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Pakistan being predominantly an agrarian economy was once self-sufficient in
production of edible oil and vegetable ghee, but that glory is long gone as depicted in Graph 1
given in the Appendix. This graph reveals that the wedge between escalating edible oil demand
and local production started to appear in 1969-1970 and since then, domestic production has
been unable to match its pace of growth with that of demand. One basic reason for this steep
rise in edible oil consumption is a consistently high population growth rate (2.5% in 2005-06)
which boosts edible oil demand at an even greater rate due to the demand multiplier effect1.
Monthly average per capita consumption of edible oil was between 1.3 to 1.5kg in 20062, which
is likely to have increased four years down the lane in 2010. Edible oil being a necessity as
opposed to being a luxury has inelastic demand and in 2004-05 the domestic production of
edible oil was recorded at 620,000 tonnes which was only 36.5% of total consumption and
hence the remaining 1,080,000 tonnes (63.5% of total consumption) had to be imported3. In
2007-08, local production was recorded at 833,000 tonnes representing a share of 27.2% of
total demand which was 3,062,500 tonnes. This represents a decline in domestic production (as
a proportion of total demand) of 9.3% over the 4 year period. As total demand in 2009 was
2,846,000 tonnes, the difference between total demand and domestic production had to be
compensated by importing 2,229,500 tonnes of edible oil (72.8% of total demand). The import
bill of Pakistan increased from the yearly total of Rs.33 billion in 2004-05 to Rs.84 billion for the
9 month period between July 2008 and March 2009. During last two decades, Edible oil imports
have shown a 14.5% annual increment and their share of Pakistan͛s total imports has risen from
3.1% in 2000-01 to 4.2% in 2007-084. Apart from rising consumption of edible oil subjected to
high population growth rate, lack of awareness amongst farmers, ignorance of policy makers
regarding oilseed crops, technological deficiency in oilseed production and smuggling of edible
oil to neighbouring countries (notably Afghanistan) serve as major deterrents to significant
growth in domestic production of edible oil and vegetable ghee. Climatically, environment of
Pakistan is believed to be conducive to cultivation of cottonseeds, sunflower seeds, canola seed
and other edible seeds crops. Pakistan, instead of incurring a sizable import expense every year
for import of palm oil seeds and other oilseeds which it is deficient in producing must rather
consider a more viable and cost effective policy of relying on its indigenous varieties of oilseeds
ranging from cottonseed crop (constitutes up to 50-60% of total domestic production) to others
such as sunflower, olive, rapeseed etc. Also canola cultivation can be done successfully in
Pakistan and it can further strengthen the growth of domestic oilseed production. Comparative

1
a unit increase in population will increase edible oil demand by greater than a unit as average consumption per
person of oil is greater than one unit of edible oil
2,3
  !""! ! #" ʹ Pre Feasibility study for ͞Farming of edible oil seeds, Production of edible oils, Processing and
Marketing͟
4
$% & Arifeen, M. (2008) ͞Needs and Prospects ʹ Edible Oil͟

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yields of cottonseed in kg/hectare for some major cottonseed growing countries are: China -
3,978, Laos - 2,890, Iran - 2,000, Pakistan - 1,867, Thailand - 1,461, Indonesia - 1,364, Vietnam -
1,069, Developed countries - 3,297, Asia Pacific - 1,869, and Rest of the world - 1,69054.

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Just like every other sector, Edible oil and Vegetable ghee manufacturers have also been
impacted by the ongoing economic meltdown and power crisis. The main impact has been on
their cost side and their sales have remained pretty much unaffected due to inelastic nature of
edible oil demand. Soaring raw material costs have to some extent eaten away profit margins of
edible oil producers. This increase in raw material prices can be dually attributed to a decline in
domestic production of oilseeds and other crops used as raw material by this industry and an
increase in import duties and tariffs on imports of the same.

In 2003, of the then total of 89 vegetable ghee and cooking oil units working in the
organised sector, 35% pulled down their shutters due to unbearable taxation structure imposed
by the government.

However, the prospects are not entirely bleak for this sector as if the indigenous cultivation
of oilseeds shows an improvement and the government rethinks its policy to give some
breathing space to this sector, then this sector can offer considerable profits to prospective
edible oil producers. Still a bit hitch can be caused for new entrants by strong cartelization in
this sector which can be repulsive for them.

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In Pakistan, currently, there are 155 units involved in solvent extraction and processing of
edible oil and vegetable ghee with an installed capacity of 3.3 million tonnes annually. Out of
these 155 units, 50 units are involved in solvent extraction and the remaining 105 units are
involved in processing of edible oil and vegetable ghee.

The edible oil and vegetable ghee industry is highly saturated with different brands like
Uniliver͛s Dalda and Planta, Season͛s Canola, Kashmir Banaspati, Sultan Banaspati, etc. which
constitute the organised sector fighting for the market share and on the other hand, the
unorganised sector, which comprises of numerous producers and sellers of oil/ghee sold as

5
Ali M., Memom M.H. and Arifullah S. (2008) "S' "
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loose which is unbranded and also under this classification comes the share of animal fat used
for cooking purposes.

On the whole, the share of unorganised sector is recognised to be significantly larger than
that of the organised sector primarily due to relative cost differential between these high-end
and low-end qualities.

Government Policies such as lavish imposition of taxes and excessive import duties and
tariffs on import of raw material used by edible oil producers is reported to be harming the
interest of the organised sector as it increases their cost of production substantially. To cite an
example, in 2009, price of vegetable ghee rose from Rs.460 per 5kg to Rs.550 as a result of an
increase in Government tax to Rs.23 per kg.

Another factor hurting domestic competition and adding to discrimination between the
organised and unorganised sectors is non-imposition of the General Sales Tax in FATA and PATA
as well as duty free import of edible oil for industries located in this region. Presently, the
capacity utilisation of the edible oil sector is about 55% and a basic reason for this under
utilisation is the existence of unregistered ghee and cooking oil-processing units in the
country65.

When it comes to foreign competition, again the Government has shown no compassion
towards protecting the domestic industry as it has allowed direct import of refined palm oil
products despite the fact that the local industry has sufficient capacity of producing them,
which is a discouraging move for the refinery growth.

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Malaysian palm oil and imported canola oil have established themselves only until recently
as potent threats to the cottonseed oil and vegetable ghee dominated sector. Increasing
awareness in the society regarding adoption of a healthy lifestyle and cutting back consumption
of fat diet have given strong signals of changing customer preferences and it has to a noticeable
extent altered the demand pattern of the high-end market.

This change has been also echoed in the middle-end and low-end segments of the market.
In the low-end segment, ghee and oil sold as loose is now losing out to relatively inexpensive
branded oil and ghee and trans-fat free vanaspati and cooking oil have started to take lead in
the middle-end segment.

6
&" ʹ January 6, 2008

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 This however does not represent a paradigm shift in the overall buying preferences, as for
the sake of an example, if one product is losing its market share in the high-end segment, then
it is knocking it competition in the relatively inferior middle-end segments, so the net effect is
in-deterministic to say the least. Therefore it can be concluded that for different product lines
there might be a danger of inter-market substitution, however on totality one market segment
might be potentially offsetting effect of the other leading to a negligible net effect.


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In Pakistan, most of the edible oil and ghee is purchased by household, food processors,
restaurants and hotels for frying and baking needs. During 2006-07, edible oil consumption for
eating purpose in Pakistan was 2.750 million tonnes.

Edible oil and vegetable ghee as mentioned before are consumer products which fall in the
category of ͚necessities͛ and hence their demand is inelastic and the customers are left with a
little bargaining power. Presence of cartelization in this industry is also one major factor for
suppliers to assert themselves on customers and hence earn handsome profits. Due to this, the
government has imposed relatively heavy taxes on this industry and it earns Rs.32, 500 per
tonne of their produce.

A 2008 news report76 reflected upon this matter in great detail. According to it, Palm oil
import prices in the international market declined by about 60% but the manufacturers
reduced prices from Rs.10 to Rs.3 per kg.

The prices of palm oil in the international market decreased to $400 per tonne, in the end
of November 2008, as against about $1,000 per tonne in March 2008.

Retail prices of edible oil and ghee ranged from Rs.95 to Rs.155 per kg depending on brands
of the product.

The retail prices of ghee reached Rs.155 to Rs.175 per kg in mid of 2008, which later
declined to Rs.145 per kg when the prices of palm oil in international market declined to $700
per tonne.

It was hence expected that prices would further decrease from Rs.120 to Rs.100 because
the palm oil prices in the international market came down to $400 per tonne from $1,000 a
tonne.

The Ministry of Industries and Pakistan Vanaspati Manufacturers Association (PVMA)

decided to reduce the prices of ghee and edible oil by Rs.5 per kg but reduced it only by Rs.3

7
""")% *+ Sabir, I. (2008) ͞Edible oil: Prices have come down but not for consumers

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per kg, which was a sheer joke with the consumers. The prices in the international market
decreased by 60% and a reduction of Rs.100 in the local market would translate to 33% only.


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Around 30% of the total oilseeds used as raw material for production of edible oil and ghee
are home-grown whereas the remaining 70% is imported. Out of the domestic proportion of
raw material of oilseeds, cottonseed accounts for around 75% of the total.

Table 1 in the Appendix compares the production of oil seeds and extraction of edible oil
from different oilseeds in 2006-07 and 2007-08. Cottonseed accounted for 57.5% and 51.3% of
total oil production in 2007 and 2008 respectively. Sunflower accounted for 27.7% and 31.7% in
2007 and 2008 and share of Canola increased from 7.4% in 2007 to 9.96% in 2008.

High dependency on few crops leads to disastrous effects on overall oil production when for
some reasons the yield of those crops declines. The supply of edible oil is comprises imports,
local production from imported oil seeds and from oilseeds produced in Pakistan. Canola and
sunflower seeds imported in 2006-07 were 838,000 and 318,000 tonnes respectively. From
both these types of seeds edible oil produced was 444,000 tonnes. Edible oil derived from
locally-produced oilseeds during 2006-07 was 837,000 tonnes.

Cultivation of oilseeds is not popular among the farming community due to a number of
reasons. Ratio of edible oil extracted from cotton has declined and in 2008, the country got
some 500,000 tonnes edible oil from cottonseeds, which was 16.7% less than the previous
year͛s volume. The private sector in 2008 announced to purchase sunflower seeds at Rs.1, 200
per 40kg as opposed to Rs.900 per 40kg in 2007. This increase in the purchase price of
sunflower seeds (which was equal to 33%) apparently seemed to have given an incentive to the
farmers to bring more area under sunflower cultivation.

Safflower and Soya beans are also used for edible oil production but their contribution is so
minute that they have a negligible impact on total oil production. Most of oil crops are low
yielding so they were competed out by High Yielding Varieties (HYVs) of wheat, rice, maize and
cotton. As a result cultivation area of oilseed crops fell consistently since 1960s. Oils crops have
suffered from different kinds of disincentives. The farmers do not get adequate support price
for oilseed moreover farmer͛s access to the funds is also very limited and in some cases the
access is completely restricted. There is no price support system for oil crops as a result oil seed
growers faced low and uncertain market prices which pull back the incentive for private
investment. Major losses are incurred after the completion of harvesting due to the improper
market infrastructure. And to top that, the powerful group of oil producers further reduces the
bargaining power of suppliers by dictating its terms.

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 However, when it comes to imported raw material and oilseeds, oil producers are unable to
assert themselves upon foreign suppliers and especially the Government of Pakistan which has
levied 16% sales tax and withholding and excise duties of 2% on imported palm oil. At present,
Pakistan imports mostly Malaysian palm oil and olein to meet domestic demand of 3 million
tonnes, as locally produced cottonseed meets around 0.59 million tonnes of the demand. Edible
oil import costs more than $1.3 billion87.

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