Sugar price: reaching equilibrium?

A news report earlier this week noted that participants in TCP’s sugar import tender placed bids of $470 per metric ton bulk supply. TCP’s tender received bids from only two participants for an order of 0.3 million tons volume.

This section had noted last week that the bid placed is extremely high and may not succeed in bringing down the price of commodity in domestic retail market. Adding 20 percent mark up to quoted bid (landed cost + 20 percent margin), imported commodity may retail at $566 per ton or Rs 95 per kilo in rupee equivalent terms.

That is eerily similar to national average price of Rs 96 per kg of refined sugar, as per weekly SPI released on August 20th. It may also corroborate earlier assertions that the price surge in domestic prices is approaching equilibrium and may plateau by August-end. However, that discounts two crucial facts.

One, at $470 per ton, the bids placed is almost $100 higher than the White Sugar Price index. While it is true that international prices have been surging as well since May 2020, the $100 mark up quoted over international traded price is at best questionable. It does not help that only two bids were placed, and the market lacks depth to establish fair price discovery.

Two, even if Rs 96 per kilo retail is where the international price meets its domestic equivalent, in absence of free flow of foreign trade, there is little certainty that supplies of sugar from global traders will make it to the local market. Trade statistics until July 2020 have failed to indicate any activity in the private sector, as despite several claims to the contrary by official quarters, the FBR is yet to withdraw tariffs on import of commodity by private sector.

Readers will recall that the valuation of imported sugar at Customs for sales tax purposes is still made at $725 per ton, based on SRO 812(I)/2016, which in effect insulates domestic producers from international competition by imposing prohibitively high tariffs. These valuations are still in effect, as SRO 751(I)/2020 finally issued on August 20th removes income and sales taxes on 0.3 million tons to be imported by TCP only.

Given the high bid price for TCP’s tender, negligible quota for import of only 0.3 million tons which is equivalent to just three weeks of domestic demand, and virtual embargo on direct private sector participation due to prohibitive tariffs, there is little hope that imported goods will make it in time before ”domestic supplies run out”.

Of course, supplies will never really run out. Demand projections are based on a static forecast of 0.45 million tons monthly consumption (measured at 25kg per capita). However, if there really is a shortfall in domestic supplies, the price may keep on climbing until equilibrium is reached.

This is where analysis enters the realm of guesstimates. Last week, seasonal working capital extended by commercial banks to sugar sector was used as a proxy to measure stocks pledged (and thus still available in godowns of mills). Using standard banking margins for liquid collateral of 15 percent, July month-end stock position was estimated at approximately 1.8 million tons, barely enough to sail through November (assuming static national consumption of 0.45 million tons between Aug-Nov).

Using quarterly stock-in-trade position to outstanding ST borrowing ratio on balance sheets of listed mills, the guesstimate can be taken a step further. Based on available interim financials for quarter ending June 2020, the earlier estimate based on commercial banks’ working capital lending is fairly validated, since inventory value is 1.25 times that of ST borrowing for the industry (listed mills average only).

Of course, this is very much a proxy and should be interpreted as such only. Many listed mills have diversified operations and have high-value by products such as ethanol and fibre board in inventory as well. But here is a kicker: historically, stock-in-trade position (value) to outstanding ST borrowing ratio for quarter ending September during the last three years stood at just 0.80 times!

Technically, that makes sense. Sugar marketing year ends on September 30th, at a time when mills aim to have sold off most of their inventory and have used proceeds to either settle suppliers’ credit and/or working capital lending from banks. By that time, next crushing season is less than two months away, as most of the stock has made its way from mills’ godowns to wholesale dealers in the open market.

And if the last 6 months have fuelled anxiety and speculation in sugar retail price when most of the output produced was still with mills/industrial units operating in the documented sector, imagine what the situation may look like once most stocks have made their way to “under-documented” wholesale and retailing segment.

Sugar retail price has undergone major revisions/adjustments over the last 8 months repeatedly. It does not appeal to common sense that the demand would not have adjusted accordingly (unless sugar falls in the special economic category of Giffin goods!), even if the shortfall in domestic production is taken at face value.

The quashing of Sugar Inquiry Report at the Sindh High Court also does not leave the government with too many tricks in its bag. Without resorting to harassment or strong arm tactics, now would be the time to requisition data of monthly sugar offtake during marketing year 2020 from all mills in the industry, collate it against national average retail prices using CPI and SPI data, and use it to make demand projections for the coming three months. If not, the government can just have hope and make prayers for an early start of the crushing season come November.