Cash-trapped state-owned Dairy Development Corporation (DDC) is under extreme pressure to clear dues to dairy farmers, which amounts to Rs580 million, following a sharp drop in the demand for raw milk and dairy products in recent years.

DDC, Nepal’s largest dairy company, recently stated that the dairy industry is going through its worst recession due to subdued demand. Packaged raw milk, powdered milk, and ghee remain unsold and have been piling up in its warehouses for the past two years.

The shrinking incomes of people have been cited as one reason behind the low demand for dairy products. At the same time, some suspect rampant smuggling of Indian dairy products into Nepal from the 1,800 km-long porous border has resulted in a glut of milk.

In his article “White 'flood' on the streets” published in the Post, Achyut Wagle, an economic analyst, points out that one key reason for such “smuggling” of milk products from across the border is the price difference between the two adjoining markets. For example, a litre of milk in Nepal costs Rs130, while the price of the same volume of milk in the neighbouring Uttar Pradesh of India, at present, is INR62 (Rs100).

An approximate profit of INR20 per litre presents an attractive margin for traders to exploit, which they can do by travelling a few kilometres across the border.

In April last year, the Nepali dairy industry surprisingly requested the government to lift the restrictions on the import of skimmed or full cream milk powder in order to prevent milk shortages in the domestic market. Dairies cited reasons such as the Covid pandemic and the prevalence of lumpy skin disease in cattle behind the drop in domestic milk production.

Commercial animal husbandry was severely affected by the pandemic and then the lumpy skin disease, forcing many farmers to leave the occupation after incurring massive losses.

After 10 months, in February, there was a surplus of milk. Dairy companies struggled to sell the milk in the market. Most converted it into powder and butter, but the demand for powdered milk and butter remained low, leaving tonnes of the products piling in warehouses.

Both state-owned and private dairy companies said the ongoing economic slowdown has dampened dairy demand, causing cash flow to stop and increasing liabilities to farmers as products remained unsold.

In February, Nepal’s dairy farmers launched a nationwide protest, including a 10-day Kathmandu-centric protest, demanding payment from dairy companies, including the DDC.

The demand for dairy products did not recover in the summer either.

In a surprising move, the DDC has now decided to sell 10,000 litres of milk a day to a private company.

“We are in the final stage of signing an agreement with a private dairy that produces dog chew, popularly known as ‘chhurpi’, to sell 10,000 litres a day,” said Surya Prasad Paudel, general manager of the DDC. “The company exports dog chew to the US market.”

“If things go as planned, it will be a huge breakthrough for the DDC.”

“This will somewhat solve the ongoing problem and generate cash flow,” said Paudel.

Manaram Group, a leading Nepali pet food exporter, said it would from Tuesday start buying 500 litres of whey, a liquid remaining after milk has been curdled and strained, as part of a pilot project to test the quality.

“We will buy whey from DDC and produce dog chew that will be exported to the US market,” said Rajendra Kumar Shrestha, founder of Manaram Group.

“Our demand is 10,000 litres a day. If DDC regularly provides quality whey, we will buy that amount.” The group, however, said it would not buy skimmed milk powder.

Manaram Group has been exporting 100 tonnes of dog chew a month under the ‘Himalayan Dog Chew’ brand in the US market. The chew is produced in its plant in Godak, Ilam.

The group has been collecting 6,000 litres of milk from nearby districts and producing dog chew at the Ilam plant. “As the collected milk is insufficient, we also buy dog chews from small local dairy farmers in Dhankuta, Sankhuwasabha, Ilam, Panchthar and Taplejung districts.”

Shrestha said that the demand for dog chew is increasing in the US. “We need more than 10,000 liters of milk per day to meet the demand.”

The demand for dog chew has been growing in overseas markets, particularly in the US, Canada and the UK, with more and more people owning pets.

The shipment of dog chew from Nepal increased by 17.6 percent in the first four months of the current fiscal year, which ended in mid-November, compared to the same period last fiscal year.

According to the Trade and Export Promotion Center data, Nepal exported dog chew worth Rs1.15 billion during the review period. Of Rs1.15 billion, Rs1.02 billion worth of dog chew were exported to the US, Rs77.29 million in Canada and Rs19.57 million in the UK.

The country exported dog chews worth Rs3.18 billion in the last fiscal year, which ended mid-July.

According to industry insiders, demand for dog chew rose sharply in the US and Canada after people bought more pets during the Covid lockdowns.

Officials say that American and Canadian pooches love the hard cheese made of yak milk, and traders can barely keep up with demand.

Dog chew is preferred as they are 60 percent protein, calcium and vitamins. The dog chew is made from 99 percent yak and cow milk. Other ingredients like lime juice and salt are also used in its preparation.

Dog chew exports have shot up by more than 240 percent in the past six years, as 90 percent of what is produced in the country is exported.

Meanwhile, DDC said it is also set to sell its butter in China.

“We have sent the document to export butter to Tibet. It might take some time for them to study the document and respond to us. But we are hopeful about this project,” said Paudel. “There is an agreement, the corporation will export 30 tonnes of butter once a week or a month depending on demand.”

The DDC will export butter to China through a trading company in Nepal that has been exporting herbs and other products.

Nepal exported 22 tonnes of butter worth Rs7.20 million to India in the current fiscal year. Similarly, four tonnes of butter worth Rs4.37 million was exported to Japan in the first four months of the current fiscal year.

DDC now has Rs580 million in outstanding payments to dairy farmers.

As sales did not improve in summer, the key consumption period for dairy products, on September 27, the DDC requested a loan from the government to pay the farmers.

Subsequently, the Public Debt Management Office issued a loan of Rs600 million.

“We expect the dues to be cleared by mid-July,” said Paudel.

The corporation has implemented a quota system to buy milk from farmers in different parts of the country.

DDC buys milk worth Rs200 million from farmers every month.

“We have implemented a quota system while buying milk from dairy farmers in Dhangadhi and Nepalgunj under our Milk Supply Scheme project, as the costs of collecting milk have risen,” said Paudel.

According to DDC, currently, it has 500 tonnes of powdered milk and 600 tonnes of butter in stock.