“Delay in crushing prevents farmers from sowing wheat”
Last week, BR Research published the interview of chairman Pakistan Sugar Mills Association, who shared industry’s perspective on the ongoing price spiral in the domestic market, despite reports of increase in crop availability compared to past two seasons. Below, Cane Commissioner Punjab presents the official perspective, in particular, a retrospective on early beginning of crushing which is blamed for lower sugar output.
Following are the edited excerpts:
BR Research: The sugar industry claims that enforcement of early crushing has led to lower sucrose recovery, causing opportunity loss of output in the ongoing crushing season 2020-21. What is your view?
ZW: Inordinate delay in the beginning of crushing season impacts sowing of wheat during rabi in many areas. This has manifested itself in wheat shortfall year after year in recent years. In the past, it was noticed that many sugar mills abuse the prerogative to start crushing any time after first of October. In fact, in more recent years, crushing began to be delayed well into December. By that time, affected farmers would miss the wheat sowing window and were left with no choice but to sow sugarcane again in the following season.
Thus, before the beginning of crushing season 2020-21, the provincial government formed a technical committee of experts including members from Agriculture, Food, and Met departments. The committee deployed scientific methods to collect samples of sucrose content from various regions during November 2020.
Based on rigorous testing by an independent third-party lab of these highly representative samples, Sugarcane Research Institute (Punjab) reported that average sucrose content in South Punjab was 10.01 percent, and 9.42 percent in Central Punjab as on November 06th. Thus, the government notified beginning of crushing season in South Punjab from November 10th, and from November 15th, in Central Punjab.
So far as the claim by sugar milling industry is concerned that early crushing has led to opportunity loss of nearly 0.3 million tons sugar due to lower recovery rate, it must be highlighted that the lab under Office of Cane Commissioner, Punjab had the sucrose levels re-assessed thrice once the crushing season went in full swing. Each time, the sucrose content has tested well above 10.50 percent.
Moreover, it must be emphasized that the sucrose content reported by the industry does not necessarily represent actual levels achieved, but also incorporates the opportunity losses due to inefficiencies present in the crushing process (i.e., operational losses at the plant), which the farmer should not have to pay for.
Furthermore, even if the argument by the industry were to be taken at its face value, we must remember that policy decisions taken by the government must strike a balance between all stakeholders involved. Mills’ unilateral decision to delay crushing in the past takes away the agency from those farmers who seek to switch away from sugarcane but cannot do so if the optimal sowing period for wheat is missed. Similarly, achieving domestic food security by ensuring adequate cultivation of wheat is an equally paramount public policy objective.
BRR: Despite reports of increase in crop area, retail price of sugar has continued to trend upwards during peak crushing period. Is sugar output lower compared to past year?
ZW: As of March 10th, mills in Punjab have reported production of 3.68 million tons sugar, which is significantly higher than last year. On nationwide basis, till date sugar production of 5.6 million tons has been achieved.
Estimates of production reported by the industry in the ongoing season appear to be at par with projections of national consumption. However, it has been observed that whenever industry reports absence of surplus, players in the value chain begin manipulating prices by withholding supply.
Therefore, the government is considering proposals to import sugar to ensure that a select few may no longer ‘manage’ prices and supply in the domestic market.
BRR: The Provincial Crop Reporting Department claims that cane crop in Punjab is higher by as much as 20 percent. Why then are mills forced to purchase cane at 25 to 50 percent premium over MSP?
ZW: Before the crushing season began, the government amended existing statutes and mandated that all payments for cane procurement must be made through banking channels only. This has ensured documentation but is also creating a challenge for those who seek to avoid documentation, forcing some to under report cane purchased, and as a result, also report lower sugar production.
Based on cane purchases reported to the Office of Cane Commissioner, average selling price in Punjab for the season so far is about Rs 250 per 40kg. Transactions appear to be taking place on a commercial rate (premium over base price) because of the upwards pressure on sugar prices in the global markets, and not due to shortfall in cane supply.
BRR: Representatives of sugar industry claim that the Cane Act requires mandatory crushing during the season; and that, in case a mill refuses to purchase cane, growers can file an FIR against the mill. Is this interpretation correct?
ZW: Start of crushing is mandatory, but mills cannot be forced to continue operations if supply of cane is inadequate. Similarly, no legal provision allows registration of FIR against mill owners or management in case it refuses to procure cane from growers. But once cane is procured by mills, they are required by law to ensure payment of minimum support price. Obviously, farmers cannot compel mill owners to pay a premium over MSP.
In fact, it has been observed that passbooks of many growers - who in the past had lodged protest in the Office of Cane Commissioner against mills – have been rescinded in following seasons. I believe the law is deficient in such circumstances and should empower the executive arm to take punitive measures against mills which resort to such pressure tactics.
BRR: Representatives of industry claim that cane price has spiralled upwards due to high involvement of middlemen in the ongoing season. It is claimed that growers are more interested to sell to middlemen who pay MSP in cash, and then store crop to sell at a premium to mills later. Is this accurate?
ZW: It is very naïve to claim so, as harvested cane begins to rot and wither away. Middlemen were active, which is why over 300 FIRs were filed against them by the Deputy Commissioners, along with Office of Cane Commissioner. Yet, the unlicensed middlemen continued to operate their weigh bridges until the district administration had trenches dug in front of their premises.
There are two permissible ways under prevailing law in which procurement takes place outside of mill gate. First, sugar mills establish their Purchase Centres where farmers bring their cane; mills are only required to intimate the DC office and need not obtain permission from Office of Cane Commissioner to establish Purchase Centres.
Second, mills may appoint Purchase Agents, who then procure cane all over the province under mills’ name. Prevailing statute prohibits procurement by any middlemen unless they are licensed by the Office of Cane Commissioner and duly authorized by a sugar mill. Furthermore, the provincial government amended the rules and included provision of a Rs 10 million security for those obtaining licenses of Purchase Agents before the ongoing season commenced. Not a single application was received from any potential middlemen nor any security deposit was received. Note that the license of Purchase Agents is renewed each season.
Remember that unless the sugar milling industry does not stop patronizing the middlemen, latter’s role cannot be eliminated through punitive measures alone taken by the administration.
BRR: Sugar produced during the short crushing period is consumed slowly over a 12-month cycle. Why should mills not be allowed to take advantage of price movements during off-season period, and are instead pressurized to sell the inventory soon after crushing, only for it to be sold to dealers and wholesalers who end up hoarding anyway?
ZW: Hoarding of inventory can take place either at the mill or wholesaler/distributor levels. The government can take effective action against hoarding taking place by dealers and wholesalers due to strong legal cover in the form of Price Control Act, Essential Commodities Act, and Anti-Hoarding Act. Laws governing sugar mills are not very effective.
BRR: Domestic price of sugar has exhibited a highly cyclical behaviour over the past decade, where either the mills claim to be making huge losses, or the price of sugar increases dramatically in a very short span. How can the government help encourage price stability?
ZW: To stabilize prices in the secondary market, determination of ex-factory price of sugar is a pre-requisite. Implementing an ex-factory price will ensure that the industry is not allowed to monetize the inefficiencies of mills with poor productivity. Currently, the industry rewards the inefficient units by setting the average ex-factory price above the cost of production of the weakest link (milling units with poorest efficiency levels). While this ensures that all units remain profitable, the most efficient units rake in abnormal profits, as their cost of production is relatively much lower. This also discourages any incentive for consolidation in the industry.
BRR: Does early start of crushing means the season will end a month earlier as well?
ZW: Fewer than 20 mills across Punjab have notified closure of crushing season out of total 48 units in the province, as of March 10th. Many mills in Central Punjab are still operational, which is in line with how the harvesting season varies across the province.
BRR: Sugar industry is unique in that all purchase and sale is reported immediately to Office of Cane Commissioner. Yet the industry is accused of under reporting its output and revenue. How is this possible?
ZW: The Cane Purchase Receipt does not indicate the sucrose recovery achieved; thus, one way is to under report sucrose recovery levels achieved. Moreover, cane sale-purchase not reported to Office of Cane Commissioner by collusion between growers and millers allows under reporting of volume crushed (and thus, sugar produced).
Currently, Office of Cane Commissioner does not have any real-time monitoring mechanism; thus, it has little choice but to accept the data reported by growers and sugar mills regarding sale-purchase of sugarcane. However, complaints of off-the-book sugarcane purchase are routinely received. Thus, the federal government has decided to install CCTV at each mill to monitor production of sugar, an arrangement which is likely to become effective beginning next crushing season. Additionally, Punjab government is also considering installation of CCTV cameras at weigh bridges, as well as establishment of sucrose lab at mills from the next season.