Governments that allow themselves to be bogged down with periodic movement in market prices, lose all willingness to carryout meaningful reform agenda. That’s the lesson of ‘PTI vs sugar industry’ drama, playing out in front of us for over two years now. A lesson that policymakers must learn, to avoid repeating same mistakes for posterity.
There is little sense in repeating the history here, as BR Research has covered the saga of sugar price spiral and government’s response to it adequately. In latest news, an Order has now been issued by Controller General of Prices, MoIP under Section 6 of Price Control and Prevention of Profiteering and Hoarding Act, 1977, which fixes “maximum retail price of sugar at Rs 88.24 per kg” across the country.
First, let’s congratulate the administration on what it has learned to do right. Unlike inquiry reports and their recommendations in the recent past, the Order has not relied upon “average unit cost of production”, across the industry to arrive at its recommended price level. It appears that the administration has finally learned to appreciate that unit costs are not constant across the industry, as mills with 30,000 TCD capacity benefit from vastly varying economies of scale than those smaller units operating at 3,000 tons per day capacity. Just as cost per unit is not same for a mill that finances its inventory through bank borrowing and the ones that uses own sources or market credit.
Instead, the Order uses sales data reported by sugar mills to FBR since the current season began (Dec 2020 to May 2021), and arrives at an average ex-mill price (for past 6-months) using total sugar volume sold (and its value). Shrewd, as it wholly sidesteps the noise surrounding ‘average costs’ and ‘normal profit margin’, and throws down the gauntlet to the industry. “If you could sell at an average ex-mill price of X from Dec to May, why can you not sell at the same price for the rest of the year (since crushing cycle has long been over)?”
Never mind that “average prices” are just as bad economics as “average cost”. For one, it favours the larger units that were previously able to sell below the recommended ex-mill rate of Rs 70.42 per kg due to better economies of scale. After all, average prices is the “average” of both highs and lows!
But more importantly, it ignores the natural seasonality in market prices of sugar, where prices typically decline during Dec – Mar when market is flush with fresh crop, and peak during Aug – Sep when it begins to run out of inventory. Can inventory carrying costs (storage + finance cost) be same for a bag of sugar sold in February when it is fresh off the production line, as it is for a unit sold in October when it has been in inventory for 8-9 months?
Of course, one could argue that mills should account for carrying cost throughout the year and then price it in at day one. Maybe the GoP believes this is good business sense, but there is definitely no law stipulating so! If it were common practice, then prices would not see periodic movements at all, such as when they fell by Rs20 per kg in less than a month during Nov-Dec. Or when they rose again by Rs10 per kg within a fortnight during January.
And that’s not the only problem, of course. By fixing everything from ex-mill price, sales tax (collected from mills), to maximum retail price, the Order has only allowed for Rs 5 per kg margin to the rest of the value chain (and just Rs 1 per kg wholesale margin!), as if every small or large distributors and retailers across the nation has the same cost structure (compare the trade discounts and pricing power of Imtiaz chain store with the cost of a wholesaler supplying to Charsadda or Khuzdar).
Without commenting on the legal merits of an Order that may impinge on freedom of trade guaranteed under Article 18 of the Constitution, or the inherent anti-competitive nature of an Order that fixes market prices, the administration must take a pause and ask itself what it seeks to achieve from repeat interventions in the marketplace.
First, against advice, it enforced early crushing – and turned what should have been a surplus season into one of possible deficit. By government’s own admission, the average price of raw material cane went up to Rs 260 per 40kg against minimum support price of Rs 200 (no political administration, of course, can bear the risk of imposing a cap on farm prices!).
Second, GoP has failed to offer any explanation why sugar production concluded at 5.7 million tons when it claims second highest ever sugarcane crop. At 81.1 million tons of crop, sugar production should have at least touched 6.2 million tons, even if one accounts for crop utilization of just 80 percent, or lower recovery rate of 9.5 percent. After all, if the government has made it its business to ensure mandatory crushing, why did production remain below potential?
The country has arguably produced 0.4 million tons less sugar, while the deficit will now be fulfilled through TCP’s imports using public funds. Even now, the GoP is more than willing to create more distortions in the market, while it quietly absolves itself from offering any explanation for the consequences of its past interventions.
For example, why did the crop trade at 30 percent premium over MSP in a year when one-fifth of the crop went unutilized/unsold? If mills crushed lower volume by choice, why did it not lead to decline in cane prices toward season-end and thus lead to more sugar production? The administration claims successful early crushing, then why did it not make sure that unutilized cane was also sold to mills so there was no deficit?
If unutilized cane went to gur (jaggery) production increasing its supply, why did it fail to substitute sugar demand? Was incremental gur produced smuggled to Afghanistan? If administrative actions enabled higher gur production, who is responsible for a policy failure that first incentivized smuggling and will now fill that deficit through imports financed by taxpayer’s money?
Or. In case the mills are under reporting output, why have they not been held accountable for the same? Maybe the simplest explanation is the most accurate: there was no bumper crop, and MNFS&R and its departments misreported crop output data consistently? What if sugar industry’s assessment is correct, and early crushing led to lower recovery and thus below-par output. Will the ministers and officers who passionately advocated forced early crushing take the stand and justify their stance?
Whether the original sin was committed by PML-N, which gave odious freight subsidies on export during election year; by PPP, which doubled the MSP during its tenure, irreversibly distorting crop profitability; or by Musharraf who allowed market concentration in the industry. Three years into power, enough time has lapsed for PTI to carry out meaningful regulatory reform and encourage a competitive market-based industry.
The sugar price spiral presented a perfect opportunity for PTI to showcase its reform-oriented credentials. Instead, three ministers later – three each at Industries and Food Security ministry – the administration has done little except fix prices across the value chain or use sugar industry as a tool for political manoeuvring. Enough with price fixing. Fix the laws to reform the market.