Co-operatives –
ii) Cost of Instruments
OR Depreciation of Instruments, which
provided to Primary Co-op. Societies,
iii) Transportation Charges for Procurement
iv) Risks, Insurance.
3. Cost of Processing :
i) Cost of Chilling and Pasteurization, Refrigeration Facilities,
ii) Cost of Standardization
iii) Cost of Packaging
iv) Handling Loss
v) Cost of Cleaning (C.LP.)
vi) Quality Control and Lab .
vii) Loss in by-products
viii) Fuel, Electricity, Water
4. Cost of Distribution :
i) Commission For Seller
ii) Transportation upto Seller
iii) Advertising
iv) Leakages
5. Essential and Development Activities Cost :
i) Veterinary Service Expenses –
ii) Training and Development Programmes-
iii) Official, Clerical Work Expenses – (Managerial Costs,
Stationery, Communications)
6. Cost of Infrastructure:
i) Interest on Capital
ii) Depreciation of Machinery and Plant –
iii) Maintenance and Repairy –
7) Wage Burden.
😎 Insurance and Taxes!
Thus, the Price for Consumer was total of 1 to 8. After considering the above factors, Milk Co-operative Unions, and Private Dairies declare the price of milk (For Producers and Consumers) for Government Milk Schemes and also for Co-operative Unions, and Private Dairies also accept this price, because it is beneficial to them.
