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BR Research

Sugar: no reform, only noise

Local prices of sugar are once again making headlines, as prices charted fresh heights last week in cities of Sindh,...
Updated 08 Nov, 2021

Sugar is making headlines again, as local prices charted fresh heights last week in cities of Sindh, KP, Balochistan, and certain parts of Punjab (esp. Faisalabad), as per PBS. Although a transient blip in sugar prices in the secondary market before the beginning of crushing season (mid to late November) is a regular – and perfectly normal – phenomenon, quantum of rise and politicization of commodity has brought things to a head. But don’t let the noise distract you!

Posterity will remember the incumbents for waging inquiries, committees, and investigations into the ‘causes of sugar price spiral’ for two long years, to little effect except mudslinging. This may be the very last time when public discourse surrounding the industry offers a rare opportunity to kickstart substantial reform, before domestic supply stabilizes due to forecast of bumper crop. Thereafter, consumer prices shall settle down, and government can declare victory over unruly prices of the sweetener ‘for the good of common man’.

Don’t believe it? History has a nasty habit of repeating itself in Pakistan. In the first three years of the last three electoral cycles, local prices of sugar increased by the highest quantum compared to all other major food commodities, irrespective of prices in global commodity market or exchange rate parity (whether fixed or market based).

Monthly retail price of sugar (CPI) increased by 242% between June 2008 and October 2011 after PPP came into power; by 34% percent between June 2013 and October 2016 during PML-N era; and by 195 percent between June 2018 and October 2021, after PTI took over. (N.B. of course, PML-N may claim that the quantum change during its reign was relatively much lower, but the rate of change in sugar price relative to all other food commodities remained abnormalduring its first 3 years in power as well).

Why? The modus operandi remains identical each time. In the year leading up to every general election, the country records a bumper sugarcane crop and surplus supply of refined sugar in the local market; during the election year, sugar mills delay crushing due to high carryover stock; government allows export to release pressure off domestic stocks and arrest fall in local prices; the triple signals of delayed crushing, export of surplus, and falling domestic prices lead to decline in cane cultivation during subsequent seasons; this is followed by up to two seasons of shortfall; later, governmentsimport sugar to meet shortfall and supply it to USCs at subsidized prices; eventually, they raise support price exorbitantlyto attract growers back to cane cultivation; and the cycle continues ad nauseum.

Of course, things can become markedly better or far worse depending upon various exogenous variables. Currency depreciation (2008-09; and 2018-19) can turn sugar export into a lucrative proposition, exaggerating effects of domestic shortfall. Similarly, global commodity price spiral (2009 and 2021) can lead to fiscal burden due to rise in cost of government imports that are then sold at subsidized rates.

But it is clearly nothing that is not predictable. Sugarcane crop is planted for up to 12 – 18 months. This means that robust crop surveys can give a fair forecast of area under cultivation (at assumed rates of productivity) to administration beforehand, arguably long before it announces any export/import policy, or minimum support prices.

Yet, the surgical precision with which sugarcane crop follows the electoral cycle raises the suspicion that the mismanagement is no coincidence. Of course, one could blame commercial interests – sugar mills or large landholding farmers depending upon one’s analytical bias – for the vicious cycle, neither control the reigns of executive or legislative power, at least not directly. Those powers solely lay with the parliament, and specifically the ruling coalition, which can put them to good use by bringing meaningful reform to the rules of the game, rather than abuse it to play blame game and victimize opponents or erstwhile friends.

If sugar mills (including millers-cum-politicians) abuse the existing regulatory framework – such as restrictive foreign trade regime - for their commercial gain at the expense of wider population, overhaul the regulation so they no longer be allowed to do so. If landed farmers (including landed-farmers-cum-politicians) exploit the rules to ceaselessly raise support prices, abolish it so the incentive for excessive cane cultivation is removed. Reform, reform, reform!

But what if it is those in power – every subsequent ruling party including the leadership at the very top – are also the ultimate beneficiary of this vicious cycle? What if, it is not the farmers nor the millers, but rulers that hold vested commercial interest beholden to their cause – trading commercial benefits in exchange for political supportduring elections? What incentive is there then to bring reform? Turn the populist narrative on its head, and the perfect alignment between electoral and sugar cycle may suddenly start making sense.

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