Edible oil and ghee face towering prices

Edible oil and ghee are essential items of daily use. Their prices are increased every now and then, without any genuine reason. The Competition Commission of Pakistan (CCP) has taken notice of this situation and raided the offices of the association, taking away books and other relevant documents. The CCP imposed a penalty of Rs50 million on the Pakistan Vanaspati Manufacturers Association (PVMA) for cartelisation and price manipulation. The order said if PVMA would not submit its compliance report within a month of issuance of the order, by July 31, PVMA will be liable for a penalty of Rs1 million for each day. The investigation team found that from December 2010 to February 2011, prices had increased four times in different categories and brands of ghee and cooking oil.

Restricted competition
The Sector Study Report identified that the association prevented, restricted and distorted competition in the sector. It indicated that manufacturers do not fully synchronise their prices with the changes in input prices and act independently of market pressure and hence influence market price. For instance, when international prices of palm oil dropped around 35 per cent over 2007-08, manufacturers and importers started accumulating palm oil stocks but did not transfer the advantage of a reduced price to the consumers. In the same period, the dollar remained stable at about Rs60 for a number of years, the price of vegetable ghee rose by 72 per cent during this period.
Contrary to the above situation, in 2008-09, the price of palm oil increased by 22 per cent, the dollar appreciated by 6 per cent, whereas the price of vegetable ghee dropped by 31 per cent. It appears this was due to government intervention and pressure on the ghee and cooking oil industry to reflect the previous import price differential in output.
The price increase was a collective decision of all manufacturers or PVMA resulting in simultaneous increase in price across the board.
Vegetable ghee and cooking oil industry is one of the largest manufacturing sectors in the country and has grown tremendously since independence. The production was 4,000 tonnes per day in 1950, reached 1,180 thousand tonnes in 2006-07 and reduced to 1,076 thousand tonnes in 2009-10.
This industry was nationalised in 1972; however, since 1988, the private sector has been allowed to run this industry. The Rs384 billion industry has 160 small and medium sized vegetable oil and ghee units that are contributing a huge amount to the national exchequer, in the shape of duties and taxes.
Out of the total units, about 100 firms are the member of PVMA, producing products of about 3 million tonnes. There are a large number of unregistered firms who are filling the gap of demand and supply. Annual consumption of edible oil has reached 2.8 million tonnes of which 28 per cent are available from domestic sources and the remaining quantity is imported. The import during July-April 2009-10 of edible oil (Soyabean & Palm Oil) was $1,054.7 million that rose to $1,660.3 million in the same period of 2010-11, showing a 57.4 per cent upward change. The total increase in amount was $605.6 million and its share in total import was 5.1 per cent in the 10 months of 2010-11.

The national & international front
Pakistan was the third largest importer of Malaysian palm oil in 2009 as its import has reached to over 1.76 million tonnes. The EU is the second largest importer of palm oil with 1.89 million tonnes. China remained the biggest importer of palm oil with an annual import of 4.03 million tonnes. Pakistan edible oil industry has 10 refining units which import crude palm oil. When crude oil is refined, it is used by the manufacturing units of the refineries or sold in the local market to other manufacturers. Crude palm oil imports are fluctuated in a big way.
As substantial foreign exchange is spent on the import of edible oils, the government has encouraged private investment for commercial edible oil seed farming, production of edible oils, processing and marketing of edible oils. The main domestic source of edible oil is cottonseed, rapeseed, mustard seed, canola and sunflower. About 64 solvent extraction plants are producing 0.5 million tonnes, 20 per cent, of local demand. The product market can be classified into two categories; vanaspati and cooking oil. Cooking oil is basically purified fat of plant origin. Whereas, when the process of hydrogenation is applied to vegetable oils and fats, it results in the conversion of liquid vegetable oil to solid or semi solid fats, which have different melting points. This hydrogenated oil is called Vanaspati or Vanaspati ghee in Pakistan.
For ghee, RBD palm oil and palm olien are imported, while local cotton seed oil and rapeseed and mustard oil are used to manufacture ghee. For cooking oil local and imported sunflower oil, canola oil and soybean oils are mostly used.
Vanaspati Ghee and cooking oils are widely used in different forms of cooking, baking, sautéing and deep frying and are also used at domestic and commercial levels.
Dietary habits all over the world, including those in Pakistan, are changing fast. Low fat, low cholesterol cooking oils are replacing ghee as cooking items. Besides health awareness, increase in per capita income is contributing to enhance the use of cooking oil. Almost 4 per cent consumers in urban areas of Pakistan are shifting to cooking oil from vanaspati ghee. However, in rural areas, ghee is still given preference considering it is more nutritional.
The industry is 70 to 75 per cent dependent on imported oils, mostly palm oil. In the cost of production, palm oil constitutes 80 to 85 per cent. Other cost factors include freight charges, utility bills, labour wages, packaging and administrative expenditures, processing wastage and marketing expenses. It was noted that the prices of vegetable ghee in Pakistan rise despite a steep decline in the price of imported palm oil. The government did not fix prices; rather it requests manufacturers to reduce prices. It has continuously instructed ghee and cooking oil manufacturers to pass on relief to the general public on account of reduction in international price of edible oils.

Actions & reactions
On January 15, 2009, the officials notified that the international price of palm oil had reduced from $1,300 per tonne to $632 per tonne and as a usual practice any increase in international prices of palm oil, the prices of ghee and, oil immediately increased by the manufacturers, but the decline in prices was not reflected properly. During January 2009, the C&F prices of RBD Palm Olein were recorded at $625 to $640 per tonne, however, the consignments were booked earlier and, therefore, were assessed by customs authorities at C&F price of $550, benefit of which was not transferred to the consumers.
PVMA has also been warned by the Government on certain occasions that costing of production prepared by PVMA and submitted to the Government departments is on the higher side. On December 8, 2008, secretary interior also called the chairman PVMA and told him that according to their costing, the price of Rs88 per kg desired by the manufacturers is still on the higher side, so it should be reduced to Rs80 per kg.
With the intervention of the government, PVMA agreed to reduce ghee price from Rs120 per kg to Rs98 per kg and then finally to Rs86 per kg within three months, September 26, 2008 to December 15, 2008. It clearly showed that mills act independent of market forces and can maneuver the price when they are asked by the government to do so. Now the price of one kg ghee or oil has reached Rs170, July 2011.
Instead of giving any justification for the price hike and failure in passing on the benefit to the consumer, PVMA pressurises the government to reduce custom duty and claimed that price will decline automatically when import duties are reduced.
It was also noted that PVMA shifted the blame towards the government for price hike. Member mills fail to reflect price reductions in the wake of declining input costs and maintain the price at a higher level of prevailing international price of edible oils or price before the import. Furthermore, the PVMA comes up with a reason that import duty structure is the major factor for price hikes, to blackmail the government, the CCP observed.
It appeared that ghee and cooking oil manufacturers behave in a collective manner, as in cartelisation. They do not synchronise their prices with change in input prices and set their price at a higher side. Recently, manufacturers of ghee and cooking oil have again made pre-budget and pre Ramadan rise in prices of their products. Reasoning out their price hike, the manufacturers said that this increase was due to revision in palm oil rates in the international market and declining value of Pak rupee against the US dollar.
During the last one year, a 25 per cent increase has been recorded in the rates of ghee and cooking oil. A 16 kg tin of cooking oil was available at Rs1700 in last Ramadan and is now being sold at Rs2,550. The unending cycle of increase in price of the most important kitchen items continue to heart to the consumers, especially to the lower segment of the population.
A market survey shows that a majority of middle and low income consumers have reduced their buying of the commodity, because of consistent rise in prices of ghee and cooking oil.