What about the milk supply situation? In a reflection of the subsistence nature of the Nepali economy, 50 percent of the milk produced in Nepal is consumed by the milk producing farmers themselves. The remaining half is distributed as follows: 15 percent supplied by the organized sector, 25 percent goes into production traditional milk and milk-related products like milk, yoghurt, hard cheese, milk solids, butter and other products, and 10 percent is supplied by the informal sector operating in various urban centres.

The traditional and informal sector still dominates this industry. The links in the value chain—from grass to the glass, that is, from the production of milk to final consumption—are all disjointed because we do not have a large scale dairy industry with cattle farming for milk. The disjointed value chain also increases the risk factor in the production and distribution of milk products.

Compared to the daily demand of 8.2 million litres, the daily supply is 4.26 million litres. This demand-supply gap in milk is reflected by a huge disparity in the importation and exportation of milk products. We import Rs 1 billion worth of milk products and export Rs 13 million worth of the same, a mere fraction of the total trade. Exporting milk and milk related products is still a long cherished goal; we are still dependent on imported milk.

Of the daily production of 650,000 litres of milk in the formal sector, 450,000 litres or around 70 percent is concentrated in the Kathmandu valley. There are around 600 domestic, small, medium and large scale milk plants. The sector is a highly concentric and competitive industry.  

The organized sector is comprised of three primary actors, namely (1) Milk producers’ cooperatives (2) State-owned enterprise (Dairy Development Corporation) and (3) The private sector producers. There is an interesting amalgam of state, cooperative and private sector interventions in the production and supply of milk and milk products. Actually, the entry of the private sector into the dairy business happened only in the late 1970s. Milk being a nutritious product affecting the health of children, adults and old people, the responsibility of regulating, producing and supplying was traditionally placed under the sphere of the government. DDC still accounts for 60 percent of the overall supply. The state sector still dominates this sector.

At present, the dairy sector contributes around 9 percent of the GDP. A total of 950,000 families are expected to depend on this sector. In the Kathmandu valley alone, the dairy sector gives employment to around 12,000 people. It is expected that something like Rs 9 billion is transferred from urban to rural areas per year simply because of the dairy industry. The sector has a high rural-urban linkage. Unfortunately, the value addition is terribly low. With 90 percent of the supply coming in fluid form, there are ample opportunities for adding value with product diversification – from fluid to solid milk products.

Having looked into the structure and composition of demand and supply, let us turn to the pricing policy and regulatory system. There are two tricky elements to be taken care of when pricing milk and milk products: (a) Cheap, easy access and availability of hygienic products to consumers and (b) Adequate incentives to cattle rearing farmers. These two policy goals contradict one another. Providing incentives to milk producing farmers offsets the goal of supplying fresh quality milk to consumers at low prices. The general dividing ratio for milk prices is that 75 percent of the money should go to the milk producing farmers and 25 percent to the factories.

Currently, the farmers in Nepal are estimated to receive less than 70 percent of the money. Hence, there is a built-in disincentive factor for milk production. One other complicating factor comes into play. We have lean and flush seasons for milk production coinciding with the monsoon. How to attain stable milk pricing is another challenging goal for the government. Earlier, we used to have “milk holidays” implying a halt in collection of milk during the flush season to attain a stable pricing policy. Thanks to the entry of private dairies, we do not have “milk holidays” nowadays. The invention of skimmed milk powder (SMP) helps to balance the over- and under-production of milk. There is another fault in milk pricing in Nepal: It is based on fat content rather than protein content.

Obviously, we have laws and regulatory agencies, yet the industry faces a crisis of “public image”.

Last year, rumours about E-coli bacteria nearly damaged the whole industry. Nepali consumers still do not trust processed milk. The more informal supplies you have, the more chances of getting adulterated milk. The “no return” policy in milk distribution has forced milk distributors to opt for a cooling system which has reduced the chances of milk adulteration.

One point which the government has failed to take note of is that the same agency has been assigned to regulate and produce milk—forget about levelling the playing field for the private sector and the dominant state-owned enterprise. We have a situation where a state-owned enterprise is operating at over-capacity while the private sector dairy industry is under-utilized. What should be the goal of the government: Benefiting rural farmers by fixing raw material prices or benefiting urban consumers?

There is also the issue of environmental concerns. You need 3 litres of water to produce 1 litre of milk. Water consumption is immense, and imagine the situation in parched Kathmandu. Moreover, waste water contains acid harmful to agriculture. What about plastic bags? They do have a recycle value. But we have given the least thought to that. Nepali “milkonomics” is far more complicated that sipping a glass of milk.