The recent 15% price hike in Amul's milk has been a hot topic in India, and for good reason. After all, #Amul controls 35% of India's fresh milk, 50% of cheese, and 80% of the butter market, so a price increase by the dairy giant is bound to have ripple effects throughout the industry. But, how is this related to the war in Ukraine? Let's dive in and find out.
To start, it's important to note that milk is a staple food in India, with per-capita consumption at 425 grams per day, which is 33% higher than the global average. As a result, any increase in milk prices directly affects the common man's pocket. And, unfortunately, the rise in prices is not due to a reduction in supply. In fact, the supply from India's 8 crore dairy farmers has only risen.
The real issue lies in the packaging and transportation of milk. 95% of milk in the organized segment is sold in plastic pouches, and plastic is made from petrochemicals produced from crude oil and natural gas. Since the war broke out in #Ukraine, the prices of both crude oil and natural gas have shot up dramatically. Crude's price increased by 50%, while gas prices rose by over 5 times at their peak. This increase in prices directly affects the cost of packaging milk in plastic pouches.
After packaging, milk has to be transported all over the nation, and diesel prices have also increased since the war. Therefore, transportation of milk has also become much costlier, further contributing to the rise in milk prices. It's not just milk, though. The price of other dairy items such as cheese, butter, curd, and sweets has also shot up in the last year, affecting companies such as #JubilantFoodworks, #DevyaniInternational, and #SapphireFoods. These companies run Domino's, #PizzaHut, and #KFC chains in India, with cheese being a key raw material for producing their food items.
While the margin compression has been manageable for Devyani and Sapphire, given they also run KFC chains, which don't depend much on milk or related items, Jubilant Foodworks has suffered significant margin compression, causing their stock price to drop. That said, the gradual rollout of price hikes by Amul has helped sustain the move, preventing a potential nation-wide shock from a sudden 15% price hike.
In conclusion, the price increase in milk and other dairy items in India is due to the impact of the Ukraine war on the prices of crude oil, natural gas, and diesel, which are key components in the packaging and transportation of milk. While the gradual increase in prices has helped sustain the move, it has still had a significant impact on the common man's pocket and the food industry as a whole. This also underscores the importance of understanding the complex supply chains and processes that are involved in bringing products to consumers. Hence, I feel it's important for all of us to stay informed about such events, and their impact on various sectors of the economy to make better-informed decisions as individuals and as a society.