Heatwave, Global Conflict Strain Milk, Wheat Supply But Consumers Won't Feel The Pinch

Raw material costs are ticking up, but consumers aren't paying much more yet as packaged food makers are holding prices down to avoid disrupting the fragile recovery in consumption after a prolonged slowdown.

Major milk producers—Amul and Mother Dairy—recently raised milk prices by Rs 2 per litre. The price of wheat is also rising unabated, with the government even contemplating the possibility of allowing the country to import the grain after a gap of six years, to arrest food inflation.

"In a normal scenario, we would have probably taken a price hike," said Mayank Shah, vice-president of Parle Products Pvt. "But given the current subdued demand environment, it would be wise to absorb these costs."

For Parle, the net material inflation stands at 10%, compared to the same period of 2021 on a normalised base.

Inflation reached unprecedented levels over the last two years. Therefore, a comparison with this time period would not accurately reflect the trend.

Most consumer goods companies said that the commodity situation for this year so far has been relatively soft. While there have been increases in prices of raw materials like wheat, milk, cocoa and sugar, these have been offset by steadier prices in palm, laminates, and corrugated boxes.

The biscuit maker is beginning to see "some green shoots" in demand revival after many quarters, backed by bumper rabi crops and improving consumer sentiment in rural areas, Shah said. "So, at least for now, we would prefer to create an environment that stimulates demand and encourages full revival rather than creating barriers by taking price hikes."

Devanshu Gandhi, managing director of Vadilal Industries Ltd., echoed the sentiment. The ice-cream maker would desist from price hikes as the season is still in full swing. "We would review pricing after three–four months."

The ongoing heat stress prevailing nationwide is causing cows to produce less milk, impacting supplies. Both Amul and Mother Dairy said that the price hike is necessary to compensate farmers for their increased cost of production. They hope supply will return to normal in November as the flush season, when animals naturally produce more milk, kicks in.

While Amul has increased the price of fresh milk, it currently has no plans to raise prices of milk products, Managing Director Jayen Mehta said.

Wheat flour prices have risen, too. Some companies say that hoarders, who are keeping hold of their wheat crop in anticipation of even higher price, are artificially jacking up prices. The price of wheat hovered around $656.4 per tonne as of June 6, up 5.6% over the last 12 months.

"While the crop seems to be fine as far as wheat is concerned, the government holding has been reasonably low," Varun Berry, managing director of Britannia Industries Ltd., told analysts in a post-earnings briefing. "So, there is going to be a government buying because of their programmes and I would think that the wheat outlook is slightly inflationary during the year."

Despite a non-deflationary environment, Britannia will focus on volumes.

"Post-elections, post-monsoon, we will see 3–4% inflation, but we would be aiming towards a double-digit volume growth, for sure," Berry said.

Companies are also refraining from increasing prices in order to regain market share from local competitors. "We are carefully balancing consumer price sensitivity with price elasticity and competitive dynamics," said Manish Aggarwal, director of Bikano, Bikanervala Foods Pvt.

Aggarwal doesn't expect the demand for sweets and other milk-based products to be affected by the recent surge in costs as the company has no immediate plans to pass on increased costs to consumers. However, the snacks major may have to contemplate raising the prices of their products down the line if the inflation scenario persists, he said.

Experts, meanwhile, are also hopeful that the shift in political climate will add another tailwind to the consumption story of India.

"The past month has witnessed multiple events rekindling investor interest and hopes of a revival in consumption demand in India, starting with expectations of good monsoon, syndicated data pointing to rural growing ahead of urban and now, expectations of favourable policies by the government, post union election results," Citi analysts wrote in a note.

All eyes are on announcements in the upcoming union budget in July.