The need for an increase in the price of milk powder

By Sanjeewa Jayaweera

The steep price increase in essentials like milk powder and cooking gas has caused much debate and anger amongst consumers. The opposition politicians are milking the angst among the public to score some points. There is no doubt that any increase in food prices causes the greatest anger and frustration amongst those struggling to make ends meet. The inability to provide dependents three square meals a day is a failure that causes a great deal of mental anguish.

In the developed world, having three meals a day is taken for granted, whilst in many developing countries, this is still not possible for a particular segment of the population. Therefore, it is the responsibility of the governments that we elect to plan and develop the economy to create productive employment so that all non-disabled adult citizens are gainfully employed. Unfortunately, successive governments in Sri Lanka have miserably failed in this area. The reasons for such failure are too numerous to be discussed in this article.

The purpose of this article is to share certain information which hopefully will enable the readers to understand better the challenge of maintaining stable prices of imported commodities and how poor decision making by GOSL makes matters worse.

It must be understood that prices of imported commodities are not within the control of the importer, who in most instances are private enterprises and individuals. Commodity prices in the world market are governed by many factors ranging from droughts and floods that impact the harvest and, at times, export bans. Currently, post covid supply chain constraints are also contributing to a surge in prices the world over as demand exceeds supply. Prices are always a function of demand and supply, and when demand exceeds supply, it is natural for prices to up.

Milk powder is an essential item amongst families with children. Due to its nutritional value, despite some in the medical profession claiming otherwise, many parents ensure that it is included in the grocery list. Therefore, the inability of parents to procure this vital commodity due to either it being too expensive or because it is not readily available leaves many such parents seething in anger. A recent news telecast before the price increase showed a long queue of persons waiting to purchase a packet of milk powder, with many complaining that they have stood for more than three hours. Some were claiming that they had travelled a distance of more than 10 kilometres.

Unfortunately, the public is not fully aware of the reasons for either the need for a sharp increase in the retail price or the cause for the shortage. The Global Dairy Trade website (www.globaldairytrade.info) shows that a metric ton of full cream milk powder on November 20, 2020, cost US $ 3,037. This price excludes freight. The retail price of 1 kg milk powder in Sri Lanka was then Rs. 945/-.

The world price then increased to a high of US $ 4,364 per ton by March 02, 2021. It has since fallen to US $ 3,749 per ton by October 05, 2021.

In addition to the significant price increase in US Dollar terms, the Sri Lanka rupee, which stood at Rs. 184 per US Dollar in October 2020 has depreciated to Rs. 203 by October 2021.

In percentage terms, the increase within the 12 months is 35 per cent whilst in March 2021, it was 50% at its peak. In addition to the rise in world prices and the depreciating rupee, the importers also had to bear an increase in freight costs, which have doubled.

The unfortunate aspect of this saga is that GOSL, through the consumer protection authority, did not allow the retail price to increase from Rs. 945. As milk powder is considered an essential item, its retail price is mandated by the GOSL.

In such a scenario, the importers were bearing significant losses. The net result was that they either stopped importing milk powder or reduced the quantity imported significantly, thus causing a shortage of milk powder in the market. When an item is sold at a loss, the more you sell, the more you lose.

The fact that the GOSL did not grant a price increase is unfathomable. It is basic common sense that no private enterprise is able or willing to bear losses. Private business people are the favourite whipping boys for politicians, media, and the public in our country. No doubt some racketeers fleece the public. People need to understand that those who engage in business activities invest their funds, invariably savings in expectation of getting a reasonable return. It is no different to us as individuals investing our savings in fixed deposits. We rightfully expect a decent return which till recently was around 10 per cent for the year. Therefore, in my view, given the risk taken by those venturing into business, a return between 15 per cent to 20 per cent after tax is a fair return. Many don’t achieve such a return, and quite a lot fail in their business ventures and lose their savings.

The alternative is for the GOSL to be the importer. However, given the repeated scams that have been perpetrated by those working in the state sector, such as Sathosa, we know that government enterprises are ill-suited for such activities. In that case, the private importers should be allowed to operate in an environment where the objective of cost-plus profit is achieved, and it is for the GOSL to facilitate this.

Businesses are often accused of not bringing down prices once increases are granted despite world prices reducing, and the general belief is that business enterprises are making super-profits. In most instances, this is not the case. The actions of the GOSL, which many are unaware of, prevent the prices of such commodities from being reduced. I want to share an example of how the GOSL uses its power to levy duties and taxes on imports that prevent importers from passing on the benefit to the consumer.

The GOSL enforces customs duty at the point of import which is a cost that needs to be added before arriving at the retail price. It has been and is the policy of the GOSL to increase the duty component when world prices of essential items reduce and reduce such duty when world prices increase.

The example given below is based on records maintained by a former colleague of mine who was the purchasing director. The company that we worked for imported Skimmed Milk Powder (SMP) as a raw material.

It should be noted that the world price shown would have fluctuated during the period. Therefore, I have shown the world price on the date when the duty change was implemented.

I trust the above schedule explains why importers of milk powder are constrained from passing on the benefit of reducing prices to the consumer. Thus, it is evident that the GOSL is surreptitiously keeping the benefit to themselves and not allowing it to be passed on to the consumers.

The rationale of pricing imports that I have outlined above is equally applicable in determining the price of gas, petrol and diesel. Even state enterprises like the Ceylon Petroleum Corporation and Litro Gas should be allowed to trade on a formula of cost-plus profit. There is no alternative to this principle.

My contention and that of many who are familiar with Economics and Finance are that by not passing on the cost increase through a price formula based on cost plus profit, even those who can bear such price increases are subsidized. There will be some consumers for whom the increased cost of petrol, diesel, gas and milk powder will have no consequences; there will be some consumers for whom a certain degree of adjustments to their monthly expenditure will need to be made and a degree of belt-tightening to accommodate such price increases. Some of these adjustments might mean resorting to carpooling, travelling by train or bus. That is the choice that needs to be made. However, there will be a segment of the population who are unable to bear such price increases. Therefore, the GOSL should provide a monetary allowance to bear such price increases and make them responsible for allocating their funds. I say this as, at times, I am perplexed when I see some of the people who flock to the Liquor shops when they are opened after a period of closure.