If 9’ o clock media speaks the pulse of the nation, then Pakistan’s economy is always in dire straits. Same can be said about the domestic sugar sector, which for the past two years has been in the throes of a crisis. The sugar lobby may very well be politically powerful, but can any party-in-power be so misfortunate as to mismanage the demand-supply of a basic commodity such as sugar throughout its tenure?
After declining for three weeks beginning mid-November, retail sugar prices in the country are once again on the rise (For more, read “Stay short on sugar”, on January 08, 2020). Going by paid content running on news channels, what was slated to be a temporary price spiral now seems to be building strong foundations. Pakistan’s Sugar Mills Association has blamed the crisis on mismanagement by cane commissioner who enforced an early start to the crushing season, even as sugar mills’ insist that early crushing results in lower recovery. Add to the mix a letter written by chairman PSMA to the Prime Minister, claiming that minimum support price is not being enforced, as growers are demanding 50 percent premium over base rate.
In an environment so political, it is hard to tell facts apart from fiction. Until today, all that is known with certainty is that Pakistan was headed for a bumper sugarcane crop of 76 million tons in 2020-21 season; a fact first confirmed by Federal Committee on Agriculture in October, and later corroborated by SBP’s State of the Economy report for 1QFY21.
If sugar were a freely traded commodity, a bumper supply of raw material would mean production exceeding domestic demand, leading to creation of exportable surplus. Instead, because tunnel vision syndrome inspires overconfidence in officialdom, policymakers insist on regulating its trade. That means allowing export is a non-starter, especially at a time when shortfall last year was recently fulfilled through duty-free imports.
So, anticipating a (non-exportable!) surplus that will have to be carried over into next season while also creating a dampener for domestic prices, the producers must resort to innovative ways of managing supply and maintain their fleeting profitability. One is to ‘lower’ cane utilization ratio (i.e., consumption of cane by mills), a parlour trick made increasingly difficult by enforcement of early & mandatory crushing by the office of cane commissioner – who is delegated the same powers as a Collector under Land Revenue Act. Another is to claim low production due to poor sucrose recovery, facts of which cannot be easily ascertainable other than through raids of factory premises.
What is the play here? Industry insiders explain that delayed crushing in previous years allowed evaporation of water content (in already harvested sugarcane) while keeping sucrose content constant. Instead, early crushing this year means mills must pay a higher price for same amount of sucrose recovered, as price of raw material is set in its weight.
The only way to break the trap of mandatory crushing then is to claim that growers are offering their crop at prices much higher than government set rate (Rs 300 against Rs 200 per 40kg). If true, mills cannot be forced to procure cane from growers under law, as growers are only legally entitled to compensation equivalent to minimum support price. This has caused fears of low cane utilization in the current season by setting off a price spiral in wholesale & retail markets.
Before blame is assigned for what is clearly a fresh mess-in-the-making, it may help to take stock of the situation. Because cane cannot be transported at long distances, sooner or later most of it will make its way to the mills, even if (some of) the sugar produced is kept off-books. Why?
Because inventory financing is the lifeblood of sugar industry; ensuring that mills cannot hoard sugar produced beyond the tenor of seasonal financing obtained. Hence, even if some players are piling up stocks to use as collateral against cheap credit, a bumper crop means eventually the surplus will push its way into the market, stabilizing prices.
Thus, all indicators point out that the volatility currently being witnessed will be short-lived. However, if a sugar crisis for ‘third year in a row’ is making the rulers in Islamabad nervous, it might help to re-consider the ban on exports.
Why? Because once exports are made permissible while crushing is still in its peak phase (until February), the industry will have one less reason to keep the surplus produced off-book. Moreover, if the industry chooses to export at current international prices ($425 per ton FOB, which sets domestic price parity at Rs 70 per kg), all claims of exorbitantly priced raw material will fall flat on their surface – eventually self-correcting the price spiral unfolding right now, and check-mating the industry at its own game.
But allowing exports will require courage in a highly charged political environment. Whether the PTI government has the nerve to take unappetizing measures, remains to be seen.
Comments
Comments are closed.