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BR Research

Vegetable price volatility: look east to find answers

15 Oct 2020
RAWALPINDI: People busy in purchasing vegetable form weekly Sunday bazar. INP PHOTO by Fahim Malik
RAWALPINDI: People busy in purchasing vegetable form weekly Sunday bazar. INP PHOTO by Fahim Malik

Every economy has its own mythical robber barons; entrepreneurs who made their fortune by bending rules in myriad of industries, whether clothmaking, ship breaking, railroads, cement, real estate, or sugar. Of course, the term carries pejorative overtones, as it suggests profiteering at the expense of public welfare.

Looking at Pakistan’s frequent inflationary spirals where prices of essentials routinely run amok, few would disagree that Pakistan has been graced with its own ‘basket of deplorables’. But is every case of price spiral an evidence of profiteering?

This autumn, it appears that the prices of perishable vegetables are all set to chart new heights. From tomatoes, to spuds, to onions, prices of desi kitchen essentials have begun to climb a tad too early in the calendar year. Because all perishables are seasonal, it will take long before the correction comes in (by next harvest season – December to March). Meanwhile, the administration is already scrambling, wondering what months of harsher winter may bring.

What brought us here? Covid-19 and lockdown were supposed to dampen domestic demand; yet, no news of crop being lain to waste made it to mainstream media during lockdown months. Yes, monsoon rains were extraordinary, but little news of widespread vegetable destruction has trickled in from the rural economy. Moreover, harvest season is still 45-60 days away. If traders are pricing in poor crop outlook, there was ample time to place import orders, as happens every season. Afterall, Pakistan imports vegetables worth at least $100 million on average. And while the incumbents may have made several errors in managing food inflation, no ban on import of vegetables was imposed in the past two years.

Does that mean those in the perishable value chain are minting abnormal profits? Historically, premium between wholesale and retail prices have averaged between 1.5 – 2.0 times, depending upon seasonality. While wholesale price data for FY20 is yet unavailable, there is little evidence to suggest that market structures transformed in the past one year, yielding too much bargaining power to anyone player in the value chain. If the only explanation is cost-push, where exactly has the supply shock come in from?

Unlike grains and cereals, vegetables are low-investment crops, that require very little costly input such as fertilizer or pesticide sprays. Thus, it is remarkable that vegetable prices have shown greater inflationary momentum over the past two years than staple crops such as wheat, maize, or paddy. And before anyone points to opportunism by exporters due to massive dollar depreciation, remember that foreign trade takes place on international prices, whereas most traders would recognize that greater profits are to be had within the country during seasonal shortages. Given its large demographic, Pakistan has not been big on export of tomatoes, onions, or potatoes in the past decade, mostly importing from neighbours to fulfil deficit in domestic supply.

But before readers are tempted to investigate vegetable price inflation in neighbouring countries, it may help to zoom in on those price charts and identify when prices really begin to run amok. It appears domestic prices reached an inflection point in mid-2019, and have refused to stabilize ever since.

Look east, and the suspension of trade with the eastern neighbour may give some pointers. In 2016 when domestic tomato crop suffered heavy losses, Pakistan imported tomatoes worth $100 million from the eastern neighbour. And although official import of potatoes and onions from India has never been high, remember that a ban on official channels only increases premium on smuggling. And be assured that border skirmishes, jingoistic rhetoric, and lockdown due to global pandemic could have only exacerbated things.

When it comes to illegal trade, there are few ways to make a confident argument either way – even in best of times. But developments over the past two years – which are unrelated to incumbents coming to power – has only made grey market movement difficult. From increased clampdown on hawalas, to encouraging trends for remittances through official channels, the means for payments against smuggled or under-invoiced trade has become more limited.

This in no way means that clampdown on smuggling is the only explanation for spiral in perishable prices, but it is as good as any. Since it is also one that absolves the current administration – after all, clamping down on illegal trade is never bad – it may not hurt investigating.

Unless the government is content on making you believe that like sugar and real estate, Pakistan also has vegetable barons. Hard to believe, unless you know of entrepreneurs who have built empires on vegetable trade.