March 29, 2014
Few dairy companies are willing to give comments on a possible imposition of a powdered milk price cap as announced by authorities. They said however that such a limit would be very difficult to execute in reality.
A representative of Vinamilk told the Saigon Times that it would be a formidable task in setting a price ceiling for dairy products available on the market. After the arrival of imported materials, there are a lot of other phases to implement, such as research and tests for an optimal formula, and then product marketing, said the representative. Moreover, Vinamilk also has to bear the costs of equipment investment and technology, pays for its 5,000-strong work force, ensure profits for 10,0000 dairy farmers and fulfill tax obligations.
The representative wondered how State agencies could adopt a reasonable price ceiling. “If management agencies have to put a price cap in place, it should be reasonable so that Vietnamese firms would have a competitive advantage and should be fair to foreign dairy companies in the local market”, said the representative, suggesting price ceiling should be applied to all enterprises, whether they are domestic or foreign.
A source from another dairy company said technically, administering agencies could apply a price ceiling on full cream powdered milk (cow milk), skim milk or fresh milk by referring to the prices on the exchanges of London and New York, plus taxes and fees, before converting them according to the exchange rate. Also, management agencies can intervene by setting a profit limit for dairy distributors. It is to say they can look into the price of milk sold on the market minus the price registered and declared by manufacturers and importers, and then specify a maximum profit of 10%, 20% or 30%.
However, it is almost impossible to do so with infant formula, the kind of dairy products which producers claim contain dozens of nutrients such as DHA, zinc and iron, to help children “smart and grow fast”, currently the major product in the powdered milk segment. The above source stressed that every time of adding a new substance to their products, foreign dairy companies had to spend a considerable sum on clinical trials as no parents want their kids to be guinea pigs. In addition, there is one thing that cannot be measured in cash, which is the brainstorm of researchers. Management agencies do not have sufficient data for this. “Should each of the dozens of substances in infant formula be given a price cap?” asked the source.
The representative said price ceiling would eliminate the motivation for research and development of dairy firms. They might even stop trading because of low profits.
It is likely that a price ceiling for dairy products would end up slipping out of control just like the advertising cost cap of less than 15% of sales (according to the Law on Corporate Income Tax), he added. In fact, many dairy producers have spent lavishly on advertising worth hundreds of thousands of U.S. dollars, far exceeding 15% of their sales. They nonetheless did not need to make accurate declarations to get tax deductions.
Thus, dairy companies want the market mechanism to fully operate in their industry as it does in other sectors. Nowadays, consumers are smart enough to keep competition among producers always tough. Every time they want to raise prices, they have to scrutinize the decision. Price hike is compulsory to offset some of the costs, they said.
Still, dairy companies said if supervisory agencies are determined to levy a price ceiling, they will fully comply.
(By Minh Tam)