The monthly CPI for Nov-21 released yesterday has raised alarm bells in the corridors of power. A much-needed reprieve however was witnessed in one critical food commodity – sugar. Refined sugar prices recorded a month-on-month decline not only for the bottom quintile SPI, falling by 3.42 percent, but also in the Wholesale Price Index by 2.95 percent. Will nationwide sugar prices finally reverse trajectory?
Not so fast. During the same period, index value for Sugar Crops – otherwise known as sugarcane– recorded a month-on-month rise of 22.6 percent in the Wholesale price Index (and 30.77 percent on year-on-year basis). This is the largest month-on-month increase since March 2019, when Sugar Crop index rose by 26.77 percent, which laid the foundations of the sugar price spiral witnessed over the last 3 years.
What’s different this time? Arguably, the last time Sugar Crops index rose at similar pace, the pressure was driven by supply-side factors. During 2018-19, national cane crop output fell by 19.4 percent over the preceding year, amid surplus carryover sugar stocks with the milling industry, and hangover of delayed payments to growers during the previous season.
In contrast, Pakistan is set to record its highest ever cane output during the current marketing year – close to 87.7 million tons, according to a press release by finance ministry. Yet, provincial governments of Punjab and Sindh have raised minimum support price for sugarcane by 12.5 and 24 percent, respectively. The price increase has ostensibly been announced in response to rising cost of farm production; however, in reality is an unfortunate tactic employed to garner electoral support from rural voters in anticipation of upcoming election cycle.
The local grower advocacy groups insist that official cane price must be set equal to cane price in India, where the industry is also victim to similar constituency politics. Grower lobbies argue that notified cane support price in Pakistan is significantly lower than next door, yet refined sugar prices are at par in both countries.
Two months ago, the Fair and Remunerative Price (FRP) in India was raised to ?290 per quintal (or Pak Rupees 270 per 40kg) by the BJP-led Union government. In a naked display of realpolitik, the same day, Congress government in Punjab raised State Advised Price (SAP) to ?360 per quintal (or Pak Rupees 337 per 40kg). Not so different from the Sindh versus Punjab MSP-politics on display back home for the past two years, both in the case of sugarcane and wheat.
However, Pakistan’s farm advocates – both in and out of government - keen to maintain sugarcane prices at par with India, conveniently forget to mention that the FRP and SAP are based on sucrose recovery rate of 10 percent. In contrast, cane MSP in Pakistan is paid according to benchmark recovery rate of just 8.5 percent, while sucrose premium is also payable under law on recovery over and above the benchmark rate.
Little surprise then that the ex-farm average cane procurement price rose to Rs 250 per 40kg during last season according to official admission. BR Research estimates suggest that the Nov-21 WPI ‘Sugar Crops’ index translates into cane market price of close to Rs 300 per 40kg!
At this price, there is little reason for refined sugar prices to fall below Rs 100 per kg in the retail market, (administrative tinkering with SPI rates through Utility Stores and Sasta Bazaar subsidies, notwithstanding). Remember, while refined sugar prices have recorded a tumble according to SPI, refined sugar prices in both Urban and Rural CPI have remained headstrong, inching ahead by 1 percent on average on month-on-month basis.
However, this is not to say that cane crop price will continue to march on. Administrative enforcement of early crushing may have led to competition for cane procurement, raising prices temporarily. In fact, if average cane procurement price maintains at current level for the remainder of the season, it may spell doom for the incumbents, hopeful to put an end to sugar wars sooner than later. This is not only because the milling industry may end up with a significant marketable surplus due to improved raw material supply, it may also find cause to raise a ruckus over significantly higher average cost of production.
Although PTI is still haunted by the ghosts of past sugar exports, it would be wise to at least consider the prospect of allowing export of marketable surplus. International sugar prices - as tracked by ISA’s White Sugar Price Index – are at 10-year high. If Pakistan’s farmers have indeed produced highest ever crop output, greater than even 2017 and 2018 harvests – than a substantial sugar surplus may be right around the corner. If only the federal government could break off its infantile addiction to building strategic commodity reserves by splurging taxpayer’s money.
But for that to happen, both provincial and federal governments must stand steadfast behind the latest official crop estimates. A polite reminder: a month ago, the SAPM on Food Security had claimed sugarcane crop output for the current season was estimated over 100 million tons. Only a month later, FinMin has downgraded that forecast by nearly 13 percent. Are official crop estimates truly above doubt? Nobody knows!