Iskander Khan is a four-time chairman of Pakistan Sugar Mills Association (PSMA), elected as chairman recently for the marketing season 2020-21. In the past, he has also held chairmanship for the provincial chapter of PSMA, Khyber Pakhtunkhwa several times. He is also the Director of the Premier Group of Companies, which is the largest sugar mill group in KP and third largest in the country by capacity. Premier Sugar Mills was also the first mill set up in West Pakistan after independence.

While a representative of industry association, Khan is an independent-minded entrepreneur known for speaking his mind. Not only an outspoken critic of past short-sighted policies, he also does not shy away from censuring people of his own cloth, especially those known to engage in under reporting and sales suppression.

As the sugarcane crushing season 2020-21 draws to a close, BR Research sat down with Khan to understand the industry dynamics, and his proposal to resolve industry’s chronic issues. Below is his vision.

BR Research (BRR): Discussions with farming groups suggest that role of middlemen in cane procurement is limited to post-delivery bill discounting (of Cane Purchase Receipt issued by mills). Why then does PSMA blame middlemen for high price of cane in the ongoing crushing season?

Iskander M. Khan (IMK): Historically, it is correct that mills prefer to transact (purchase cane) directly from growers, especially those located near millgate. But that is not always the case for growers.

Mills pay farmers within 15 days of delivery, as required by law. In a direct transaction, farmers bring harvested cane to mill gate in trolleys. Thus, they bear the cost of transportation as well as pay road cess.

In contrast, middlemen enter procurement if they anticipate a rising market and purchase cane against cash payment by offering a premium over support price. Most middlemen rent few acres of empty farm estate, and store cane for 7-14 days before selling it to mills at exorbitant rates.

BRR: What is the profile of a typical middleman? Surely, middlemen cannot have greater bargaining power than a typical sugar mill owner.

IMK: A typical middleman need not be a village elder or a man of influence. Anybody with sufficient liquidity and sense of market timing can enter the business, for as long as he is willing to pay a bribe to DC to turn a blind eye. Typically, unscrupulous large-hold farmers are best placed to perform this role.

Remember, the crushing period is officially notified, and mills incur overheads by running the plant 24/7 during the crushing season. Thus, mills may end up running huge operational losses in case they refuse to procure cane supplied by middlemen. Once middlemen have cornered the market by procuring a high percentage of cane in the millgate area, the bargaining power shifts to them, and mills are forced to purchase cane at the jacked-up price.

In the MY2019-20 season, several mills in Punjab refused to procure from middlemen who had artificially jacked up the price. This resulted in halt of crushing operations for several days. The Inquiry Committee called the industry out, insisting that it had turned into a buying cartel.

Given an unfriendly administration that insists on treating the industry as thieves yet forces us to operate mills during officially notified period – or else, face prison or worse, takeover of mills using archaic colonial laws - what choice does the industry have other than to procure cane at prices dictated by middlemen?

BRR: Shouldn’t traders with sufficient liquidity prefer to store refined sugar instead of cane? Cane not only has very high volume (occupying more physical space) it can also not be stored for long intervals as it begins to rot. Refined sugar, on the other hand, is a non-perishable commodity.

IMK: Since the past two seasons, no trader wants to store white refined sugar because of increased surveillance by administration leading to raids and confiscation of inventory; even from well-reputed dealers and wholesalers who have been part of supply chain for decades.

BRR: Legality aside, in a free market why should growers not sell to middlemen willing to pay a premium in a cash transaction rather than to mills, some of which have historically been known to delay payments beyond 15 days?

IMK: The sugar industry faces a unique cash cycle as it must settle payables due to growers within 15 days of procurement (as per Cane Act), but sells the sugar produced over a 12-month period.

The 15-day settlement made sense back when all sugar produced by mills during the crushing season was procured by the government through TCP and supplied to ration shops. All cane produced within 75-mile radius of millgate was designated as ‘exclusive mill area’, and no middlemen or competing mills could enter and procure cane from growers in that area. Until 1980s, the retail price of sugar was also fixed by the government, which also settled its dues with the mills on a timely basis. Today, the skewed cash cycle no longer makes sense as we operate in a vastly different industry dynamic.

Today, in order to settle dues with growers within 15 days of procurement, mills are either forced to obtain pledge financing from banks – which can be a costly proposition in a high interest rate environment (for example, during last season) – or force-sell to dealers and wholesalers at a discount for cash.

BRR: What alternate mechanism for payment settlement does the industry propose to ensure that neither mills nor growers are exploited?

IMK: Consider that almost every sugar mill in the country has a commercial bank branch located near its premises. Consider also that banks advance 80 percent financing to sugar mills against the value of sugar pledged. Furthermore, in a 2017 judgement by Lahore High Court (WP No.4562/2016, Al-Baraka Bank v. Province of Punjab), the LHC has already ruled that in case any mill has not settled its dues to growers against cane procured, the right of growers supersedes that of bank as secured creditors.

In light of this, my proposal to the government is as follows: notify that the Cane Purchase Receipt is a negotiable instrument just like any other bill of exchange such as cheque, thereby paving way for its bill discounting by banks.

Two, in light of LHC’s ruling, banks should deploy a creative strategy to discourage unscrupulous behaviour by some mills that obtain bank financing but do not use the cash to settle dues with growers. Instead of extending pledge financing to mills, banks should make direct payment to growers against the sugar pledged as collateral, and the CPR as the underlying instrument. Banks’ exposure will continue to be secured against pledge stock (which is traditionally under bank’s physical custody and placed with muqaddam), just as the case is currently.

Third, either set the cane market free by removing support price mechanism altogether, or link the pricing of cane to sucrose recovery, so that mills pay a premium for high quality cane but are not forced to pay the same price for cane of low quality or low recovery. This will incentivize farmers to invest in inputs and improve cane productivity.

BRR: How will this mechanism ensure that the role of middlemen is eliminated?

IMK: The crucial element is linkage of cane price to recovery level. Once payment is linked to sucrose recovery, farmers will have every incentive to deliver freshly harvested cane directly to mills. Remember, the recovery level is at maximum levels when the cane is freshly cut, whereas cane stored after harvest begins to rot because of a natural phenomenon called sucrose inversion which leads to reproduction of bacteria within the juice present in cane (notice that the colour of freshly squeezed sugarcane juice changes soon after and cannot be stored for long intervals).

Currently, no provision under law protects sugar mills from paying middlemen the government fixed rate (or higher) demanded – as the government sets the minimum support price in terms of weight (40 kg or or per maund), even if the sucrose recovery level is low, the quality of cane has degraded, or has begun to rot. Once mills are only obliged to pay against recovery level, middlemen will have little incentive to buy cane to jack up its price.

BRR: Let’s now come to the subject of gur making (jaggery). Rumour mills suggest that despite surplus crop, cane supply to mills is short as demand from gur makers has gone through the roof for export to Afghanistan. Why has demand from Afghanistan increased overnight?

IMK: Domestic sugar mills and gur makers have always co-existed, especially in KP where as much as 30 to 40 percent of sugarcane produced was consumed by gur makers historically.

However, ever since the Taliban insurgency has died down, large volumes of impurities-free (high-grade) gur is being smuggled (earlier exported) to Afghanistan – and travels as far as Central Asian countries – where it is used for liquor/wine making. Thus, price of gur in Afghanistan has gone through the roof, leading to increased demand from smugglers and unscrupulous traders in KP.

Understand that there is also a persistent domestic demand for gur, especially in KP where it is consumed with kehwa (black/green tea). Moreover, previously demand for gur from other provinces was also catered to by gur factories, mainly located in Peshawar valley.

Now, because pure-grade gur is being smuggled to Afghanistan, a cottage industry has mushroomed in Peshawar valley – spreading as far as to Punjab. These are engaged in making impure gur that mostly caters to domestic demand. They use dangerous chemicals and an environmentally degrading process. While price of impure gur used domestically is lower, it does not cater to Afghan-demand because it ruins the fermentation process integral to wine-making.

Thus, even though domestic retail price of gur moves in tandem with retail price due to availability of impure gur in the market, gur-making is consuming much raw material today compared to in the past. As a result, sugar production in Peshawar valley has come to naught, as several mills – including our own – have gone bust. Many of these unscrupulous gur-makers – which also include several politicians from KP - use white sugar as an input due to its relatively lower cost, increasing their profitability manifold, and further attracting others to this unlawful trade.

The sugar industry is not against lawful export of gur to Afghanistan or any other country. However, the government must ensure the implementation of Gur Factories Control Act in its letter and spirit. The Act envisions that a maximum of 25 percent of total provincial cane production may be consumed by gur makers, while the rest is to be procured by sugar mills.

If the long-term trend of cane utilization level by mills in KP – especially those located in Peshawar valley – is charted, it becomes obvious that this is no longer happening. Gur makers also do not pay GST at source, creating even more distortions.

Furthermore, gur making should be declared an industry which pays its due shares of taxes and duties and is also entitled to rebates against export. Currently, this is the case in India, where the gur making industry operates under formal sector.

Currently, the illegal impure gur making trade is not only contributing to a flourishing smuggling racket but is also contributing to a spiral in domestic price of white sugar by sending the raw material demand in an overdrive. Unfortunately, while the government has banned export of gur, it has taken few steps to curtail its smuggling.

BRR: One-off demand from gur makers notwithstanding, the annual report of PSMA does not address why white sugar production routinely falls short when compared to total crop produced. Consider that latest report places cane crop estimates at 75 million tons (clearly, a surplus!) - yet places sugar production forecast at 5.6 million tons due to low cane utilization (only 74 percent).

What explains low utilization by mills when the law requires mills to crush all cane sold at MSP? While the anomaly may be explicable for KP, it does not hold true for provinces such as Punjab and Sindh where consumption by gur makers has historically been low.

IMK: The crop estimate is based on figures supplied by Provincial Crop Reporting Departments, and confirmed by federal government’s Sugar Advisory Board (SAB). The industry does not conduct any surveys of crop, and as association chairman, I cannot vouch for crop estimates. In fact, based on personal assessment and average cost of cane procurement between November 2020 and February 2021, there is little evidence to suggest that there is a surplus crop in the ongoing season.

In the past, the association used to collect data of monthly crushing volume from its member mills; however, in 2010, CCP declared that this amounted to cartelization, and the practice came to an end. Now, the association collects data long after it has been made publicly available through PBS; the annual report is also published with a significant lag after the marketing year comes to an end.