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The sugar industry’s two-year long happy hour is finally ending. This appears to be the consensus view, at least among the listed players, whose ‘outlook’ for MY21 predicts a surplus crop.

Regular readers will recall that the domestic sugar prices have been on what seemed like a never-ending bull ride since the beginning of marketing year 2018-2019, an anomaly that just kept on giving. Historically, sugar prices tend to crash by as much as 10 percent between Dec-Jan, from their peak levels touched at the end of marketing season in August-September.

Instead, the past two years have stood out as prices kept on soaring during and after the peak crushing season. This came as a consequence of mills slowing down their procurement of raw material cane, ostensibly to get rid of high carryover stocks, but really to ensure that ex-factory prices remain intact.

But there is only a limit to which mills can restrain crop procurement. Like any other business, sugar industry is also in a long-term, committed relationship with its suppliers – namely, the growers. A refusal to procure large swathes of crop in mill area can have grievous consequences, as growers may switch to substitute crops permanently, rendering the units out of business. And this is no hypothetical, the rural areas of central Punjab and southern Sindh are checkered with defunct mills who took the idea of ‘bargaining power of buyer’ too far.

And now, the management commentaries in the nine-month financials of listed sugar mills are already predicting a surplus crop in the upcoming 2020-21 crushing season. Although provisional estimates from Crop Reporting Services are so far not in, the industry’s claim seems to make sense.

First, cane growers recorded remarkable returns last season when rumors of crop shortfall created a competition among mills in early December, driving raw material prices to 30 percent premium over an already raised government notified rate (procurement paused for 20 days in Dec-Jan when revised crop estimates began to trickle in, leading to an eventual lower procurement for the whole season).

Second, losses borne by growers who had shifted to cotton last season have led many to switch back to cane in the current season, already reflecting in lower area under cotton cultivation as per Pakistan Central Cotton Committee.

Risks persist, however. Crop yield has been adversely affected in the past due to shortfall of irrigation water, but no indication to this effect has made news so far. In fact, high frequency data from IRSA and SUPARCO indicates both irrigation water and rainfall has remained adequate throughout the Indus basin. On the other hand, fertilizer offtake data has not shown any significant growth spurt. While this need not necessarily translate into low yield; at the same time, it may indicate that crop yield may not vary above 10-year average of 60 ton per hectare by much (or less than 5 percent).

Which brings the bets down to the final variable: sucrose recovery. Here, the management commentary in listed firms’ financials come in handy. The consensus implies an ‘above par or healthy’ recovery, indicating the industry is looking forward to an output level above the 5-year low touched last season.

Put the pieces of the puzzle together, and it appears unlikely that the ‘rise and rise’ recorded in sugar prices may continue into 2021. But does that mean an immediate decline between October and December, in line with historic price trends? On that note, the 2020-21 season may look a lot more like 2016-17 than any other year, considering the currently thin level of domestic stocks and no developments on the TCP’s import orders. Sugar prices are all set to dial it down, just not yet.