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Coronavirus
VERY HIGH Source: covid.gov.pk
Pakistan Deaths
27,524
4224hr
Pakistan Cases
1,236,888
2,06024hr
4.58% positivity
Sindh
454,510
Punjab
427,583
Balochistan
32,837
Islamabad
104,913
KPK
172,766

After receiving flak from farmer lobbies, the Punjab government has reinstated several amendments to The Sugar Factories (Control) Act, 1950. The amendments restore the power of the provincial government to notify beginning of cane crushing season, “no later than November 30th”. The ruling party, it appears, is leaving no stone unturned to please the farmer support base in the province. But is it a wise decision?

The promulgation of amended legislation demonstrates that the administration has made up its mind regarding early start of crushing, despite intense opposition by the sugar milling industry. The milling industry, as highlighted in this space before, resolutely insists that enforcement of early crushing results in loss of sucrose content during cane crushing. It appears to be the only reasonable explanation for the low output of refined sugar in the outgoing season, considering GoP claims that the country achieved second highest sugarcane output during 2020-21. In absence of a counter argument presented by the administration for poor sucrose recovery and low output despite bumper crop, enforcement of early crushing raises fear that output may remain sub-par in the upcoming crushing season as well.

That does not mean government has no justifications in its armoury. For one, evidence from outgoing season shows that early crushing was largely beneficial for growers, as they were able to demand immediate payment for early harvest. Farmer community also acknowledges that they were able to sell cane at a steep premium (over base price). The measure earned incumbents much needed popularity with cane growers, and clearly, they would like for the momentum to continue.

Moreover, estimates of refined sugar stocks available as at May 2021 indicate that the country may very well run out of stocks by early November 2021, given estimated national consumption of 0.45 to 0.50 million tons per month. Given that the next marketing year (beginning Oct 2021) will start with nil carryover stocks, the administration believes it has no other choice except to start the crushing season as early as possible.

Of course, the government could allow sugar import equivalent to two months of national consumption, allowing milling industry to begin crushing by late November or early December. But that would not only aggravate the farming community who may be forced to delay harvest, but will also rake in import bill anywhere between $400 - $500 million (for import of 0.8 – 1 million tons of sugar). However, the new bosses at finance ministry are increasingly making their annoyance visible with pressures on current account, and may agree to any measures necessary to keep a tab on imports.

As the ruling coalition gears up to go in full election mode, it may increasingly have to make zero-sum choices to make politically influential constituencies happy; constituencies that are often at odds with each other. But if sugar millers claim another season of low sucrose recovery, they may also enlist political capital to exert influence and discontinue what in their view is a ‘lopsided arrangement. Sooner or later, “something’s gotta give”.

Note: Stock positions in ‘D’ and ‘E’ have been arrived through independent estimation methods.

As explained in the table, ‘D’ uses working capital financing outstanding with commercial banks against seasonal pledge finance facilities, and applies a 15% margin for collateral value. In cases where commercial banks use 25% margin (instead of 15% due to liquid nature of commodity), the value of pledged stock would increase. Similarly, for estimation of volume pledged, national average monthly retail price of refined sugar – as appearing in CPI – is used as proxy. Of course, for sugar pledged by mills, commercial banks would ideally use ex-factory or wholesale price, not retail price. Having said that, using wholesale prices (data not available) would result in increase in the volume of pledge, as the denominator would be reduced (as wholesale prices are < retail prices). ‘E’ represents estimate of nationwide month-end stocks of sugar. This is based on BR Research’s internal database based on historical sugar production (LSM), foreign trade data (PBS), and year-end sugar stocks (PSMA). The divergence should not be interpreted as anything other than difference in estimation techniques.

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