Of ghee and Ramazan

With Ramazan almost here, readers would recall when this column wrote about an impending ghee shortage in Punjab (Read: “Punjab's ghee crisis,” published April 21, 2016). BR Research spoke to the Pakistan Vanaspati Manufacturers Association (PVMA) to get an update on the situation. Thankfully, the Association confirms that there is in fact enough stock of ghee in the shelves (40,000 MT) and enough palm oil reserves (138,000 MT) to get us through the month. So the consumers are safe! But the industry is still in deep trouble.

The issue started last year in April, when the Punjab government decided to fix the retail prices of ghee. Some brands got a decent enough price (based on personal connections and political clout) with enough margins, while the price of others was brought below their cost of production. Then, when palm oil prices began rebounding, it became unfeasible for a lot of the brands to import, which brought us to the crisis. Talking to BR Research, the PVMA mentioned that most brands have been importing at a loss to prevent the shortage.

The intervention has created waves of disruption in the market. Those brands priced less than Rs135 have been at a loss. These are the brands that commanded the largest market share; in a letter addressed to the Secretary Industries Punjab, the PVMA has written that the most popular brands that make up 60 percent of the market share have been wiped out. This has left a giant vacuum to be filled by non-standardized and adulterated loose products.

Coming back to Holy month - the Ramazan package announced earlier this week sees the federal government subsidizing the sale of ghee by Rs8 per kg, via the Utility Stores Corporation. That's well and good. The Punjab government, on the other hand, is asking the ghee manufacturers to sell their products at Rs10 discount in Ramazan bazaars while offering no subsidies (Read: “Bad ghee for all to see,” published May 13, 2016). The ghee that will be sold in these Ramazan bazaars, if priced below Rs135 per kg, is likely to be non-standardized and unchecked.

As for the budget, things are about to get worse for the ghee industry: as part of what seems to be a broader program of cracking down on unregistered persons, the federal government will now tax the ghee industry on a presumptive basis at 25 percent of the difference between the retail and ex-factory price. Simply put, the government is making the ghee manufacturer pay so that it can pass that on to its buyer. Ultimately, this will be passed on to the end consumer, so a revision in the retail prices is likely. Around 90 percent of the wholesalers/retailers of ghee are unregistered, and this is an unorthodox way of trying to crack down on them.

However, this won't be a problem, because only those brands that can afford Rs10 margin (i.e. priced above Rs140 per kg) will be found in the Ramazan bazaars. In Ramazan bazaar, no one will choose to buy these anyway as they'll still be too expensive.