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DAIRY PRODUCTS

Recent hike in prices of ice cream & other food items
Wednesday, 01 June, 2022, 12 : 00 PM [IST]
Laltu Sinha
The top Food and Beverage companies are likely to raise prices even higher after initiating an increase in product costs earlier this year (2022). Due to growing transportation costs, the US inflation has grown rapidly for almost a decade. With the early advent of summer, increased power supply in villages, the return of the push-cart workforce to cities, the restoration of business and leisure trips, as well as general mobility, demand for soft drinks and ice creams has reached a five-year high.

•    According to the Indian Ice Cream Manufacturers Association, which represents 80 private ice cream makers, ice cream sales in India have increased by 45% due to the extreme heat. This increase in demand in 2022 is expected to help the $1,159.7 million industry get closer to the $1,417.5 million targets.
•    According to Gujarat Cooperative Milk Marketing Federation (GCMMF), ice-cream sales of the Amul brand have increased by nearly 40% in 2022.
•    In 2021, due to a cold spell in Brazil, coffee prices had reached a six-year high.
•    In 2022, other major consumer goods companies, such as Unilever, Procter & Gamble, and General Mills, have warned their investors that the rising commodity costs may force them to raise their prices, especially as demand for products has risen in tandem with an increase in the US vaccination rates leading to the return to increasingly normal work and travel patterns.

Rising Global Prices of Sugar and Dairy Products
The increasing prices of raw materials used for the production of ice creams such as sugar and other dairy products are forcing market players to raise ice cream prices. According to estimates by Amul (one of the leading dairy brands in India), skimmed milk powder (SMP), costs have increased by 90%, sugar by 30%, white butter by 40%, and milk by more than 30% as compared to 2017.

The manufacturers of ice cream and frozen desserts in India face challenges in getting skimmed milk powder (SMP), since the stock is scarce and the unit price has risen sharply. SMP is an important component in producing ice cream and frozen desserts.

The continued import demand, particularly from Asia, and generally constrained exportable supply from the world's key producing countries drove these dairy price hikes. For instance, a decrease in milk cowherds in the US, freight shortages, shipping delays, and growing supply chain expenses have contributed to the rise in butter prices; about a 2.8% decrease in butter production has also been witnessed.

In 2021, China remained the world's top dairy importer, with imports increasing dramatically owing to growing demand from consumers and food processing industry. Imports of milk powders and whey products from China increased dramatically. Import demand surged in a number of other countries, including Mexico, Indonesia, Vietnam, and Bangladesh, as market activity and consumer demand expanded.

Global milk availability was characterized by restricted supplies relative to import demand for the majority of 2021. At the beginning of 2021, milk deliveries in Western Europe fell below the previous year, constraining export availability. Although milk deliveries in Western Europe exceeded 2020 levels during the peak months of March to June, export availability did not improve considerably due to seasonally high domestic demand. Increased internal demand was also fueled by expectations for a busy summer and some relaxation on social distancing.

However, by July, stockpiles in Western Europe had risen as internal sales had failed to materialise as projected, indicating the modest growth in foodservice sales, putting negative pressure on global dairy prices from July to August of 2021. Prices have continued to rise since then, owing to constrained worldwide export availability, as milk deliveries in several large milk-producing countries in Western Europe dropped below seasonal averages.

Table: Food and Agriculture Organization (FAO) Dairy Price Index, International Prices (USD Per Ton)

Period (Annual)

Skim Milk Powder

Whole Milk Powder

2010

2,971

3,499

2011

3,408

3,962

2012

3,063

3,336

2013

4,148

4,730

2014

3,606

3,854

2015

2,089

3,854

2016

1,986

2,481

2017

2,011

3,163

2018

1,834

3,060

2019

2,440

3,186

2020

2,606

3,041


Source: Food and Agriculture Organization of the United Nations

Price Increase by Ice-Cream Market Players
In India, due to higher input costs of sugar and milk powder, ice-cream giants such as Cream Bell, Mother Dairy, Amul, and Vadilal have raised prices by 5% to 8% in 2021, a move that comes after two years. Since February 2017, Amul has increased the cost of ice cream by 5% to 8%; this rise comes after a two-year wait. The Gujarat-based Vadilal firm has also raised prices between 6% to 7% and reduced the number of their 6¢ to 13¢ range ice-cream packs. Mother Dairy has also increased ice cream prices by 5%. Despite the price increase, the ice-cream sector anticipates annual sales growth of 15% to 20%, increase as compared to 10% to 12% in 2017.

Price Hike on Other Food Items
Globally, retail food inflation surpassed the headline inflation rate, with a slew of commodities such as potato, tomato, brinjal, chicken, and wheat seeing the most significant price hikes. For instance, in India, in March 2022, chicken prices increased by more than 20.7%, while food inflation in the meat and fish category witnessed 9.6%. On the other hand, inflation in fish and prawn prices increased by a modest 3%.

In March 2022, inflation in the edible oil and fat category was 18.8%, owing primarily to considerable increase in domestic prices over the previous year. As a result, of a more than 30% increase in retail prices of commodities during the last year, where mustard oil inflation was 28.6% in March 2022.

In 2021, Unilever said that it would raise prices for various brands, including Ben & Jerry's, in reaction to soybean oil prices that were 80% higher than this time last year. Danone, the company behind Activia yogurt and Evian water, announced that it intends to hike prices across its products to maintain profit margins.

Also, inflation puts pressure on some of Diageo's products, including Bailey's and Casamigos tequila. As bars started to reopen in 2021, the company has seen an increase in demand, but rising maize prices could drive costs upward.
 
Unlike commodities’ prices, the weather is favoring ice cream sales. Since dairy cooperatives have limited carry forward stocks and are paying more to farmers to procure milk, skimmed milk powder prices are expected to rise further.

Since demand increases rapidly, procurement prices are expected to rise by 5% in 2022, even during the flush season (December to March). Together with the impact of inflation on transportation and packaging expenses, CRISIL-rated dairies operating profitability to fall to 5% in 2022, down from 5.3% last year. In addition, incremental increases in retail prices will help to protect operating profitability.

Also, skimmed milk powder (SMP), exports would be limited due to strong domestic demand for value-added products (VAP), and liquid milk, as well as inventory will be reduced.

While many companies aim to boost prices, it is expected that costs will continue to rise in the coming months of 2022 as shipping delays persist and adverse weather conditions throughout the world endanger food supplies.

(The author is research director at BlueWeave Consulting)
 
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