Mott MacDonald | Options for a fortified flour price adjustment mechanism
4 Options for fortification cost transfer in Pakistan 4.1
Maida and fine flour fortification cost
Other than restricting the proportion of maida that millers can produce from government distributed wheat there is no involvement in setting retail prices for maida. Maida and other fine flours whether milled from government wheat or from private market wheat is traded under open market conditions. If the cost of fortification is passed through the value chain it is estimated that the annual cost to the public would be approximately PKR 30 per person. The total volume of maida and fine atta produced by commercial mills, comprised of maida from government stocks as well as a range of refined products from privately procured wheat, totals ~3.1 MMT. Assuming the costs of fortification at PKR 306 per MT the estimated additional cost of fortifying this volume of fortified maida and fine atta to be aroundPKR 943 million/year. This additional cost would be expected to be included in the mark-up from the mill in the price e to the whole sale and distributor – and eventually to the consumer. At 0.6% of the ex-mill price, or 0.5% of the retail price, or at PKR 30 per person per year the added cost is invisibly addressed in an environment where food inflation is projected at 9.5%/yr.6 A small market survey conducted by FFP has revealed there are currently no retail price differences between the selling prices being charged for fortified maida and fine atta and their unfortified equivalents. This is most likely due to the 100% premix subsidy offered through the project meaning the miller is not experiencing an increased cost of production. Also volumes of fortified maida and fine atta remain very low compared to the total volumes produced. Once mandatory fortification is introduced and subsidies are withdrawn cost differences will likely become more evident.
Evidence from a survey of flour millers showed that under conditions of mandatory legislation millers would be willing to fortify their products to agreed fortification standards 7. However, without legislation for mandatory fortification millers choosing to comply with fortification standards consider their products adversely affected by an increased selling price compared to mills selling unfortified flour at marginally lower prices. This argument is frequently cited by the industry by those who choose not to fortify their flour without legislation.
Recommendation: Provincial Governments pass legislation for mandatory fortification to provide an even playing field for millers to set market driven selling prices for producers.
4.2
Atta
Atta is dominantly milled from government stocks of wheat purchased and sold at fixed prices allowing a fixed margin for millers. With margins only at about 5% millers are not able to absorb the additional production costs of fortification which are effectively 40% of their fixed margin. Therefore the cost of fortification requires the government or consumer to cover these additional production costs.
6
Trading Economics: https://tradingeconomics.com/pakistan/foodinflation#:~:text=Food%20Inflation%20in%20Pakistan%20is,macro%20models%20and%20analysts%20expectations.&text=In %20the%20long%2Dterm%2C%20the,according%20to%20our%20econometric%20models.
7
Millers’ Incentive Study: Results 31 August 2018 Prepared by Dr Umar Taj, Dr Avri Bilovich and Edward Gardiner for FFP
November 2020
6
