The so-called ‘commodity [price] problem’ is not integral to Pakistan’s dairy sector alone. Although low returns to producers – both crop grower and livestock farmers – are universally acknowledged, an overarching argument for price control, especially food group products, persists still.
The rationale usually advanced premises on the assumption that food product prices are abnormally high despite low farmgate price because the middleman pockets bulk of the margin. This view is so pervasive that in an interview with BR Research earlier this year, FBR chairman Shabbar Zaidi fatefully commented that the country is “run by arthis [middlemen]”.
The criticism – accurate or exaggerated – of middleman’s role has a very powerful unintended consequence. In seasons of supply shock, a typical farmer is in a position to negotiate/demand a better rate from middleman for his produce. In turn, as a rational economic agent, the middleman passes on the impact of higher farmgate price down to retailer and ultimately, final consumers. A backlash ensues, eventually putting the political government into action – reactively. Prices are forcibly brought down; the middleman refuses to offer grower higher rate any longer in order to maintain his own profit margin.
The vicious cycle set in motion results in farmers barely breaking-even. This inhibits any incentive, and in many cases, inadequate liquidity for farmers to invest in yield improving inputs whether feed/fodder, silage, higher quality breed animals, or even proper vaccination and treatment.
The situation is particularly worrisome in dairy, where fairly young “off-lactation cattle” is sold off to butchers immediately, instead of being taken through the reproduction cycle. Naturally, when returns on milk are low amid risks such as delayed pregnancy, infertility, and disease; livestock farmers have little motive to care after the animal for a minimum number of 10 pregnancy months.
Twenty years ago, it was hoped that ushering a dairy revolution led by formal sector (mostly UHT) processors could resolve this bottleneck. Milk collection centres set up by dairy processors, it was argued, would engage in sustainable practices, ensuring payment of fair price to even small- and subsistence farmers.
That was then. Over the last decade, the formal sector has seen its share barely budge from eight percent of the commercially traded milk universe. Suppliers (livestock farmers) still largely depend on middlemen (dhoodi/gawala) to sell the bulk of their output, whose procurement cost remains low (as discussed earlier) despite seasonal fluctuations in, and long-term inching up of retail price.
On the other hand, the paltry share of formal (packaged) industry in commercially traded universe has become a chicken and egg problem. While the industry had set itself a virtuous target of achieving at least additional ten percent category conversion, it has been bogged down by both a perception problem (malicious campaigns laced with half-truths about processed milk’s purity), and price distortion.
When the price differential between processed and khula doodh is between 30-40 percent on average, why would an average consumer, influenced by said campaigns, pay a premium for a product with questionable merit?
Thus, the packaged milk players, instead of focusing on expanding size of the pie have instead been spending energies on battling amongst themselves for the five percent share, sometimes undercutting each other by engaging in price cuts, and on other occasions, lowering volumes to maintain profitability.
Had the packaged milk players been allowed to keep their eye on the ball, an ever increasing number of livestock farmers would have received a higher price for their product, in turn allowing investment in animal productivity, calf saving, and high quality breed insemination, among other best practices.
Notice that the conversation has not even touched the subject of adulteration in khula doodh so far. While a later column in this series will expand on the subject, suffice to say that consumers are rational economic agents, and base their preference for khula doodh on the trade-off of paying over thirty percent premium for an essential food item, a differential most consumers from SEC-B and below can barely afford.
Thus, the existence of price-control on khula doodh ensures unintended consequences all round. One, farmers’ return remains low, leading to little investment in animal productivity; two, processed milk companies are unable to achieve category conversion due to friction in prices; and three, the profit margins of the middlemen remain intact, despite long-term increase in commodity price.
At a recent talk at Pakistan Institute of Development Economics, Asad Umar noted that policy making “needs to be for the next generation, not next election”. The distortions in dairy pricing not only concern the profitability of the economic agents in the value chain, but more importantly the health of future generations considering dairy is still the cheapest source of protein for a country with highest levels of hunger and malnourishment in South Asia.
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