Sugar prices: Ramazan and beyond

The legendary Pakistani sweet tooth, guilty of over two kilograms monthly sugar intake per capita, is especially vulnerable in the month of Ramazan. Not only do the taste buds crave for more, the sugar prices also cause mayhem, as witnessed in the not-so-distant past.
In April, a United States Department of Agriculture (USDA) report highlighted that "bulk consumers such as bakeries, makers of candy and local sweets, and soft drink manufacturers account for about 60 percent of the total sugar demand in Pakistan." Increased consumption of eatables and liquids would take the Ramazan sugar consumption much beyond the average monthly consumption of 0.35 million tons.
Unlike Ramazan packages of 2008, 2009 and 2010, the federal government did not include sugar in the 2011 Ramazan package. Under such a package, essential food items are offered at subsidised rates through the Utility Stores Corporation (USC) outlets.
Industry sources maintain that USC is already selling sugar at Rs55 per kg, much below the retail price; hence, further concessions are out of the question. The only concern is an adequate sugar supply in over 5,700 USC stores across Pakistan as the government is not in the mood to buy sugar from millers. It seems like the USC will manage, at least for Ramazan, because over 0.3 million tons of sugar is available with the Trading Corporation of Pakistan (TCP).
Currently, the government and the Pakistan Sugar Mills Association (PSMA) are at loggerheads over the commoditys procurement. PSMA wanted the government to buy at least 300,000 tons of white sugar from millers so that the latter could pay back the growers before the next crushing season starts in November. This sounds like an in-kind bailout.
In May, the Economic Coordination Committee (ECC) had granted approval for the purchase of 400,000 tons of sugar from PSMA (50,000 tons per month) through TCP as strategic reserves. However, the governments fixed procurement price, Rs60 per kilogram, was well below PSMA estimates of Rs64 per kilogram.
Just last week, the ECC with the finance minister Abdul Hafeez Shaikh in chair, decided not to procure the first lot of 50,000 tons of sugar - until December - owing to satisfactory situation of strategic reserves. Bitter-sweet: this is what the relationship between government and the influential association has come to.
What effect will these seemingly disparate yet interconnected issues have on sugar prices? The wholesale price moves with the ex-mill price. Sources say that the ex-mill price will likely be under pressure in the coming months. Firstly, there are no signs of procurement any time soon and sugar millers will continue to carry financial costs of holding on to large inventories.
Secondly, in the months leading up to the next crushing season in November, the sugar supply would be solely dependent on domestic reserves (production and carried-forward stocks) because private imports are not feasible due to higher international prices.
Cheap sugar prices in Pakistan may also provoke smuggling of the commodity to Afghanistan, Iran and other Central Asian countries. Artificial shortages and hoarding practices would compound the matter.
Some industry sources say that there is enough sugar to meet demand till December 2011. If this is true, then this adequate supply should translate into easing of prices. This does not seem to be the case as sugar prices have gone up in recent months..
If sugar millers are unable to offload their excess stocks, then this is part of the business, not something new and it must have factored into their calculations. Passing over the entire Rs0.7-1.0 in monthly interest costs (per kilogram of refined sugar) to the ex-mill price is not justified.
The government should do more than merely fixing sugar prices in the month of Ramazan. It must monitor and check industry practices to curb hoarding, smuggling and shrinkage incidences. Going forward, if need be, timely import of the commodity must be undertaken by the government to keep local prices in check and not let special interest groups extract outrageous rents.