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And life comes full circle again. Pakistan is once again at the cusp of a sugar surplus, as production during the just concluded crushing season reaches an estimated 7.5 million metric tons. The new government in Islamabad faces an unenviable decision whether or not to export sugar. Which way must it sway?

National average retail price of sugar has declined by some Rs 20 per kg since Aug-21, a godsend for the parties in coalition government that had until recently held PTI’s governance failure responsible for a price spiral that lasted for over two years.

Thus, allowing export of sugar is not going to be politically popular, as it shall ease pressure on local stocks and arrest the slide in local prices. Falling prices of kitchen essentials makes for amazing optics, especially when the new administration must soon also raise prices on fuel and electricity.

Yet, not allowing export is also fraught with risks. A slide in local sugar prices due to inventory buildup will eventually reverberate through the supply chain. Although it may be too late for cane farmers to shift to other crops before the next season as plantation is already complete (2022-23), high carryover inventory may result in delayed start to the following crushing season.

Mills inadvertently become reluctant to start crushing if they are already sitting on significant unsold inventory. Challenges in offloading the stocks may also create a liquidity crunch in the industry, as unsold inventory is fully financed through bank borrowing that must be paid back before banks can extend fresh credit lines.

In absence of bank financing, mills must either finance cane procurement through own sources, delay payment to growers, or altogether refuse/delay crushing for as long as possible. That may bring down local prices of sugar further still; however, will ensure that farmers reduce acreage massively in the following seasons, slowly but surely sending the market into another cycle of deficit.

So, what must the government do? As BR Research has highlighted previously, global prices of sugar are at 12 year high – in line with global commodity price spiral across other food commodities. However, before taking any decision on the export front, administration must first identify answers to the following: first, what is Pakistan’s annual consumption of sugar at various price levels? And two, what exactly is the extent of surplus, given the fears that the claimed surplus is an outcome of improved efforts at documenting the industry, and may not truly represent a massive glut over past two years.

BR Research will attempt to answer these questions in a series of articles next week.

Comments

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SAMIR SARDANA Apr 24, 2022 09:16am
Sugar mills get project loans at a 4:1 Debt.Equity Ratio,with capital and interest subsidies.If the project cost is inflated by 30% by using a mix of news & used machines, and 5% is paid to bankers and netas – then the equity is nil or negative. In essence,the sugar mill is used by the polity,to make transfer payments to voters in agri areas – as an NGO – except that the NGO makes a CERTAIN INFINTE PROFIT % ON CAPITAL EMPLOUED The mill owner has 2 income streams – Profit & Bonus.Bonus is selling unaccounted stocks,in price spikes,and earnings on export subsidies & drawbacks (on inflated costs and hawala exports & bogus export,s ,PKR Depreciation.Profit is the cash profit earned,as the book profit is all bogus,as costs are inflated.A Sugar mill profit has not to be assessed quarterly or yearly,but when the entire supply & value chain of a crushing season,is conclusively liquidated & realised – net of all working capital costs. This makes the ROE,financially incalculable.dindooohindoo
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