PAKISTAN’S dairy industry is in deep trouble. Its sales are plummeting because retail prices of processed, packaged milk and other dairy products have risen significantly on soaring input costs, withdrawal of zero-rating regime that makes the industry ineligible to claim refunds of sales tax paid across the value chain, and compliance of costly, multiple, competing food safety regulations.

Consequently, the share of packaged milk in the market to unpackaged milk being sold is consistently dropping for the last three years as it becomes less affordable for most Pakistanis due to the growing price differential, which now stands at 90 per cent, up from 77pc three years back.

The industry data shows the processed milk industry’s sales have declined by 30pc and profits nosedived by 80pc in the last three years as its competitiveness to raw milk erodes. Abolition of zero-rating alone has left an upward impact of 6-8pc on dairy prices. Different provincial sales tax rates and barriers to interprovincial milk trade also add to their costs.

The volume sales of producers of packaged milk have plunged by 6.2pc to 464 million tonnes and their revenues declined by 23pc to Rs22 billion since 2017, with some firms already running in the red.

The dairy industry has the potential to attract FDI to the tune of $1.5bn in the next few years, generate exports worth $100m annually and start production of such high-value dairy products as cheese

In 2019, for instance, FrieslandCampina Engro lost Rs955m and Fauji Foods Rs5.8bn while Nestle’s profit tumbled 50pc from a year ago. The data for the first quarter of 2020 isn’t encouraging either. Fauji Foods and FrieslandCampina Engro have still reported losses of Rs952m and Rs130m despite growing sales by 20pc and 13.8pc. Nestle’s profit has dipped 53pc.

These losses are resulting from unforgiving market dynamics. Since demand for processed milk is highly elastic, it starts going down as soon as the price crosses a certain threshold vis-à-vis the price of unprocessed and unpackaged milk. The producers, thus, cannot pass on the impact of higher input costs, inflation and increased taxation to consumers without losing a share of the market to the sellers of unpackaged milk. That is exactly what Nielsen, a marketing intelligence company, found: the demand for processed milk plunged by 17pc when producers raised their price by 6pc, a year after the abolition of zero-rating.

The industry’s future stability and performance, therefore, look highly uncertain unless its viability to unpackaged trade is restored. Industry sources argue the dairy industry can deposit as much as Rs10.5bn in additional taxes if zero-rating is restored. This compares with Rs3.5bn the government will be foregoing by making the producers eligible to claim sales tax refunds.

Market indicators suggest the industry’s growth potential is huge. As of now, it treats and packages only around 1.9bn litres of milk or less than 8pc of 25.2bn litres which are available annually for trade. The remainder is sold in its raw form through an unhygienic supply chain, jeopardising food safety at the expense of public health. If the dairy industry merely doubles the quantity of milk that it processes and packages, the amount of income tax and sales tax that the government generates from it will also be doubled.

And that will just be the beginning. Pakistan’s tradable milk surplus is around 44pc of its total annual milk production of 57.3bn litres. If the entire tradable surplus is processed, the market will have 23.3bn litres of additional milk to handle, attracting billions of dollars in new investments in new processing capacity and development of cold chain, creating millions of jobs, drastically reducing rural poverty and spiking tax revenues.

Many other countries have made a similar transition in recent years. Indonesia, Thailand, Malaysia, South Africa and Turkey have increased the share of packaged milk to 85-98pc of their tradable surplus. Among our South Asian neighbours, Sri Lanka and Bangladesh process and package 83pc and 50pc of their tradable surplus.

Pakistan can also achieve these levels with sustained government support on the implementation of laws requiring minimum pasteurisation and packaging standards for every drop of milk sold for enforcement of uniform food safety regulations across the supply chain.

Pakistan’s socio-economic indicators also suggest the local market is ripe for a transition to processed milk. A rapidly urbanising and overwhelmingly young population, which is exposed to a whole host of commercial products that their parents did not even know about, may accept treated and packaged milk much more readily than those from the previous generations.

Nowhere in the world has the dairy industry developed successfully without active support from the government. Thailand heavily subsidises its dairy sector and India has invested millions of dollars in the development of a cold chain for the industry. Turkey has increased the use of processed milk in a short time by exempting the industry from value-added tax, giving grants to producers and passing laws on minimum pasteurisation and minimum packaging to discourage the sale of unpackaged milk. Pakistan needs to follow Turkey to put money directly into the pockets of farmers, eliminate middlemen, help slash processed milk price and control disease.

The dairy industry has the potential to attract foreign direct investment to the tune of $1.5bn in the next few years, generate exports worth $100m annually and start production of such high-value dairy products as cheese.

The industry’s growth can have many salutary impacts on the economy. Already, it provides 10,000 jobs and transfers Rs120bn to over 250,000 farmers, many of them being women, as payment for milk collected. Even a one per cent increase in the market share of processed milk can create 2,500 new jobs and transfer an additional Rs36bn into the rural economy, according to industry calculations. To do all this, however, it needs to be provided level playing field with the right kind of incentives and operational environment.

Published in Dawn, The Business and Finance Weekly, May 25th , 2020