CONCEPT OF DETERMINATION OF DAIRY MILK PRICE ON THE

BASIS OF FAT & SNF% IN INDIA

Price is one of the most effective means of achieving organizational

objectives.Pricing can effectively serve as an instrument of supply and demand
management.It has a significant role to develop and influence the structure of any
segment of the economy including dairying. Most marketed milk is a joint product
of mixed farming. For successful purchase pricing it is necessary that the purchase
price should be such that it attracts the inputs required for milk production such as
labour and cultivable land for growing fodders. The sufficient conditions for
success include the competitiveness of the purchase price i.e. its absolute value v/s
other prices offered, timing and reliability of payment.Milk thus procured is to be
utilized in most efficient way in the production of different dairy products
according to the consumer demand. The dairy plants have to look after the interests
of milk producers as well as the consumers. It demands a rational pricing policy to
meet the objectives of serving both these entities and at the same time to see that
the plant’s own economic viability and growth prospects are not lost sight of.

The selling price for milk and milk products must be competitive with others
selling prices, consistent with the objective of social justice, relative consumer
preferences and techno-economics of dairying.

Determination of a pricing structure for milk has not only to be based on the
demand-supply equilibrium but also on the compositional quality of milk. The
market forces will determine the base price for milk. The dairy plants should
decide what price is to be paid to the farmers on the basis of quality of milk. Most
dairy plants have some kind of a purchase pricing policy, which has some kind of
relationship to what the plants get from the sale of their milk and milk products. In
the interest of the organized sector, the milk pricing system has to be such that it
becomes instrumental in increasing milk production by ensuring lucrative returns
to the milk producers.
A rational pricing structure should ensure that :———-

• Milk production is encouraged.

• The farmers get a fair return.
• Producers should get the incentives to supply better quality and larger
quantity of milk.
• It should ensure the maintenance of an even supply of milk throughout the
year.
• Consumers should get wholesome milk at reasonable rates.
• An attractive margin of profit to processors of milk and milk products.

A faulty pricing policy can lead to a combination of the following

undesirable effects:———–

• Encourage adulteration with water or with fat and solids not fat from non-
milk sources.
• Discourage production of one kind of milk while encouraging the
production of other kind.
• Encourage mixing of cow milk with buffalo milk or vice versa.
• Encourage malpractices in payment for milk.
The pricing systems that are operative in the country for milk procurement
are of the following type:

i. Pricing on Fat Content

Under this system milk is paid on the basis of its fat content alone.———-

• This system discourages adulteration with water or mixing cow and buffalo
milk with a view to gain an economic advantage.
• This system involves relatively simple accounting.
• This system encourages partial skimming and adulteration with cheaper
fats.
• Production of cow milk is discouraged, as milk is valued only on fat basis,
completely disregarding the SNF contents. According to this system, cow
milk containing 3.5% fat will be paid at half the rate for buffalo milk
containing 7%fat, even though the solids-not-fat (SNF) content of both the
milk is nearly the same.
ii. Pricing on the Species Source
Milk pricing is made on the consideration of the species from which milk is
drawn i.e. cow or buffalo. Usually a minimum fat standard for the different
types of milk is adopted for acceptance or rejection of the product. Milk that
meets the minimum fat standards is usually paid a flat price without regard to
its compositional quality. Such system provides no incentives for production
of richer milk. The producers, therefore, under this system, would not get any
extra payment for extra fat in their milk during lean season. Generally in the
lean season milk production goes down while fat percentage goes up.

iii. Pricing on the basis of a Minimum Fat Percentage plus Premium for Fat

Under this system a minimum fat standard is laid and a base price is fixed for
the minimum fat standard. Fat over and above the minimum standard is paid
premium on pro-rata basis. It discourages the production of cow milk.

iv. Pricing on Total Milk Solids

This system is mostly adopted by traditional milk traders. Milk is paid on the
basis of yield of Mawa or Khoa.
• Fat & SNF are priced at the same level which in fact is not rational.
• This system discourages the production of high fat milk.
• It encourages partial skimming & adulteration of milk with cheaper non-
milk- solids.
v. Two Axis Pricing of Milk

National Commission on Agriculture recommended that dairy industry

should adopt two axis pricing policy for milk procurement as it is rationally
based on evaluation of both fat and solids-not-fat contents of milk. According
to the two-axis pricing policy, the price of milk is calculated by fixing a pre-
determined rate for fat and solids-not-fat. In this system fat and SNF are,
generally, given equal value and per kg. price for fat and SNF are fixed in
that ratio at which these occur naturally i.e. round 2/3 of fat price per kg. for
each kilogram of SNF. In actual practice incentive for higher than the
minimum SNF and penalty for supplying lower grade of milk by way of
deducting the amount at a higher rate otherwise payable for good quality milk
is well specified.

This type of raw milk pricing automatically discourages adulteration. This

system does not discriminate against the cow or the buffalo milk. To
minimize the effect of seasonality on milk procurement seasonal price
premium can be paid up to 30% of flush season rate during lean months as it
will increase average plant utilization and reduce the cost of processing.

vi. Pricing of Milk Products for Sale

The sale price of milk and its products should be fixed in a manner that
would enable the organized dairy industry to pay remunerative price to the
milk producers and meet the cost of collection, processing and distribution of
milk and milk products.The sale prices should also cover the cost of services
rendered in connection with channellizing the inputs for milk production,
keep a fair margin of profit and yet make the price of the commodities
competitive.

In case of milk schemes sponsored by the Government, the consumer’s price

is administered so as to keep it as low as possible. It becomes difficult to pay
remunerative price to the producer and thereby induce more production and
procurement. Commercial consideration of profit and loss should be the
guiding policy to help and develop the dairy industry so that it becomes
viable and commercially profitable. However, Govt. may have differential
pricing of dual-price policy for milk distributed through milk supply schemes
to render assistance to weaker sections of the community.

The only method for maintenance of the competitiveness of consumer price

without reducing the remunerative price for producers is to keep marketing
cost as low as possible. This can be done by attaining greater efficiency in
procurement, processing and distribution of milk and milk products.
The Committee on Pricing of Milk set up by the Government of India
detailed the criteria for a rational pricing policy. It recommended that a Milk
Pricing Committee should be appointed at (a) each dairy plant, (b) in each
state and (c) an inter-state authority should be set up to coordinate the
activities of the dairy plants that collect milk from more than one state to fix
the producer and consumer prices of milk from time to time. The Milk
Pricing Committee of the state and dairy plants should be sensitive to the
variations in the prices of various inputs for milk production and the benefits
that the farmer can obtain so that milk production is not discouraged by the
pricing structure. The committees should also keep in view the interests of
the consumers and should critically examine the overhead charges for
collection, processing and administration so that the gap between the
producer and the consumer price is kept to the minimum.

Pricing Systems——
Since thousands of years milk is being used for infants, young ones and for
adult also. Milk has become integral part of food for both vegetarians and
non-vegetarians. Therefore prices paid by customers have become
economically important. As a result government has also considered prices of
milk.
Pricing of milk is always based on its cost price and price paid by the
customers. Actually cost of milk is a complex phenomena, as prices of
material related to cost differ from period to period and market to market.
Pricing structure should be based on the following principles.
i) Prices should be remunerative to producers.
ii) Prices should be competitive to local market prices
iii) Prices should be discourage adulteration and promote quality
consequences.
iv) Prices should be based on milk constituents i.e. FAT and SNF.
v) Prices should consider the range of quantitative variation in above
constituents of milk.

Various pricing systems functioning in the country for milk procurement are
given below:
Pricing on fat content———

A very large section of dairy industry is buying the milk on fat basis,
disregarding the SNF content of milk. This is practiced by most private
dairies. The advantage involves discouraging adulteration with water or
separated milk or, mixing of cow milk with buffalo milk. A disadvantage of
this system is that it discourages production of cow milk. The price paid per
kg of fat was Rs. 425/- in 2011.

Pricing on volume or weight——-

This method is also known as flat rate. It saves time and is simple to calculate
but encourages adulteration i.e. watering or skimming. It is popular in the
unorganized sector.

Pricing on total milk solids———

The traditional milk traders generally price the milk on the basis of total milk
solids. They consider the yield of Khoa to be produced from the milk to be
purchased. This system encourages partial skimming or adulteration with
cheaper non-milk solids.

Pricing on species of milk animal——

In this system, consideration is given to the species of animal from which the
milk is obtained i.e. cow or buffalo. Normally buffalo milk fetches more
price than cow milk. This system encourages the adulteration of buffalo milk
with water or cow milk.

Pricing as per cost of milk production——-

The price should be related to the cost of milk production and ensure a fair
margin of profit to the producer. It should take into account the seasonal
variation in production and demand.

Pricing according to the use of milk———-

This practice is followed mainly for milk products. Milk procurement for a
specialized dairy product such as cheese requires selection of raw milk by
avoiding mastitis, colostrum, late lactation, and antibiotic-free milks. The
milk should be free from detergents, sanitizers, pesticides, insecticides,
aflatoxins, mycotoxins, heavy metals and even off-flavours.

Two-axis pricing of milk——–

Liquid milk plants have a differential pricing system for flush and lean
months based on the fat and SNF content of milk, with provision for the
payment of a premium for a higher fat and SNF content than the specified
standard. According to this pricing policy, the price of milk is calculated by
fixing a predetermined rate for fat and SNF. This system discourages
adulteration and provides a common pricing approach to both cow and
buffalo milk. The requirement by Food Safety and Standards Rules (FSSR) –
2011 (erstwhile PFA) for cow milk is 3.0% – 4.0% fat and 8.5%-9.0% SNF
while those for buffalo milk 5.0%-6.0% fat and minimum 9.0% SNF
throughout country. This is done with a view to encourage the milk
production through high-yielding indigenous and cross breeds and to give
adequate incentive for production of cow milk. In this context, National
Dairy Development Board (NDDB) has suggested the ‘two-axes milk
pricing’ policy.

Two Axes Formula———–

India has been producing large quantities of buffalo milk when compared
with any other country. This milk being rich in fat content always attracted
good price in comparison to cow milk. The fat portion being visible (giving
thickness), separable (yielding cream) and measurable (in percentage) made
it easier to decide milk price.

Kilo fat system———-

A system based on ‘kilo fat’ became a practice for purchase of buffalo milk.
Under this system, an amount in rupees per kg of fat means an amount
payable on that quantum of milk which would yield one kg of fat. For
example, when the rate per kg fat is Rs. 425, it means that the said amount
will be paid for 16.66 L of buffalo milk with 6% fat (minimum standard):

1 kilo (1000gm) fat ÷ 60 gm/L (6%) = 16.66 L

On this basis, the price per L works out to: Rs 425 ÷ 16.66 = Rs 25.51/ L

If cow milk with 3.5% fat (min standard) were to be purchased under kg fat
system, it would fetch Rs 7.70 per L as shown below:

1000 gm ÷ 35 gm/L (3.5%) = 28.57 L

Rs 425 ÷ 28.57 = Rs. 14.87/L

This works out to 58% of the rate paid for buffalo milk, an injustice to cow
milk producer.

Double axes pricing————

With a view to pay for buffalo milk and cow milk on the rationale of their
two components, viz. fat and SNF, a system was devised called as Double–
axis milk pricing. The purchase rate for fat and SNF are determined based on
previous experience or ruling market prices/ consumer appreciation for
buffalo milk fat (white ghee) vis-à-vis cow milk fat (yellow ghee) and for
buffalo milk SNF vis-à-vis cow milk SNF (i.e. SMP). Accordingly, the
difference between prices paid for buffalo milk and cow milk is reduced.
Suppose the rate of Rs. 425 per kg fat (which can neither be purchased nor it
is the selling rate for ghee normally) is translated into Rs. 190 per kg fat and
Rs. 158 per kg SNF, then the purchase price for buffalo milk and cow milk is
determined as shown below:
Table 6.1 Purchase price for buffalo milk and cow milk

*Calculated in grams per L of milk × price per grams of component.

In this way, the cow milk is paid to the extent of 78% of the rate for buffalo
milk. This also matches with 80% TS in cow milk compared to buffalo milk.

Note:
• A ready reckoner can be prepared depending on actual rates decided from
season to season. For every 0.1 % increase in fat and SNF, the value per L
can be worked out for buffalo/cow milk.
• In above calculation, volume to weight conversion has not been considered.
For calculation of kg fat/kg SNF, the milk volume is to be multiplied by
specific gravity and the weight thus arrived is multiplied by fat or SNF % and
then divided by 100. However, under the Anand Pattern, farmers are paid on
volume and the DCS is paid on weight basis. Hence, the above calculations
holds good and serves as a guideline to pay the farmers.
• Incentives for quality milk production are sometimes given in form of
premium price offered based on microbiological tests such as MBR and
Resazurin Reduction.

Understanding the Methods of Milk Pricing——

Milk has two major constituents (FAT and SNF) and the pricing can be based
either on FAT alone or both FAT and SNF. The milk pricing structure in the
country is based on FAT contents of milk, while this method has provided
justified price for buffalo milk. The cow milk has always been paid low price
as the SNF contents of cow milk has never been given into consideration.
Therefore, various methods were based on FAT and SNF. These contents
have been assumed to provide justified and remunerative price to cow milk.
Accordingly, three different models of milk pricing are discussed below.
READ MORE : FERMENTED DAIRY PRODUCTS:RECENT
TRENDS & DEVELOPMENT

1. Pricing on Pro-rata Fat Basis : ———-

The price of milk is fixed proportional to the fat variation in milk or the price
is paid according to the fat percentage present in milk. Guided by the
prevailing market forces, the cost of one Kg. of Fat is fixed by the
Management and this rate differs from season to season. The formula can be
shown as below Formula :
(Kg.Fat Rate) x (% of Fat Content) …… (i)

2. Pricing on Two-axis Basis : ——–

Pricing on pro-rata Basis, no consideration is given to SNF content of milk.

Thus, two-axis Formula was used in which both FAT and SNF contents were
taken into account. Considering FAT and SNF as two main milk constituents,
the milk price was decided by certain market price of Ghee and SMP as if
they are purchased individually. This fixing of price on both FAT and SNF
basis was called the two-axis pricing.
Hence, in this case, the prices of FAT and SNF in milk were different.
Keeping the commercial value of Ghee and Skim Milk Powder in mind,
depending upon the predominance of cow or buffalo in the milk shed. The
price of milk is fixed by using following formula.

Formula : —–

Price of 100 Kg. = Kg.Fat Rate + Kg.SNF Rate

of Milk x Fat% x SNF % ..(II)

3. Pricing on Equivalent – Fat – Unit (E.F.U.) – Basis : —–

This concept is again a part of two-axis-formula with little change. In this
case, the SNF Units were converted into Equivalent Fat Units in proportion to
the relative market prices of the two constituents. However to work out the
cost of Equivalent-Fat-Unit, the average Fat % and SNF % in milk received
by the plant in previous year was taken as a base. Thus, the SNF valued at
2/3rd price of Fat on Unit Basis.
Further a provisional price of buffalo milk on Kg. Fat Rate Basis was
declared. On this basis, the price of cow milk was worked out having
different percentage of Fat and SNF. Still as determining SNF % was not
practical at field level, a minimum specified SNF limit can be taken for cow
milk for price calculation.

Formula : —–

Price of 100 Kg. of Milk = (Equivalent-Fat-Units) x (Rate per E.F.U.).. (III)

Solution :——

For example the average Fat and SNF of buffalo milk in previous year was
6.0% Fat and 9.0% SNF and the present buffalo milk fat is Rs.140/~ Per Kg.
Fat. As per Formula (III).
The cost of 100 litres of buffalo milk with 6% Fat and 9% SNF’ will be
Rs.140 x 6.00= Rs.840 For 100 Litres
OR
Rs. 8.40 For 1 Litre
Now SNF Units were converted into Fat Units on 2/3rd value basis.
Thus, the total Fat Units in buffalo milk which has 6% Fat and 9% SNF
will be –
= 6.0 + (9.0×2/3)
= 6 + 6 = 12 Equivalent Fat Units.
Rs. 140×12= Rs. 1,480/- For 100 litres
OR
Rs. 14.80 For Litre
In above three methods, the cost of processing, distribution,
procurement was not considered. If those factors were taken into
consideration, the producer gets less price for his produce. Also these
methods decided the price for milk on the basis of the price of Fat in the
market, means at First the
price for Fat was decided in the market by demand and supply equilibrium.
Therefore, we can say that above three methods only consider the demand
and supply factors in the market and not the cost of milk production.

Price of Milk For Consumer : —–

1. Price of Milk Paid by Milk Union to Producer

2. Cost of Procurement :
i) Commission For Dairy Co-operatives –
ii) Cost of Instruments
OR Depreciation of Instruments, which
provided to Primary Co-op. Societies,
iii) Transportation Charges for Procurement
iv) Risks, Insurance.
3. Cost of Processing :
i) Cost of Chilling and Pasteurization, Refrigeration Facilities,
ii) Cost of Standardization
iii) Cost of Packaging
iv) Handling Loss
v) Cost of Cleaning (C.LP.)
vi) Quality Control and Lab .
vii) Loss in by-products
viii) Fuel, Electricity, Water
4. Cost of Distribution :
i) Commission For Seller
ii) Transportation upto Seller
iii) Advertising
iv) Leakages
5. Essential and Development Activities Cost :
i) Veterinary Service Expenses –
ii) Training and Development Programmes-
iii) Official, Clerical Work Expenses – (Managerial Costs,
Stationery, Communications)

6. Cost of Infrastructure:
i) Interest on Capital
ii) Depreciation of Machinery and Plant –
iii) Maintenance and Repairy –
7) Wage Burden.

Insurance and Taxes!

Thus, the Price for Consumer was total of 1 to 8. After considering the above
factors, Milk Co-operative Unions, and Private Dairies declare the price of
milk (For Producers and Consumers) for Government Milk Schemes and also
for Co-operative Unions, and Private Dairies also accept this price, because it
is beneficial to them.