India’s dairy sector is moving into a phase of tighter supply after several years of sharp volatility, signalling a structural reset rather than a cyclical fluctuation. Insights from an expert session hosted by Systematix Institutional Equities suggest the industry is now navigating a delicate balance between recovering farmer confidence, firming procurement costs, and steadily strengthening consumer demand.
From Price Shock to Supply Recovery
The post-COVID period of 2022–23 proved particularly disruptive. Milk prices fell to levels that failed to cover farmers’ rising production costs, eroding on-farm profitability. This resulted in reduced cattle induction and a noticeable contraction in milk output. The impact was not immediate but structural, as herd rebuilding in dairy is inherently slow.
By mid-2023, the narrative began to shift. Leading cooperatives and private dairy players intensified farmer engagement through sustainable fodder programmes, assured procurement, and improved payment visibility. These interventions helped restore producer confidence, setting the stage for a supply rebound.
A Short-Lived Surplus
The recovery culminated in a sharp production surge during the October 2024–March 2025 flush season, when milk output rose by nearly 25 per cent. This temporary surplus placed pressure on processors, prompting a strategic response. Dairy companies accelerated the expansion of value-added product portfolios, strengthened cold-chain infrastructure, and increased advertising and promotional activity to absorb excess volumes.
Backend investments and last-mile distribution enhancements also gained pace as large players sought to manage inventories more efficiently. However, the surplus proved fleeting.
Supply Tightens Again
In 2025, early and unseasonal rains disrupted the conventional summer demand-supply cycle. At the same time, geopolitical disturbances, including the India–Pakistan conflict, affected key northern milk-producing belts such as Punjab, Haryana, and Jammu & Kashmir. These supply-side pressures coincided with strong festive demand, rapidly eroding inventories.
As a result, the industry is entering late 2025 with a limited surplus. Milk procurement costs have firmed across most regions, even as retail product prices have largely remained stable following the recent GST cut. Selective regional price increases of ₹1–1.5 per litre in states such as Bihar and Andhra Pradesh indicate emerging cost pressures.
Margins Under Pressure
Demand has been supported by lower consumer prices and increased grammage following the GST cut, particularly in small stock-keeping units. While this has boosted volumes, it has also compressed margins due to channel disruption, higher logistics costs, and increased complexity in supply chains.
Industry participants are now evaluating calibrated price hikes or selective volume rationalisation to restore profitability. Procurement cost corrections are expected around April 2026, coinciding with the Ramzan period, offering some relief on the cost side.
Structural Demand Shifts
A defining trend is the accelerating shift towards value-added dairy products such as curd, paneer, ghee, and ice cream. Ice cream consumption, once closely tied to the peak summer months, is now extending across a broader seasonal window. Dairy products are increasingly purchased on impulse, supported by changing consumer preferences away from carbonated beverages towards milk-based alternatives.
Distribution Realignment
Distribution dynamics are also undergoing rapid change. Quick-commerce and e-commerce platforms are gaining share, reshaping buying behaviour and inventory planning. General trade continues to lose ground, while modern trade, despite offering visibility, remains margin-dilutive. This is forcing dairy companies to adopt a more selective and channel-specific growth strategy.
Looking Ahead to 2026
As demand strengthens and supply tightens, India’s dairy sector is entering a phase of margin recalibration rather than expansion driven purely by volume. The industry’s ability to manage procurement costs, optimise channel mix, and deepen value-added portfolios will determine its performance heading into 2026. The coming year is likely to reward operational discipline and strategic pricing far more than scale alone.