Milk muddle

The dairy industry is one of the most protected sectors in Sri Lanka, but even after decades of public funds, it remains one of the least efficient and most contentious segments of the economy. Caught in the cross hairs of politics, bad decision-making, mismanagement and outdated economic thinking, it has lately become a case study for the problems created by State-run business.   

On the surface, successive governments have justified billions of rupees worth of subsidies to the sector on the basis that Sri Lanka spends over Rs. 40 billion annually to import milk powder, and have argued that import substitution would save the country precious foreign exchange while boosting the nutrition of the masses. Politicians have also attempted to win votes by artificially reducing milk powder prices and forcing a State-run company to sell below production costs, resulting in the company remaining largely in the red and the entire sector having to grapple with a lopsided playing field.

The mess has once again hit headlines because the Milk Industries of Lanka Company (MILCO) has once again become embroiled in a payment dispute with farmers. The chronically loss-making company has been unable to pay about 375,000 farmers as they are awaiting a Rs. 4.2 billion cash infusion from the Treasury. MILCO has run into a liquidity shortage because they spent Rs. 450 million on new infrastructure facilities, including a new milk powder plant in Ambewela, but despite these upgrades, it still lacks a proper chilling and processing facility, resulting in large amounts of milk being wasted. MILCO officials have been quoted in the media as saying that milk had to be dumped in 2012, 2016 and 2017. It is mind-boggling that a company that has existed for about 60 years is still lacking the capacity to absorb the volumes produced by the sector. But, this is largely the result of mismanagement, lack of investment and terrible policymaking.   

As part of the Government’s import substitution program, particularly under former President Mahinda Rajapaksa’s administration, the State spent billions of rupees on importing thousands of dairy cows and handed them out to small farmers in select areas of the country. However, farmer associations and experts have since pointed out that these cows do not suit the Sri Lankan climate and farmers are forced to spend significant amounts of money on their upkeep. Large numbers have perished over the years, and those left produce less volumes of milk than initially projected. The loss of public funds aside, even though the Government worked to improve milk production, partly because the dairy sector is in key vote areas such as Kurunegala, Anuradhapura and Polonnaruwa, they did not increase the capacity of MILCO.

MILCO, as a State entity, is entrusted with purchasing milk at a higher price from small farmers. As much as 80% of Sri Lanka’s dairy industry is made up of small producers who desperately need their payments to keep up production. When they are not paid, rural families and economies suffer while on the opposite end, poor families lose access to an affordable product.

Despite much time, public money and energy being funnelled into the local dairy sector, milk and milk products such as cheese remain beyond the reach of ordinary Sri Lankans. Surely it is time to take a different approach to the local dairy industry and create a system that serves all stakeholders.