Pakistan is amongst the top five milk producers in the world but has one of the lowest yields. There is a huge potential to leap forward and for that to happen, overall milk chain formalization is imperative. (read ’Formalizing Pakistan’s dairy value chain’). The sector is widespread with less than 10 percent formalized. Dairy development cannot take place without adequate government support, and that helps a long way in promotion of safe milk consumption.
The processed milk market was slowly growing and big players had started to come in both production (big farms), processing and selling processed milk. Since 2006, there was zero rating sales tax on milk and milk products, and that has been paying dividends. Engro came up big in the dairy sector thereafter, and many others (such as Prema, Anhaar etc) ventured into the pasteurized segment.
However, in the past five years (FY16 onwards), the zero-rating status has been abolished, and 10 percent sales tax is imposed on various dairy products. The loose milk segment almost totally operates in shadows of informality. The price delta (due to taxation difference) has incentivized price sensitive consumers to marginally move towards informal segment. This is evident from the fact that ambient milk volumes took a dip since 2016.
The milk processing cost has increased and that has pushed up prices of packaged milk and its products. That has hindered the potential investment coming into the formal dairy sector by existing players and potential new entrants. There is high wastage in the informal sector and the prime reason for wastage is widespread small farms and lack of milk cold value chain. The value chain is developed by multinational and local big players. And the taxation delta has hindered that investment flows lately.
Not only the processed milk market was developed in the past fifteen years, but also the culture of midsize and big farms was being inculcated. A few giant business groups (such as Sapphire, Nishat, Interloop etc) built farms to supply processors. Some of these are aspiring to venture into entire value chain from farming to processing.
This process has helped improve milk producing yield. Many farm animals are being imported from the US, Netherlands. Australia, and other countries. The yield of average animal in Pakistan is 20-25 percent of top yielding countries. Import of animals from high yielding countries helped improve yields at home. However, there is still a long way to go as 97 percent of farms and 80 percent of milk production is from very small farms (1-10 animals).
Improving domestic animals’ yields is critical for dairy industry growth. For that, quality feed and seed (semen) need to improve. Then proper and timely vaccination is crucial for managing risk of diseases. There needs to be a supportive policy to import vaccines and for small farms to use quality seed and feed. Government can offer tax benefits for farmers to adopt best farm practices. And government should think of abolishing duties on import of exotic animals.
Then the milk supply is seasonal in nature. Summer months are lean and winter months are flush. The processed milk suppliers ensure supply by importing powdered milk, and then high-quality products - such as infant milk formula, needs high quality imports. A rule of thumb is that processed industry uses one third of powdered milk in the mix to manage seasonality and to ensure right fat content. The import is being hampered due to high tax rates – there is 25 percent regulatory duty in addition to 20 percent custom duty and 7 percent additional custom duty. That duty structure needs to be revisited.
In a nutshell, having fiscal incentives help formal dairy sector to grow to its potential. There are numerous countries where lower taxes facilitated processing to grow - for example Mexico and Australia are GST free. UK is zero rated, and Turkey is VAT exempted along with grants for producers. Pakistan needs to take a leaf from these countries and start rationalizing taxation from upcoming budget.
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