When the high base effect of gas prices and house rent index were about to be arrested to tame down the headline inflation, recent surge in perishable food items is likely to keep the CPI high for a month or two. The sub index of perishable food items increased by 7 percent in Aug-19 over Jul-19 and that is 45 percent of the monthly CPI increase.
Some items like pulses, edible oil and sugar price increase is plausible as either these items are imported or there are new taxes imposed on these – or a combination of both. The puzzle is produced vegetables prices and Chicken getting expensive in wedding off-season.
Pulses are mainly imported and currency depreciation has a direct bearing– year-on-year price increase in Aug-19 ranges from 12-48 percent for different variety of pulses – which is less than the currency depreciation in the same period. In case of sugar, the increase of 34 percent is contributed to doubling sales tax (8% to 17%) and increase in sugarcane prices. Similarly, edible oil is being imported and this coupled with higher duty of edible oil is reflecting in 12 percent increase in cooking oil prices.
But what is with chicken? Why have the chicken prices increased 54 percent year-on-year in Aug19? Based on latest weekly SPI numbers, the chicken farm broiler price increased by a whopping 79 percent on the week ending September 19, compared to the same week last year. According to channel check, the price peaked on Sep 23, and now administration is in action to normalize the prices in days, and market forces will play to reduce the price in couple of months.
Within chicken feed, not all raw materials are imported –soya bean meal is directly imported or the bean extracted from imported soya bean seed. The soya meal price has increased by around 40-50 percent due to currency depreciation and recently due to suspension of trade with India. But majority of soya comes from South and North America. The maize is locally produced but it was producing in surplus in prior years and farmers were not getting right price, and this time less maize has been produced - since the price has increased, more farmers will grow to normalize the price.
The feed bag - constitutes of maize/corn, soya meal, minerals and vitamins, prices have increased over the last year from around Rs2,200 per 50 kg bag to around Rs2,900. But that 30-35 percent increase in prices does not justify nearly 70 percent plus increase in chicken prices. There is something more to the story.
Prior to July-19, poultry farmers were making losses as broiler prices did not increase proportionately to input price hike. Some had stopped production; and in turn the demand of day old chicken (DOC) started falling. The DOC price dipped sharply from normal price of Rs25-30 to almost zero. Farmers were not willing to buy day old chicken even for free.
Eventually hatchery production lapsed, and now there is shortage of DOC in the market, and it rates went up to Rs65-70. The problem is that industry has capacity at 150 percent of demand, and such supply gluts are frequent, and in response, broiler chicken prices fluctuate as well. But the volatility used to be managed administratively by Punjab Government under Shahbaz Sharif. Now, the market is not taking Buzdar as seriously. Since 60-70 percent market is around 100-150 km radius of Lahore, the impact of prices is felt in Karachi and other parts as well.
With prices at record high, production is ought to increase and the prices will normalize after one flock cycle – six weeks. The Punjab government has awakened in the last two days and prices have started to come down.
The prices will normalize like any perishable item, and in this case, the cycle is short to have adjustment quickly. There are two points to be noted here. One is that, it is a short term blip and the SBP should not take this increase seriously in its next monetary policy decision. The second point is to check the monopolistic behaviour (cartelization) in the chicken value chain, and if there is any, it should be curbed.
Big poultry players are vertically integrated. Excess supply cannot happen in hatchery market without them knowing the consequences. As they were making losses since 6-7 months (prior to Jul-19), production stopped, and that impact cascaded into DOC market. Now due to short supply, the price increase is much higher and that would overcompensate the losses in just one flock. Coincidence?