It is commonly held that administrative failures – in particular, absence of value chains for perishable processing – is responsible for food inflation in the country. BR Research looked at a select group of perishable food items subject to extreme seasonal volatility, in juxtaposition with major non-perishable food items to find out the veracity of this claim.
Commentators fond of administrative measures to control food prices are often found noting that Pakistan wastes thousand tons of perishables every year, which if processed could help reduce prices. While there is little denying that an evolution from ‘fresh produce’ to ‘processed’ in frozen or canned form will help improve price stability, it is not necessarily obvious that consumers are subjected to the short end of the stick due to absence of food processing value chains.
Over the last decade, 12-month average prices of perishable commodities such as onion, tomatoes, and broiler chicken have increased at a lower rate than staples such as flour, rice, basmati, and sugar. Although commentators would tell you that processing ‘tomatoes’ into storable ‘pulp’ will resolve the drama of “tomato”-flation witnessed every year, retail price of tomatoes remained below Rs 60 per kg in 85 out past 120 months over the last 10 years! In contrast, per kg prices went above Rs 100 only 12 times, of which 7 instances occurred in the last 24 months alone.
Why is this significant? It takes no rocket scientist to figure out that volatility in raw material prices hurts. But it is equally important to remember that more often it is the producers - and not the consumers – that suffer due to price volatility, as they may be forced to sell their output at throwaway prices, often below-cost. In the case of tomatoes, retail prices fell below Rs 40 in 30 out of 120 months, often coinciding with peak harvest season.
Moreover, while cheeky headlines such as “tomato-flation” may capture consumers’ attention, it is not exactly obvious whether cold chains and storage will directly benefit the consumers. Afterall, construction of storages, and processing into canned/frozen form will add intermediaries to the value chain, increasing final cost to the consumers. Is the evolution inevitable? Most likely, but it is worthwhile to get the objectives right.
At a broader level, it is the question of what contributes more to food inflation that merits most attention. Since the ongoing cycle of commodity price increase began more than three years ago, price of non-perishable staples such as flour, basmati and refined sugar have increased at a much sharper rate than, for example, broiler chicken or even fresh milk.
Not only do non-perishables make a bigger chunk of national CPI – nearly 30 percent weight against just 5 percent for perishables – increase in prices of flour, rice and other non-perishables are also downward sticky, and do not come down as easily as they go up.
Lastly, it is worth asking whether extreme volatility in perishable prices affect inflation expectations. If consumers are indeed rational, then it is hard to imagine if a sudden spiral in perishable prices would irreversibly impact their expectations regarding general prices level and impact on purchasing power. For example, given the observed behaviour of long-term prices of broiler chicken, a sudden rise from Rs 200 to Rs 300 per kg – as was observed in last Ramzan (May 2021) – may temporarily tighten the purse strings, but should not hurt consumer expectations concerning purchasing power. As PTI surrogates don’t forget reminding us, “chicken prices come down too”.
N.B. The above analysis is only meant as a thought-starter, and is neither comprehensive nor subjected to rigor of an econometric study. Only those perishable commodities are included where long-term data is publicly available and where prices are not subject to extreme seasonal volatility. Therefore, while broiler chicken is included, mutton and beef are excluded.
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