The saga of surplus sugar

This must have come as a great respite for sugar industry which had long been shuttling back and forth the decision-making corridors to get excess stocks off their backs. A delegation of the Pakistan Sugar Mills Association - the industry body - recently met the President of Pakistan, and apparently got their wish list fulfilled. The sales pitch, again, centered on making payments to the sugar cane growers.
The communiqué released on the Presidents official website states that the President has advised the concerned ministers to consider the PSMA proposal of exporting 0.4 million tons of sugar. The proposal will be presented in the cabinets Economic Coordination Committee for consideration. It appears that the government would accommodate the sugar industrys demands, and do so rather swiftly this time around.
The PSMA has worked out sugar production in the country at around 4.7 million tons, which, after accounting for estimated annual domestic consumption of 4.2 million tons, would leave an exportable surplus of over 0.4 million tons. It must be noted that the government had banned sugar exports in 2009, and only in February this year allowed the exports of only 0.1 million tons.
Talking to BR Research, Iskander Khan - who is the former Chairman PSMA and who also attended this meeting - hailed the Presidents decision. "The move will create a liquidity of Rs.30 billion in the system which will be used to settle the outstanding dues of the sugar cane growers. Exporting (0.4 million tons) sugar will not disturb domestic supplies as 5.2-5.3 million tons is currently available in the country."
He, however, termed the government move belated, stating that the industry could have locked in export orders priced over $650 per ton if more exports were allowed earlier this year. "The international sugar prices have significantly decreased recently, now hovering around $560 per ton; but it is still viable for the millers to export."
In case the government decides to procure sugar, he stressed that the procurement price should be linked with market price as sugar cane accounted for around 80 percent of the mills cost of production. The ex-factory price is presently Rs.52-53 per kg, but, if the government allows sugar exports or procures it (or goes for a mix of the two); the retail prices are bound to increase. How much is difficult to say.
On the contrary, Iskander Khan termed the current sugar prices as too low for the millers to recover their costs. "For everyone in the system - the growers, millers and consumers - to benefit, I think that the retail price range should be between Rs.62 and 65 per kg of the commodity." However, the household consumers would be progressively worse off with each rupee increase in sugar prices.
Iskander Khan argued that nearly 70 percent of sugars demand originated from industrial consumers, such as soft drinks manufacturers, bakers and confectioners. "These entities raise their prices with increases in sugar prices, but they do not lower them when sugars price declines," he contended.
The Presidents decision is praiseworthy, but there is a need to do away with sporadic government interventions, and instead install a long-term policy framework that takes into account interests of all the stakeholders. Any such policy must balance food security concerns with the viability of the industry.
From food security viewpoint, steady domestic sugar supplies must be ensured round the year, strategic reserves be replenished periodically and targeted subsidy be provided (e.g. through USC outlets) to give relief to the poorest of the poor. However, from the industry standpoint, exportable surplus shouldn be restricted from overseas sales, except for during lean years to avoid crisis like situation.