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Loose milk and lost opportunity.


The packaged dairy industry has spent years taking one step forward and two steps back. The foremost cause of its haphazard progress is the lack of favourable regulatory policies.

Thanks to the widespread misgivings about packaged dairy products propagated by vested interests, the general public mostly consumes loose milk that is expensive and has poor nutritional value. This is despite the fact that many studies have conclusively established that loose milk is bad for consumers. Before discussing the major problems hampering the growth of the packaged dairy industry, let's first take a brief look at the dairy sector and its contribution to the national economy.

With milk production of nearly 60 billion litres a year, Pakistan is the world's fifth biggest raw milk producer. The dairy sector's share in GDP is more than 11 per cent. Yet the sector remains highly uncompetitive. More than 90 per cent of the total milk output is sold in the unregulated market. Wastage is as high as 15 per cent. More importantly, selling loose milk has not made any positive impact on the incomes of average farmers over the years.

In short, farming is replete with inefficiencies caused by small-scale operations, lack of investment, bad hygiene, use of dubious chemicals, unsuitable storage and the absence of a cold value chain.

One of the key factors that make packaged milk infinitely better than its loose counterpart is the cold value chain. Most consumers buy loose milk through the informal value chain dominated by smallholders and farmers. They consume unprocessed and unpasteurised loose milk that has a short shelf life. The advent of formal modern value chains, developed by international agri-businesses and the national corporate sector, has partly addressed some of the problems caused by the traditional supply chain of loose milk. The introduction of the cold value chain enabled agri-businesses to process raw milk into ultra-high temperature (UHT) and pasteurised milk. This helped address the issues of short shelf life, poor hygiene and distribution over longer distances.

The modern value chain also led to a drastic increase in milk yields, thanks to the good quality of green fodder and the use of better medicines and machinery. But most of these technological and supply chain gains have yet to reach the majority of milk consumers. That's because of the absence of favourable legislation like the minimum pasteurisation law.

The government should follow the example set by Turkey, which brought the dairy industry into the regulatory ambit by incentivising the pasteurisation of milk. It first made pasteurisation compulsory for milk in 1995 and then completely banned the sale of loose milk in 2008. The move on the legislative front forced consumers to shift from loose to processed milk.

Another legislative measure that the government must take is the reinstitution of the zero-rated sales tax regime. It was in place until 2017 and was applicable to a majority of dairy products. It was then withdrawn arbitrarily and sales tax was imposed at the rate of 10 per cent on sweetened, concentrated/powdered milk, cream, yoghurt, cheese, butter and whey.

Since then, the absence of the zero-rated sales tax regime has been a major factor behind the lacklustre growth in the formal dairy sector. Doing away with zero-rating increased the cost of production for milk and milk products by six to eight per cent, according to one estimate. It constitutes an additional cost for the processed milk industry -- something that could not be passed on to the consumers completely. In other words, the adverse impact of the abolition of the zero-rated sales tax regime has largely been on farmers.

Whoever came up with the idea of abolishing zero-rating forgot to take into account the price elasticity of processed milk. Low-priced loose milk is easily available. Hence, people switch to cheaper options if the price of packaged milk goes up even by a few percentage points.

Loose milk consumers have been paying too much for a subpar product. It's time the government enacted a minimum pasteurisation law and deregulated and de-capped the price of loose milk to incentivise investments in the dairy sector. This will not only help the rural economy grow faster but also ensure better documentation of the economy.
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Publication:The Nation (Karachi, Pakistan)
Date:Jun 10, 2021
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