Sugar supply glut persists

The sugar industry which had been sending out SOS signals of late finally got a breakthrough recently with an inter-ministerial committed recommending export of 1.5 million tons (MT) of sugar in three phases with a subsidy of Rs10.7 per kg.

Sugar production has flourished on the back of incentivisation by the government. This has led to frequent situations of a supply glut being created. The primary reason for this seems to be the imposition of a minimum support price (MSP) which has distorted demand-supply dynamics. In the last five years, sugar cane cultivation area has gone up by 7 percent whereas the production has gone up by 15 percent!

During FY17 crushing season, the provincial governments of Punjab, Sindh and KPK have maintained the minimum support price (MSP) announced in FY15. The MSP for Punjab and Sindh is Rs180 per 40 Kg ($43.3/ton), and for Sindh Rs182 per 40 Kg ($44/ton). Even though sugar mills are obligated to pay farmers the MSP, yet in many cases the farmers and sugar mills negotiate below-MSP rates if both parties agree.

The Pakistan Sugar Mills Association (PSMA) had already raised concerns recently stating the mills will be unable to pay more than Rs120/40 kg for the purchase of sugar cane in the upcoming season. The reason is the record surplus sugarcane production which has led to a severe supply glut. According to the association, the mills still have 55 percent surplus stock available even after fulfilling the annual domestic demand of sugar.

To ease the situation the PSMA had been intent on getting government permission to export 1.5 million tons of sugar immediately with a rebate of Rs19 per kg. International sugar prices have taken a sharp downturn which means the government needs to pay the price differential in the form of an export subsidy. But the government, wary of a rise in domestic sugar prices if too much export is allowed, also needs to balance local demand considerations when taking into account the level of export quota.

There seem to be no winning sides here. Flawed economics, political influence and populist measures have all combined to make the burden fall on the taxpayer eventually.

If left unchecked the sugar supply glut will only worsen in the years to come. Serious steps need to be taken to plan sugarcane cultivation in line with the required consumption and the MSP needs to be reconsidered.