On February 18, as a prelude to their protest against non-payment for their milk supplies since October last year, dairy farmers of Chitwan District spilt several hundred litres of milk at the Bharatpur Bus Park cross-section. The farmers say they are awaiting payment of Rs520 million in Chitwan alone. In total, processing companies owe about Rs6 billion to milk producers nationwide. The government-owned Dairy Development Corporation (DDC) alone owes over Rs1 billion.

Nepal’s dairy farmers have announced a 10-day Kathamndu-centric protest demanding payment from dairy companies, including the DDC. Last Thursday, about 15 farmers’ organisations formed the National Farmers’ Network, which includes the Nepal Peasants’ Federation, the All Nepal Peasants’ Federation, the National Democratic Peasants’ Organisation, the Central Dairy Cooperative Association and the Nepal Dairy Association. They have put forth a 16-point demand related to farmers’ problems in milk production and distribution.

Dairy economics

According to the latest Economic Survey published by the government, Nepal produces 7.1 million litres of milk daily. About 300,000 households are involved in milk production, contributing about 5 percent to the gross domestic product (GDP). The annual per capita availability of milk is 88 litres, short of 6 litres of the government’s optimal per capita supply target.

An estimated 50 percent of the total produce goes to the market. Between 500,000 and 600,000 litres of milk get wasted every day for lack of market; raw milk and dairy products are imported, legally and illegally, from the southern neighbour India at cheaper prices.

According to the Department of Customs data, during the last seven months of the current fiscal year, the import of dairy products has been worth more than Rs1.5 billion ($12 million). The imports include raw milk and semi-processed products like milk powder, cheese, flavoured milk, butter, milk cream and ghee. If value-added products like dairy-based chocolates, baby foods and other highly value-added dietary/nutrition supplements are accounted for, the import bill stands at around Rs13 billion ($100 million). This is only official data, and there is a massive amount of unrecorded—if not outrightly illegal—cross-border trade of dairy and related products across the 1,800 km-long Nepal-India open border.

One key reason for such “smuggling” of milk products across the border is a price difference in two adjoining markets. Just for indicative comparison, a litre of milk in Nepal costs Rs130, while the milk price in the bordering Uttar Pradesh of India, at present, is INR62 (Rs100). An approximate profit of INR20 per litre is indeed an attractive margin for traders to harness by travelling a few kilometres across the border.

Instead of addressing the issues of the supply chain as well as the value chain for a sustainable market mechanism, the Ministry of Agriculture and Livestock last week decided to ban the import of milk and milk products until further decision. The import of skimmed milk, dairy whitener, skimmed milk powder and whole milk powder, raw and processed milk (frozen or unfrozen, sugar added or not, granulated or not), butter, ghee, chhurpi, processed bhujuri or unpowdered products and all forms of cheese has been completely banned.

On the contrary, the Nepal Dairy Association, an organisation of the owners of large processing companies, claims that the problem has arisen due to a slump in consumption. The stock of milk products worth Rs5 billion is lying idle in the inventory of these companies for lack of demand due to “economic recession”. Therefore, they are unable to pay the farmers on time.

The increased frequency of the “milk holiday” and non-payment of the outstanding dues has become a double whammy to the farmers. This happened immediately after they suffered massive losses in a recent lumpy skin disease epidemic affecting the cattle. Over last year, it was estimated that about 70,000 cattle died, and some 1.5 million got severely infected, causing a loss of more than Rs75 billion.

Structural issues

Although the problem is reported to be unprecedented this time, “milk holidays” and lack of timely payment to the milk farmers are chronic issues emanating from the disrupted supply chain and market volatility of dairy products. Given the sensitivity of the milk and products, good infrastructure and logistics surrounding sanitation, collection, chilling/fridging, processing, preserving, transportation and distribution of these products are required. In addition, both production and demand are hugely seasonal. The demand for sweets produced with milk is high during Dashain and Tihar.

The DDC has the largest collection and marketing network of “milk supply schemes” spanning seven major cities of the country from Biratnagar in the east to Dhangadhi in the west. Still, the largest market is Kathmandu Valley, and transporting the milk produced in distant locations is costly and challenging. About seven companies, including the one with the DDC, have plants to convert raw milk into powder. However, Nepalis prefer “fresh” milk over powdered one.

Despite the immense potential, Nepali dairy companies have not yet made meaningful efforts to explore the market in foreign countries and customise their products according to their demand and taste. Nepal exports only a small amount of chhurpi (dried and cubed cheese) to the third country. The dairy companies here are over-focusing on traditional products like yoghurt, butter, sweets and ice cream. However, they are failing to invest in developing high-value exportable milk products like chocolates, ice creams, quality milk powder and sophisticated dietary supplements designed for large consumer markets in two populous neighbouring countries, if not the distant developed ones.

The pricing mechanism for farmers and the end consumers is ad-hoc. There is no reason for Nepali milk products to be more expensive than in India in light of the cheap labour cost and well-rooted cattle-farming culture here. Even the current arrears of Rs7 billion to be paid to the farmers should not have been a great deal for the state, given the size of its contribution to employment and productivity in the economy. The state operatives appear as if they derived immense amusement from the spectre of milk flood in the street spilt by the farmers almost invariably each year.