All eyes on sugar

Talks on the second precious white of Pakistan - sugar - had remained largely muted for some time. Until the government entered the picture yesterday, announcing procurement of 250,000 tons of the commodity.
Expected production for the year stands promising at over 3.8 million tons, which, combined with existing inventory, sums to more than Pakistans annual requirement of 4.2 million tons.
This favourable stock position is what appears to have motivated the government to carry out procurement, as Mohammed Waheed Chaudhry, Director, Hunza Sugar Mills explained. "Procurement had been carried out a few years back, but not in the recent past because sugar production had been relatively low in the country", he said.
Growers complaints regarding sluggish payments for their crop had instigated the government to step in to procure the commodity, in order to pacify them to some extent.
Although, the procurement quantity of 250,000 tons may not seem significant enough to appease the growers - that is as much as the government can afford at this time of fiscal constraints, said voices in the industry.
Besides that, procurement also allows for some buffer stock to be stored as strategic reserves for a rainy day. "Ultimately, having a buffer stock benefits the consumers in times of low sugar production, by ebbing down price pressures through release of the reserves," said a sugar miller speaking to BR Research.
But the silent villain of the industry, the middleman is still there, and therefore, concerns about sugar prices still abound. These intermediaries stash up the commodity after purchasing it from the mills, create artificial shortages to jack up prices, and sell their stocks when the market is steamed.
So, its shouldn be odd to expect that the usual supply-demand dynamics would not apply to Pakistans sugar industry due to the middlemens distortionary practices.
Hence, neither the promising production forecast, nor the governments procurement decision, completely dispel apprehensions that sugar price may rise later this year.
Besides, with the restoration of the standard tax rate of 17 percent sales tax on sugar - which, needless to say, will be passed on to consumers - prices for consumers will definitely increase.
The magnitude of the increase will depend on whether the tax is imposed on the price fixed for taxable purposes - Rs28.8 per kg to be precise- or on the market value that is currently hovering around Rs60/kg.
In case of the former, prices will rise by anywhere between Rs2.5-4 per kg, according to industry estimates.
In case of the latter, however, a double whammy for consumers is a surety; at one end, the rate of sales tax will be increased, and at the other end, the value on which this tax is imposed will also be increased from Rs28.8 to the market value, which is currently around Rs60 per kg. The impact is believed to be as much as Rs7.5-8/kg if this comes true.
Until the details of the cess are disclosed, and until the middlemen play their part, sugar prices are and will stay relatively rationalised and consumers enjoy the calm. One hopes its not the calm before a storm, however.