Budget reiterates local production despite 2020 imports surpassing 2019

By Uwin Lugoda During the Budget 2021 reading on 17 November, Prime Minister and Finance Minister Mahinda Rajapaksa stated that a key policy priority of the Government is to gradually reduce the foreign exchange utilised on the importation of milk powder, which amounts to more than $ 300 million per annum (Rs. 55 billion), and to meet the increasing demand for liquid milk through domestic dairy production. “Directing the large foreign exchange outflow utilised in the importation of milk powder to local farmers and producers will result in an expansion of the agriculture sector and creation of alternative income sources for rural farmers,” the Premier stated. He said the amount of milk that can be obtained from one cow per day in dairy farms operating at different scales ranges from 4.5 litres to 22.4 litres. Experts have pointed out that imported dairy cows can produce more than 20 litres in accordance with their genetic potential. The lack of pastures and lands that can be developed as pastures, temperature and issues in water management, insufficient animal feed with the required nutrients, non-usage of modern methods in animal farms, and infertility of cows were identified as constraints for the enhancement of milk production. Therefore, it is planned to import dairy cattle for the development of the Rideegama and Bopaththalawa farms of the National Livestock Development Board (NLDB) as cattle breeding farms and to cultivate nutritious pasture, maize, and sorghum crops in the livestock farms. Prime Minister Rajapaksa also proposed to increase the Government’s contribution to develop small and medium-scale dairy farms through extension services that support the dairy cattle for breeding. “I propose to implement a loan scheme to provide special loan facilities of up to Rs. 500,000 at an interest rate of 7.5% per annum for the purchase of dairy cattle, setting up of eco-friendly cattle sheds, and purchase of equipment for small and medium-scale dairy farms,” he noted. He went on to propose to allow the deprecation of two years of capital investments done on the latest technology to collect local liquid milk in collaboration with local dairy farmers, enhancements to milk-related productions, and promotion of liquid milk. His proposal also included a plan to provide strategic investment tax concessions for a period of five years for capital investments of over $ 25 million with the view of facilitating these companies to process milk powder exports instead of importing milk powder. Import restrictions Due to the economic impact of the Covid-19 pandemic, the Government has maintained import restrictions from late March to protect the currency by preventing foreign exchange outflow. This has also had the secondary goal of promoting local industries and using locally sourced goods to replace imports in order to bring down the country's import expenditure. However, an external sector performance report by the Central Bank of Sri Lanka (CBSL) showed that dairy imports in the first nine months of the year, from January to September, had increased to $ 253 million, compared to the imports of dairy products between January and September in 2019, which was $ 225 million. This is while expenditures on other imports such as merchandise have declined by 10.9% to $ 1,525 million in September 2020, compared to September 2019, thus continuing the Year-on-Year (YoY) declining trend observed since March 2020. This decline can also be seen in consumer goods that was 14.8% lower in September 2020 than it was in September 2019. However, expenditure on milk powder has significantly increased, even though the price of whole milk powder was lower than it was in 2019, in line with the global market. Despite this, the Government has been very vocal about the need for self-sufficiency in the dairy industry. Yet, the All Island Dairy Association (AIDA) stated that local production meets under 40% of the total domestic milk requirement, considerably below the 80% it met in the 1970s. Therefore presently, the majority of the demand in milk products is met through imports, mostly from New Zealand and Australia. In 2015, local milk production amounted to 374 million litres, a 12.1% increase from the previous year. In comparison, imports of milk and milk products grew by 21.5% over the year. Over the last decade, imports of milk powder have grown at a higher pace than the growth in local production. Speaking to The Sunday Morning Business, AIDA President Nishantha Jayasooriya stated that the reality is that the formal demand for dairy products in Sri Lanka is 1.2 billion litres per annum, which local dairy producers cannot cater to, seeing as they only produce 420 million litres per annum. “You can see this in stats in the reports put out by government institutions such as the Ministry of Agriculture and the Department of Animal Production and Health. There is a balance deficit of about 600 million litres of milk, and no matter what anyone says, that is being filled by imports,” Jayasooriya said. He explained the reason for the early increase in dairy imports to be due to the annual consumption of milk by the local market growing, reaching the current demand of 1.2 billion litres, which results in the gap between the demand and locally sourced milk growing wider. He went on to state that if local producers want to cater to the local demand, they must double down and meet at least 75% of the demand, which is 750-800 million litres per annum. “If they can cater to at least this much of the demand, the imports will eventually stop, because we will not be able to compete with the prices of local milk powder,” he pointed out. Local production Speaking on the side of the local dairy producers, Ariyaseela Wickramanayake, Founder Chairman of Pelwatte Dairy Industries Ltd., Sri Lanka's leading local dairy producer, dismissed dairy import statistics of Sri Lanka, claiming that the numbers have been manipulated and are exaggerated. Pelwatte Dairy Industries is one of the two biggest local producers of milk in Sri Lanka, along with Milco (Pvt.) Ltd., a state-run diary producer. Wickramanayake questioned how, despite the gradual growth in the local dairy industry output and its growth in market share, Sri Lanka’s milk powder imports have increased over the past few years. “I put 20 tonnes of milk into the local market daily, and if you ask any of the supermarkets, they only sell around 50 tonnes every week. This is despite the fact that my product is of a higher quality and cheaper. So how are they saying the consumer demand has increased?” he questioned. According to the CBSL Annual Report 2017, Sri Lanka imported Rs. 48 billion worth of milk and milk products, an increase from the figures of 2016 and 2015, which were Rs. 36 billion and Rs. 34 billion, respectively. Wickramanayake disregarded the reasons for this increase in imports to the higher per capita consumption of milk and milk-related products or the growing population. “The fertility rate and population have nothing to do with increased importation. Consider the number of cups of tea you and I drink. Has it gone up? No.” Furthermore, he claimed that local producers presently satisfy 75% of Sri Lanka’s national milk requirement of 700 million litres per year and are even capable of meeting 100% of the demand without the aid of imports. According to Wickramanayake, at the moment, Sri Lanka has 1.3 million cows, from which only 240,000 cows are used for milking purposes, allowing the imports to be dumped in the country. “Now we have a shortfall of 200 million litres, which is getting covered, but if we utilise our cows, we will meet the national demand and even export milk.” Taking butter as an example, he stated that his company currently has at least  50-60 tonnes of butter stuck in three warehouses because the national requirement is much less than what the officials claim. Due to this, he stated that the company is currently in discussions with foreign partners in countries like Abu Dhabi, China, and Japan to start exporting their products. Reports from the Agriculture and Environment Statistic Division of the Department of Census and Statistics say that local milk production was 471 million litres in 2018, up from 396 million the previous year. Wickramanayake stated that in the last three years, the local industry has come up from 400 million litres to 500 million litres in production. “Every year, we are increasing annual production. And as such, importation should come down with the increase in these numbers. The irrelevant importation of milk in the presence of a possible reliability on local production results in losses from Sri Lanka’s foreign exchange earnings and a weakening rupee.” He stated that Sri Lanka should look at supporting the local supply chains instead of depending on imports. He explained that he currently spends Rs. 700 million to Rs. 800 million a month on purchasing raw milk from local farmers. However, in an earlier conversation with us, Department of Animal Production and Health Director General Dr. N. Wedasinghe said that Sri Lanka was not equipped to meet the full local requirement of milk yet. He explained that the local industry cannot meet the local requirement overnight, and it will take them a period of 10 years to meet the demand 100% locally, based on the assessment of current industry performance. Meanwhile, speaking from a Government point of view, Secretary to the Ministry of Trade Badrani Jayawardana stated that the Government is currently initiating several programmes in order to support the local industry. These programmes include increasing grasslands, breeding different varieties of cows, and increasing staff and research within the industry. The Government will also focus on catering to the varying demands of the public, making necessary adjustments to the local industry and their strategies.