The 'white gold' for the economy.

Byline: Nasir Jamal

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-a-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...