Iran Economy Snapshot: Subsidy Cuts and the Milk Problem

This week, there were reports that, with the implementation of President Ahmadinejad's subsidy cuts plan, the price of milk was increasing up to 70% in Iran. An EA correspondent tries to clarify the situation by sending us the English translation of an article in Iran's leading economic newspaper, Donya-e Eqtesad. 

It takes a bit of work to get through the complexities of the report, but it is worth the effort. The article establishes that the decision on subsidy cuts for milk has not been resolved. With the prospect of rising prices, dairy producers using that milk will be allowed to raise their prices 10%, but --- as they anticipate the cost of milk to them may rise sharply --- that is far less than the increase they are seeking.

So, amidst the diversion of International Monetary Fund statements that all-is-well, this snapshot offers two realities: 1) the implementation of the subsidy cuts programme is haphazard, if not chaotic, and 2) inflation in Iran this year is likely to be well beyond the official 14.2% figure currently being put about.

Since the second half of last year and concurrent with the implementation of subsidy reforms, the issue of eliminating indirect subsidies from milk and making it a cash subsidy became a topic of discussion. In the last month of the year, there were rumours of restrictions on subsidized milk supplies in Tehran and some provinces.

At that time due to the increased rates of energy carriers and the elimination of milk subsidies, many dairy factories called for price increases for their products. In some cases they raised the prices of some of their products without permission from the Consumer and Producer Support Organization.

Of course at that time the Ministry of Commerce announced that it would deal with any willful price increases of dairy products with fines and punishments. The Consumer and Producer Support Organization also did not accept any price increases for dairy products. Also, in the first three months of this year (the year beginning 21 March 2011), the Ministry of Commerce continued to purchase milk for producers at last year's prices in order to be able to supply subsidised milk. Some producers refrained from agreements with the Ministry of Commerce because their previous deliveries had not been paid for and the situation with subsidised milk was not clear.

At the same time, the media began reporting on the issue of eliminating subsidies for milk, and, following that, calls for increasing prices of dairy products became more serious. Following these requests, several meetings were held to clarify the situation of subsidised milk. Eventually the subsidy reform task force made a final decision on payment of subsidies for milk starting at the beginning of Tir (June/July). It was 100 billion tomans (about $90 million) in subsidies for cattle feed to bring down the cost of stockbreeding for producers. The Ministry of Commerce announced, however, that no decision had been made on raising the price of milk and that they have to wait for the approval of the agricultural jihad and producers.

But apparently with the start of summer and the high consumption of energy along with the increase in consumption of some dairy products like ice cream, the time had arrived for producers to increase prices. That is how reports on the 30 to 70% increase in prices of dairy products came out.

Official Price Increases

After many ups and downs and back and forth between producers and the government, increasing prices of milk and other dairy products was officially approved. The reports say that the working group for controlling the market agreed to the price increase for dairy products and that the level of this price increase depends on the views of provincial commerce organizations. Each commerce organization in the related province will receive documents and analyses of prices by producers and will set the rate of increase on that basis. Perhaps the differences in the prices of dairy products in different markets are because of this price setting in the provinces.

Recently before the official approval of price increases for dairy products by the working group controlling the market, the Ministry of Commerce sent a circular to the commerce organizations in provinces across the country and said the average price increase must not be more than 10%.

Producers' Continued Dissatisfaction

The head of the Iran dairy products union said prices of dairy products have gone up by 10% in some provinces.

Majid Alidad also said that, with the high prices of energy carriers, especially in the summer, dairy producers asked for a 20% increase in the price of dairy products, and they have discussed this with the Consumer and Producer Support Organization.

He said the request for the 20% increase was made if the price of milk stayed the same and based on the increase in the price of essentials for production given to the Consumer and Producer Support Organization. The Support Organization has authorized the commerce organization in each province to make the decision for dairy factories to get the permit for the 10% price increase.

At the same time the head of the Iran dairy products union said the 10 to 20% price increase for dairy products was not approved by the factories. With the price of milk changing, producers believe they will lose money.

Regarding the statement by the Minister of Agricultural Jihad that dairy factories set their final costs based on 500 tomans per kilogram of milk, he said: "Industrial milk, which has a better quality for dairy products, is purchased at 500 tomans per kilogram, but traditional milk collected from milk centers is purchased at 450 tomans per kilogram. Last year industrial milk was purchased at 430 tomans per kilogram and traditional milk at 400 tomans per kilogram. This year it has gone up by 12 to 15%.

Supermarket Unions Also Confirmed

The head of the supermarket and protein products union also confirmed the 10 to 15% price increase of dairy products and said each package of milk, which was 850 tumans, is now 920 tumans.

Regarding subsidized milk, which it is rumored that it will no longer be distributed, Sa'id Derakhshani said: "Subsidised milk has been distributed in east Tehran but with less weight and for two days with higher prices. But the weight and price have gone back to what they were before."

Stressing that prices in the market have to be based on existing changes, he criticised the pricing and asked, now that they have to raise the price, why is it 920 tomans instead of that same 900 tomans?

Denied!

But apparently when price increases of dairy products have been confirmed by administrators, the Ministry of Commerce prefers to insist on the position of not increasing prices. The head of the Tehran commerce organization announced that, even though producers want at least a 10% increase in prices, except for the price of butter, the price of no other dairy product has gone up.

Abbas Qobadi said that, in the next few days, a working group made up of the Ministry of Commerce, Ministry of Agricultural Jihad, and Ministry of Health will be established under the supervision of the governor general's office to set the price of milk and finalise the purchase price of milk from breeders and announce it to the Tehran governor general's office.

He said if the price of milk stays the same there won't be any changes in the price of dairy products. But if the price of milk purchased from breeders goes up there is the possibility of higher prices for dairy products. He said: "We are not looking to raise the price of purchased milk; we are looking to give subsidies to stockbreeders."

At any rate, it seems as if, in the dispute between the Ministry of Commerce and producers of dairy products, in the end it will be consumers who have to pay the higher prices. Experts say creating the wall of fines and punishments for producers and ordering prices will not work in the market. When a producer faces increased costs especially for energy carriers, he has no choice but to raise his prices to stay in business. Of course, if this price increase is done with the government's wisdom in a gradual way, it will not be that much pressure for consumers.