Sri Lanka's top producers have already sought permission for an immediate price increase of about 10 percent, with further price increases on the cards.

“Severe drought in Australia, coupled with the removal of subsidies for milk in Europe have made prices in the world market go up,” Chetiya Sri-Nammuni, Director Corporate Affairs, Fonterra told LBO.

Fonterra is estimated to hold 60 percent volume-based market share in Sri Lanka. In addition to its flagship Anchor brand, it also supplies milk powder to a number of other packers.

First Round

A 400 gram pack of milk powder is now retailed in Sri Lanka at prices ranging from 140 to 170 rupees. The first round of price increases is likely to see this going up to 165 – 185 rupees.

Import prices of whole milk powder which were around 2,700 US dollar per metric tonne at the end of last year, have now topped 3,000 US dollars, importers said.

Two month forward prices are now quoted by some suppliers as high as 3,500 dollars a tonne, which could eventually push the price of a retail pack to around 200 - 225 rupee levels.

Australia, one of the major milk powder producers has suffered a severe blow from a year long drought with forecasts of milk production dropping by 11 percent to 9 billion litres during the current year.

"But the root of the problem dates back to the Iraq conflict when excess stocks were sent as aid," says Kotmale Holdings CEO Trevine Gomez.

"Lots of excess milk was also sent as aid during the tsunami, this ran down stocks. Later Europe took off the 250 US dollar per tonne subsidy they were paying."

A year ago, a tonne of whole milk powder was about 2400 US dollars.

Importers have already asked for a price increase from the Consumer Affairs Authority with the first round of price increases expected to take place within days.

Sri Lanka imports around 60,000 metric tonnes of milk powder per year.

Worse Case

The industry expects prices to ease after August, when the Southern hemisphere spring pushes up milk production in Australia and New Zealand.

"But it may even take up to a year for the market to stabilize," says Gomez.

"Australia exported a lot of the milch cows to China when the drought started to get bad. So the cattle stock has also depleted."

In some farms cows have been slaughtered. A cow requires about 50 litres of water a day.

The drought has also dried up grass and also driven up grain prices, which made alternative dry feed also too expensive for farmers.

The industry which met Consumer Affairs Minister Bandula Gunewardene has asked for a waiver of an existing nine percent import duty, at least until August.

"What we need is a mechanism where prices can be adjusted up and down. I would want the importers to bring down the prices when international prices come down," Gunewardene told LBO.

Source: Lanka Business Online