Economics of Milk Procurement

Milk and its procurement is the base on which the structure of dairy Industry is built. The efficiency with which milk procurement activities are undertaken affects the costs and returns of the dairy plants. The efficiency of procurement operations namely milk collection, chilling and transportation of milk has deep impact on the cost of milk procurement. The total cost of procurement of milk in addition to payment for milk, include milk collection cost, transportation cost, chilling cost and other procurement overheads. Generally it is found that milk collection cost per litre bears a negative relationship with the quantity of milk collected. As the quantity of milk increases the per litre cost of milk collection is decreased. It may be pointed out that there are seasonal fluctuations in the milk production which give rise to lean and flush seasons. It also affects the cost of milk collection. The density of milk produced in the vicinity, quantity of milk supplied per household, proximity of the milk shed area to the plant, organizational set up, location of collection centres,milk losses at the collection centres are the other factors which influence milk procurement cost.

i. Milk Transportation Cost

Milk may be hauled from collection centres to the plant directly or to the chilling centre first and then transported to the plant after it is chilled at the chilling centre to avoid its spoilage. Depending upon the mode of milk transport used by the plant and or the transporter, the cost of milk transportation may vary depending upon quantity of milk transported. Due to economies that accrue when larger quantity of milk is transported, milk transportation cost per litre generally shows a decreasing trend. In addition to quantity of milk to be handled, system of transportation whether bulk or in cans, type of trucks used, distance of milk collection area from the plant, routes followed, road conditions, weather conditions are other determinants of transportation cost. The average transportation may come about around 50 paise per litre of milk transported. This cost may increase further if milk is taken to the chilling plant first and then transported subsequently after chilling at the chilling centre. Under the contractual arrangement made for haulage of milk from co-operative societies/collection centres to the chilling centres and or the reception dock of the dairy plant, then transportation cost per litre of milk generally behaves more or less like as depicted in Fig.

Cost of Transportation per Kg. of Milk

The above diagram is illustrative only indicating the underlying phenomenon. The actual cost may vary from plant to plant depending on the factors discussed above.

ii. Milk Chilling Cost
The mode of chilling, type of chillers used, efficiency of chilling machine, quantity of milk chilled, ambient temperatures are some of the significant factors which affect milk chilling cost. Chilling cost per litre during summers is relatively high partially due to high ambient temperature and also on account of relatively low volume of milk handled. As milk quantity increases the fixed cost is shared by larger volume resulting in lowering of overall average chilling cost/litre.

In addition to above activities of milk collection, transportation and chilling milk is to be received at the dock of the plant. Expenditure on the use of fixed assets which include depreciation and interest on fixed assets, salaries and wages of staff involved in the milk reception, electricity cost, consumables, repairs & maintenance of machinery and other miscellaneous expenses add to total milk procurement cost to determine the cost of milk at the dock of the dairy plant. The cost of milk procurement excluding the payment made to the milk producers at various levels is illustrated in Fig.

Cost of Milk Procurement at Various Levels