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Another year, another shortfall. That seems to be the takeaway from the annual report for marketing year 2019-2020, released by Pakistan Sugar Mills Association (PSMA) over the weekend. Meanwhile, the industry association has largely endorsed official forecast of surplus crop and encouraging supply-side dynamics. What is the missing link?

As usual, the association has complained about lack of linkage between minimum support price and domestic retail prices, yet fell short of demanding removal of MSP; decried the imposition of sales tax, yet failed to call for reducing cumbersome regulation; blamed the growers for withholding raw material supply and the administration for enforced crushing and mandatory payment to farmers within 15 days of procurement, yet has not raised its voice for buyer documentation. So far, unsurprising.

What is peculiar, however, is that not only has the industry endorsed official forecast of 14 percent increase in crop output in the ongoing marketing season – acknowledging that the crop is in abundant supply – it has also forecast a 14 percent increase in annual sugar production. Yet, it has offered little explanation for continuous increase in retail prices, apart from holding ‘market forces’ (read, sugar dealers and wholesalers) responsible for speculation of shortfall.

Lest it is forgotten, predictions of surplus supply of cane have been around for as far back as August last year, as raw material procurement at higher-than-official-rate during last season helped improved area under the crop. (For more, read: “2021: Will sugar supply be balanced?”, published on August 04, 2020; and, “Time to go short on sugar”, published on 24 November, 2020). Why then are speculators estimating a shortfall remains an unanswered mystery.

Which then raises the question, is the 14 percent forecast increase in output insufficient to cater to domestic demand? This is where things begin to get interesting. Insiders suggest that the incidence of under reported production – which in the past may have ranged anywhere between 10 to 20 percent of reported output – is lower this year due to increased government surveillance and media oversight. Thus, what percentage of incremental reported output this year may reflect an actual increase in supply is uncertain. Except, this theory only raises further questions.

For example, if the industry is forced to show higher output this year, should it not result in higher recovery per unit of raw material (i.e. sucrose recovery rate)? Except, ever since the season began, the industry has been running a media blitzkrieg decrying sucrose recovery being lower by as much as 50 – 100 bps, blamed on early start of crushing season. Yet, the output forecast section of the annual report reflects a 10 percent recovery rate, same as 5-year average. An honest mistake?

Moreover, a 14 percent increase in crop supply coupled with higher ‘reported’ production should result in an even higher increase in sugar production, which is clearly not the case made by PSMA. Yet, it is not just the sugar industry that is blaming high raw material prices; sugarcane prices as tracked by Wholesale Price Index (PBS) also shows an 11 percent increase between Dec and Jan. How exactly are farmers able to extract a higher dime in a season of surplus crop is another mystery, left unanswered in the report.

The biggest mystery, however, is the casual description of low cane utilization levels published in industry annual reports – year after year. On one hand, the industry claims that it is mandated by law to crush all sugarcane harvested once crushing season is notified and brought to mill gate by growers/middlemen – as long as the seller demands a maximum price of MSP (of course, mills are free to pay a higher price if they perceive a shortfall). On the other hand, the annual report shows that sugarcane utilized by mills for crushing (as a percentage of total cane harvested in a season), has averaged at 75 percent over the last decade, and showing signs of decline in the past two years.

Of course, not all sugarcane is sold to mills. While some is used by cottage-based industries to produce gur, it is hard to fathom that a small, informal industry has been giving large-scale sugar mills a run for their money and successfully outbidding them in the race for cane procurement. The alternate narrative pushed by some farming lobbyists – that mills just refuse to procure cane when rate is high and instead close operations – also makes little sense, considering that 25 percent ‘unutilized’ crop is just too high a number for it to go waste without making headlines. And surely, faced with the prospect of letting their standing crop go to waste, growers must become willing sellers at lower rates acceptable to mills, before the latter actually wind down crushing operations. And lastly, if the industry is striving to lower incidence of under reporting this season, should the ‘reported’ utilization level not actually increase?

The real missing link sadly, is the absence of any understanding of consumption patterns in the country. Consider that industry has been increasing ‘estimated’ annual domestic consumption at a constant rate of 25 kilogram per capita, held in tandem with the healthy rate of population growth. For an industry that has significant vertical integration (especially at sponsor group levels) into value-add production, it is highly unconvincing that demand projections simply do not exist.

Sugar industry remains unique in that it releases copious amounts of supply-side data yet claims to have little knowledge of demand-side dynamics. The incidence of sales under-reporting may very well decrease this season, but will the under-reporting of material information reduce too, any time soon? Unlikely.