CCP inquiry reveals cartelization, price fixing in milk sector

ISLAMABAD: The Competition Commission of Pakistan (CCP) on Tuesday concluded an inquiry in the dairy sector which has found the prima facie involvement of three leading dairy associations in cartelization and price-fixing of milk in Karachi – the country’s largest metropolitan. The commission initiated the inquiry after taking notice of the media reports and concerns raised in a letter received from a leading Consumer Association against the rise announced in the price of milk in Karachi and its adjacent areas by the dairy associations at farm, wholesale and retail levels. Media reports highlighted involvement of several other dairy associations in price-fixing of milk. It was specifically mentioned that the Dairy Farmers Association (DFA) had raised the price of milk from Rs110 per liter to Rs120 per liter with immediate effect, whereas, the official government rate was Rs94 per liter. Since the milk price set by the government was Rs94 per liter while the association collectively sold it at Rs120 per liter, it resulted in daily liability passed on to consumers to the tune of approximately Rs130 million and an annual impact of approximately Rs47 billion to the consumer of Karachi and its adjacent areas. On the other hand, the market was distorted as there was no competition on prices and consumers were made to pay unfair prices irrespective of the quality of milk – that is an essential commodity and a key ingredient in desi ghee, butter, cheese, a variety of confectioneries, and several cosmetics. Therefore, a change in the price of milk affects the prices of all these and other products throughout the country. Analysis of Karachi’s milk sector reveals that fresh milk in Karachi is supplied by five cattle colonies located on the outskirts of the city. The supply chain of milk consists of dairy farmers, wholesalers, and retailers, where milk is sold to retailers through an annual contract called ‘bandhi’ in which the rate and quantity for purchase of milk is fixed by various dairy and retailer associations. Karachi is also unique in the sense that there milk can also be purchased from the mandi located at Lee (Bolton) market. As per the inquiry committee, the commissioner Karachi Division notifies the prices at all tiers of the milk supply chain and the last such notification was issued on 14th March 2018 fixing the prices per liter as Rs85 per liter for the dairy farmer, Rs. 88.75 for wholesalers, and Rs. 94 per liter for retailers. However, the official data shows that the notified prices are not adhered to mainly due to the role of various associations involved in the milk supply chain. There are three dairy farmers associations in Karachi namely: (i) Dairy and Cattle Farmers Association Karachi (DCFAK); (ii). Dairy Farmers Association Karachi (DFAK) and (iii) Karachi Dairy Farmers Association (KDFA). In February 2021, an informant shared some video footage’s of representatives of DCFAK announcing the revised prices of milk in Karachi. This was followed by the President of DCFAK appearing on various TV programmes stating that milk in Karachi would not be available to consumers at the old rate of Rs. 120 and that his association will not take back the increase in milk prices. Similarly, the TV appearances of President DCFAK is presented in the inquiry report where he announces new rates of milk in July 2020. Statements from various retailers’ representatives and a dairy farmer’s representative revealed that all the three dairy associations in Karachi had formed a cartel and were announcing the rates of bandhi. If a retailer refused to abide by the association’s set rates his supply of milk would be stopped. The inquiry committee after taking into account: (i) statements of retailers’ representatives, dairy farmers and (ii) the above mentioned video footage’s reached the conclusion that in July 2020 and February 2021, decisions to fix the prices of fresh milk in Karachi were primarily taken by DCFAK. It also appears that the other two dairy farmers associations-DFAK and KDFA followed suit as the prices of milk in the relevant market rose immediately after the announcement of new rates by DCFAK. It is observed that the rate rise could not have been possible without the collusion of all three dairy associations. Price data shows that prices of milk in Karachi rose immediately after the rate announcement by the DCFAK. In July 2020 prices rose from an average of Rs.110 per liter to Rs. 120 per liter and in March 2021 prices rose from Rs. 120 to Rs. 130 per liter. Once the rate of bandhi was increased by the dairy farmers it would have an impact on prices at all other levels of the supply chain including wholesalers and retailers. A city-wise comparison among Karachi, Lahore and Islamabad-Rawalpindi shows that only Karachi has a uniform milk price, whereas the prices vary in all other cities. Such uniformity in prices also points towards rate fixation by the various dairy associations. Therefore, these decisions to fix the rate of bandhi in the relevant market is a prim facie, violation of Section 4 of the Competition Act 2010. Rate announcements or even recommendations by associations to fix the price of milk are decisions by an association in prima facie violation of Section 4(1) read with Section 4(2)(a) of the Competition Act, 2010. This rate acts as a benchmark and the product would be priced at or near this level. In light of the findings, the inquiry committee recommended the commission to consider initiating proceedings under Section 30 of the Act against DCFAK, DFAK and KDFA.