If ban on the sale of cows and buffaloes for slaughter goes through, the dynamics of the dairy industry could weaken in such a scenario due to increased margin pressure.
If farm business owner cannot easily get rid of an unproductive cow, say by selling to a cattle trader, who in turn sells it to the slaughter house. The implied cost implication is not insignificant, in our view. Not only are producers deprived of a traditional source of income from selling non-milch and ageing cattle, they are also stuck with having to feed the cow for the rest of her life.
Anecdotal evidence suggests that the immediate impact of a slaughter ban are the low realisations on the sale of cows. Last year, while the ban was in force in Maharashtra, realisations on cow sales fell to less than half the previous year’s level. A Holstein cow was selling at Rs 30,000 vs Rs 75,000 a year before.
Further, if the farmer continues to hold on to the cattle because he is not able to fulfill strict regulatory criteria for selling, then there is high cost to it in terms of providing maintenance to the cattle. Back-of-the-envelope calculations suggest feed cost to be at least 35 percent of the realisation the farmer makes on the milk sale.
The dairy sector has recently been impacted by the liquidity crunch, fragile farm economics and surge in raw material costs. So, not only has there been topline impact but also considerable margin pressures. For the major players in the industry, compared to 2016, there has been a surge in raw material costs. In aggregate, there has been a 715-basis-point increase in raw material costs as a percentage of sales.
|Company||Q4 17||Q3 17||Q2 17||Q1 17|
Given this context a further disruption in farm income i.e. reduced visibility in monetisation of cattle lifecycle can have an incremental impact on margins.
Companies which are in a better position are those where there is higher revenue exposure to value-added products.
The following table shows companies revenue composition: