Sugar: information asymmetry fuelling speculation

News report earlier this week in this daily noted that TCP’s tender to import sugar has received poor response, following directives of federal government last month to import 0.3 million tons of sugar to meet shortfall in domestic stock availability before the calendar year-end.

Recall that domestic production of sugar of 4.9 million tons during marketing year 2019-2020 was lowest in a decade. A flurry of accusations and counteraccusations on the industry of profiteering, hoarding and withholding payments to growers at the beginning of crushing season had kept utilization of cane lowest in several years. This was compounded by growers demanding premium over support price on commercial sale of raw material, as crop output was also the lowest in at least five years.

Since the crushing season ended in March 2020, retail price of sugar across the country has closed in on Rs 90 per kg, as market watchers predict that the domestic price may score a century before the year ends. In its desperate attempt “to be seen in control of matters”, the federal government announced import of sugar through TCP to ensure that retail price of sugar is brought “under control”, so far to no avail.

It appears that the government has now faced a second set back after the quashing of Sugar inquiry report by Sindh High Court earlier this week. As per news reports, the landed price quoted by commodity traders for import is on higher side and may end up keeping domestic prices at current rates permanently. So, is Pakistan set to face a shortfall in sugar availability before the next crushing season begins come December?

That Covid-19 and the ensuing lockdown has failed to suppress the demand for sugar raises many questions regarding the price elasticity of sweetener demand; yet, the subject remains ignored by most academics. State Bank data indicates that between December 2019 and March 2020, pledge financing offtake – seasonal short-term credit facility extended for six months against pledge of sugar – to the sugar mills stood at Rs100 billion. After peaking in March 2020, the seasonal credit is now on a drawdown.

Of course, pledge finance estimates only offer a proxy to measure actual availability of sugar in domestic market, as stock already sold to dealers may not be represented in bank pledge data. However, given the steep decline in policy rate since the beginning of the year, it is intuitive that the quantum of sugar pledged and financing obtained against it should be on a higher side given much lower inventory financing cost. It allows mills to take advantage of market timing as domestic sugar prices are also on an upward trajectory.

Based on central bank data, the indicators are not too positive for the price control hawks in the federal government. If estimated monthly domestic consumption of 0.45 million tons holds, available stock of approximately 1.8 million tons with mills as of July 2020 is barely sufficient to meet demand until November end.

Unless sugar dealers are hoarding stocks in anticipation of a further price rise, or mills have substantial stocks outside of bank pledge, the government may have little choice but to import sugar at a higher price. But before any premature steps are taken, it may help to take make public data of stocks available with the mills through official channels, which both the industry association and FBR have access to. Let not speculation and anxiety take the better off consumers.