Demand for Dairy
Source: Flickr, Andrea Kirby

In a report released Monday, the OECD and FAO forecast more stable global agricultural markets in the coming decade; growth rates in the cereals, meat, fish, and vegetable oil markets are expected to decline by around 50 percent. One exception to that is the dairy sector, which the report forecasts will see significant gains in per capita consumption over the next ten years. This growth will be due in large part to steadily increasing demand in India.

The OECD-FAO Agricultural Outlook 2016-2017  is released annually and assesses the medium-term (ten-year) prospects for agricultural and fish commodity markets at the national, regional, and international level. This year’s edition focuses specifically on the agricultural and fish sectors of Southeast Asia.

According to the report, India is set to overtake China as the world’s most populous country; over the next decade, India and Africa south of the Sahara will together account for 56 percent of global population growth. This means that India will also be a major driver of growth in global demand and consumption trends. India’s demand for fresh dairy products will account for 54 percent of overall global demand growth in the sector. Increased consumption of fresh dairy products also means increased consumption of protein in India, an important factor in improving food security in the country. 

In a recent article published in Agricultural Economics Research Review, IFPRI researchers examined this increased demand for dairy products, specifically fresh milk, in India. Using district-level data spanning 1997-2007, the authors concluded that, on the demand side, urbanization has had a strong positive influence on the development of India's dairy sector. Increased demand for fresh milk from urban dwellers has provided incentives for farmers, particularly smallholders, to increasingly use cows for dairying rather than as draught animals for agricultural production. 

According to the OECD-FAO report, global milk production will also increase by 22 percent in 2026, compared to the 2014-2016 baseline used in the report. As with consumption, most of this increase is slated to come from developing countries. India and Pakistan are expected to account for 29 percent of total global milk production by 2026, compared to 24 percent in the baseline. The same article in Agricultural Economics Research Review identifies several supply-side factors that have contributed to the intensification of dairy production in India. These include farm mechanization and diversification of crops away from cereals; these trends have further encouraged farmers to use cows for dairying rather than for draught.

Dairy production in India, while steadily growing, does face several constraints. A 2016 IFPRI discussion paper finds that smallholder farmers in particular struggle with a lack of access to organized markets and institutionalized credit. This in turn limits their capacity to engage in the dairy value chain and hinders growth in the scale and productivity of dairying in India. The study finds that, from a sample of 612 households in Punjab, more than half of farmers borrow from sources both within and outside of the dairy value chain; however, only 9 percent of those borrowers receive credit from commercial banks or other formal financial instiutions, and most of that 9 percent are larger farmers. Poorer, smaller, and socially disadvantaged farmers are often overlooked by institutional lenders because they lack the physical assets to use as collateral for a loan. The authors suggest that the use of more innovative lending tools, such as dairy credit cards (similar to the Kishan credit card) or contract-as-collateral agreements, would help lenders better connect with smaller and poorer farmers, enabling those farmers to adopt improved dairying technologies and scale up their production. 

The OECD-FAO report highlights that trade of fresh dairy products will likely remain limited, meaning that increased domestic consumption in India will have a limited impact on world dairy prices. India is not expected to become a major dairy exporter due to the need to fulfill its high domestic demand. 

Photo credit:Flickr, Andrea Kirby