Nothing 'White' About This Milk!

Nothing 'White' About This Milk!

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar


Energy prices are in the news again. That's probably the understatement of the year. Crude prices have been skyrocketing. And with it, prices of petroleum products, at least of those products not controlled by the government. As it happens, this is a particularly important caveat for industries that are 'intensive' consumers of petroleum products – especially those such as the road freight where diesel is subsidized and aviation sector where gasoline is taxed. Elsewhere, as in energy-intensive sectors characterized by government-owned or -subsidized firms competing with private firms, the net impact of government control on energy prices is not immediately apparent.

After years of government-sponsored monopoly, the milk market has finally opened up. Where there was a single all too familiar government sponsored- and supported regional milk cooperative, there are now a few inter-regional competitors. As a shareholder in one of these private competitors however, I have had mixed feelings about patronizing one or the other brand of milk. No economics textbook will dare print this, but many consumers presume that higher priced milk produced and marketed privately is superior in quality to the government-subsidized milk, despite nominally conforming to the same quality standard. Indeed, until very recently, I too followed this dictum. Lately though, I have begun wondering about my choices. As the crude rises beyond the $100 mark, I have pondered over the incentives facing private milk producers and cooperatives under a regime of differentiated prices for the power/fuel they consume during pasteurization. (Pasteurization, as you know, is mandatory, and accounts for a third or more of the cost of production). In particular, what should we expect following a hike in energy prices when private firms pay the full cost for power while cooperatives are either subsidized directly for their power consumption, or subsidized for milk production? Now I have presumed that milk from cooperatives is lower in quality even within the so called 'toned' or '3% or 6% fat' category. But, under this 'mixed' industrial structure where private players co-exist with milk cooperatives, the conventional logic about higher priced milk vended by the private producer being superior does not necessarily stand. It seems to me that private players already burdened to pay in full for their energy consumption, will seek to economize further on their pasteurization cost. On the other hand, cooperative producers not under any immediate pressure to curtail energy cost or the cost of milk production, are likely to respond less or only respond after a delay. A hike in energy prices hurts the private producer more than it does the milk cooperative. Naturally, a private producer seeks to reduce his pasteurization cost while the milk cooperative is yet indifferent. Does that mean I am better off buying milk from the cooperative when energy price rise, product quality standards notwithstanding? My suspicions are strengthened every time I taste what seems like raw milk. (In all honesty, that could be a more common, but less reported problem since most South Indians boil their pasteurized milk. I wonder though if milk producers take advantage of this practice!).

There are other, equally sobering thoughts. Like how long private milk producers can withstand the drag on their profits before succumbing. Like what happens to energy efficiency in the dairy sector if consumers switched to subsidized, lower-priced cooperative milk? Would cooperatives gain the upper hand (and even turn competitive!) by exploiting scale economies consequent to a rise in demand following a price hike by private producers in response to higher power/fuel prices? Wouldn't that be a case of perverted incentives fit for exposition in a book on regulatory economics? A case fit for our judges at the CCI!

......And, how is the stock market's answer anticipating these possibilities. Shall I call up the 11 am 'Buy or Sell' segment on NDTV Profit?


Ps: Years ago, I thought of gainfully using dairy manure for growing fodder and in organic farming. Whatever happened to that idea?