In ‘Set the cane market free', published in this space on July 29, 2019, it was surmised that installation of additional capacity, coupled with minimum support price had incentivized increased cultivation of sugarcane in southern Punjab's fertile cotton belt.
This did not occur in isolation. Before 2005-06, when majority of the regional sugar milling capacity was installed in the central Punjab region, average sucrose recovery ratio for the province for stuck under 8.50 percent. Sucrose recovery ratio, as regular readers will appreciate, is the ratio of raw sugar syrup extracted from per ton sugarcane.
After the temporary lifting of ban on sugar mill establishment in southern region in mid 2000s, share of milling capacity installed in erstwhile ‘negative areas' increased to 43 percent of total installed capacity in the province, as did share of acreage under cane to 46 percent, from respective 28 and 29 percent back in 2002.
While the province has suffered from a blight of excess capacity since mid-1990s, opening up of southern Punjab districts proved to be a game changer. Until 2012, when cane cultivation in southern Punjab was still not as high, regional gaps in capacity utilization were all over the place, as most mills from the central region were still able to keep their heads above water by relying on scale despite below average sucrose recovery.
However, sucrose yield gap between central and southern mills has now reached 150bps, leaving mills from former region largely uncompetitive. As of 2018, the region-wise scatter plot of capacity utilizations – plotted on x-axis – and sucrose ratio – plotted on y-axis, have come to represent a positive straight-line relationship.
Although capacity installed in central region still exceeds over half of total, their utilization in recent years has averaged below 50 percent – barring Shahtaj Sugar Mills in Mandi Bahauddin (division Gujranwala).
The regional gap in sucrose recovery in turn reflects in variance in cost of production for mills across various regions, as those regions with lower sucrose content require higher amount of sugarcane to produce incremental volume of sugar.
For so long as sugarcane pricing is pegged against weight, small sized units from central Punjab will continue to be put out of business, while medium- and larger units will lobby for government intervention in the form of subsidy on export to stay afloat.
If there is any lesson to be drawn from last ten years of development in the industry, it is that the distortion in pricing of sugarcane based on weight needs to be fast addressed. Instead of fixing minimum support price against weight of sugarcane, pricing needs to be encouraged on quality terms: higher the sucrose content of crop, higher the remunerative returns paid to farmers.