The dry spell is over. After recording years of losses on the back of depressed retail and international prices and high cost of production, the just ended sugar marketing year (September-end), will bring the sector back with a bang.

Let's count the positives. Export quota kept up momentum from the previous year, retail prices finally shifted gears beginning Mar-19, and supply remained constricted on the back of poor sugarcane crop owing to both lower acreage and declining water availability. Sector was finally able to offload inventory built up from previous periods, with commodity trading in domestic market at 60 percent premium over global prices.

Historical Export Quota Utilization (vol. in tons)
MonthAllowable quotaApproved ordersReported export*Diff.Price*
(A)(B)(C)(D)D:Ccts/kg
Oct-13 to Feb-14 500,000 501,519 502,460 100%37.4
May-14 to Sep-14 250,000 249,955 288,201 115%38.6
Dec-14 to Jul-15 650,000 554,920 524,100 94%30.25
Jan-16 to Mar-16 500,000 253,909 273,420 108%31.33
Jan-17 to Mar-17 225,000 222,392 190,282 86%43.33
Apr-17 to Jul-17 200,000 203,823 175,621 86%33.5
Aug-17 to Oct-17 300,000 81,122 70,557 87%32
Oct-17 to Jun-18 2,000,000 2,003,425 1,522,832 76%29.8
Jan-19 to date 1,100,000 688,750 556,542 81%28.2
Orders requested in last 15 days  15,333 Average price last 15-days  34.3
Order requested first 25 days of Sep-19  10,075 Average price 25-days of Sep-19  29.2
*Month indicate order approval period; reported export vol. inclusive of exports made within 60 days from date/month of order approval. Source: all vol. data as per SBP Sugar Quota Report except (D) which is as per PBS. Prices in cents/kg from indexmundi.com based on 12-month average, & upto Aug-19; last 40-day price as per ISO

But beginning mid-September, prices in the international market have also finally rebounded, led by poor global outlook for the raw material crop. Meanwhile back home, close to forty percent of allowable export quota for CY19 remains un-availed, which means that millers may begin to rake in orders, free from the insinuations of a ‘subsidy-based export' model.

Sugar export quota, which started as a balancing act to stabilize stock position in domestic market and incentivize crushing, has now taken a life of its own. Even though subsidy announced by Punjab government lapsed by June-19 (whereas Sindh and federal had announced none), export has continued unabated, with a major uptick of 137thousand tons recorded for approved orders in August, which shall reflect itself in PBS monthly trade numbers for September.

Note that the August orders were booked when prevailing price in international market was still at a 10-year low of 28 cents per kg, which is finally undergoing correction. Although market pundits had insisted that export will dry out beginning September, now that international prices have recovered this appears unlikely, corroborated by heightened order activity in last 15 days (see illustration).

The affect will be twofold: sugar-segment financial performance – of both non-diversified and vertically integrated mills – will now rebound after posting gross losses for several periods on the back of high selling prices both in domestic and international market.

On the supply side, channel checks from major mills in Rahim Yar Khan indicate that crushing will not begin before December first week earliest. With crop acreage for the just started MY20 marketing year already on the lower side, export of 250 thousand tons between Sep-Nov will ensure that domestic stocks fall to dead level, barely enough to cover one month's domestic demand (already predicted in this space last month: read, ‘D-Day for Sugar in December').

From a policy perspective, things could not look bleaker. Lower domestic stocks supported by improved international prices will mean that retail price may continue to persist at current level of Rs 75 per kg for the foreseeable future, if not more.

Government is caught between, to put it mildly, the devil and the deep sea. Its push to incentivize cotton cultivation over sugarcane – reflected in renewed talk of support price on cotton – means that it has already shown its cards on maintaining sugarcane support price on current levels.

Sugarcane cultivation is a long-term commitment, as the crop cycle lasts up to three years at a time. An increase in cane support price, in fact, will mean that the government can wave goodbye to dreams of cotton revival for the remainder of its tenure. Not to mention that increasing cane rate will not go down well with stakeholders vested in supporting the central government, as it will change their cost of production for the worse.

With crop acreage outlook for future periods also on the lower side, there is precious little government will be able to do if prices go on another upward spiral. Export quota for the coming year will obviously not see a renewal, but that's a forgone conclusion anyway, considering foreign markets will be of no interest to domestic producers if retail price kisses Rs 90 per kg.

Fingers will then again be pointed at the sixty percent plus differential between domestic and retail prices, blamed on the phantom of ‘sugar barons'. Yet no one will speak of the root cause – the market distortion created by perverse price-setting of crops by the government.

Meanwhile, at a time when productive sector of the economy is pronouncing gloom and doom all round, let's find some comfort in much awaited financial recovery of sugar sector.