Amid the 30+ percent average inflation during the calendar year 2023, the rise in sugar prices may have been one of the most under-reported events. Retail sugar prices averaged at Rs130 per kg throughout the calendar year, up 45 percent against annual average retail price of just Rs89 per kg during CY22. In fact, inflation in sugar prices averaged above the inflation in Food CPI during the year, which itself clocked in at 40 percent during this year of many firsts.
Pakistanis paying little attention to sugar prices might itself have been another first. During CY19 and CY20, the annual average increase of 25+ percent in retail prices of sugar dominated media space for many months, with criminal investigations and inquiries launched at the highest level of government to understand and fix responsibility of abnormal rise in sugar prices. Over the past two years, however, 25+ percent inflation has become common across the food basket. Afterall, in a country which has experienced double digit food inflation in 48 out of past 52 months, no quantum of price increases appears abnormal after a while.
However, both the central bank and the market are now confident that the worst of inflation – especially food inflation – is behind us, and prices will begin to witness stability come 2024. Whether that may happen across broader economy remains to be seen, however, BR Research can also assert with a fair degree of confidence that this won’t happen for sugar prices.
Why? Although sugar market players may have seen the price rise coming in 2023, 2024 may prove to be a different beast. Market watchers would recall that although national production of cane crops reached its highest-ever level of 91.1 million metric tons (MMT), extreme weather events during monsoon 2022 significantly damaged the crop, lowering its sugar yield. Despite a high crop utilization level, mills could only manage to produce 6.7MMT of refined white sugar, which was 16 percent lower than the previous year. (Recall that in 2022, production of 7.9MMT of refined sugar from 89MMT of cane crop left the market with a small surplus, leading to restoration of sugar export quota for the industry).
This was in addition to the 33 percent rise in the minimum support price of sugarcane, which was raised under the pretext of compensating the cane farmers for their crop losses due to flood. Together with 16 percent lower output, the quantum jump in raw material price was enough for the market to price in a significant rise at retail level. With virtually no imports to speak of, the local consumers – industrial, commercial, and households – consisting of a market which was previously sized at least at 7.6MMT, learned to make do with nearly one million metric tons less sugar, albeit with a 45 percent price increase. This was pure demand destruction at play.
The next calendar year, however, is supposed to be one of recovery. But how does recovery happen if the output is slated to decline further? According to quarterly GDP figures published by Pakistan Bureau of Statistics, the area under sugarcane cultivation has receded by 11 percent during kharif 2023-24, with a more significant decline taking place in the Punjab province – of 14 percent. Historically, cane yield in Punjab has been at least 10 percent higher than in other provinces, due to better availability of water for irrigation and more suitable weather conditions.
Even so, if national yield somehow miraculously manages to break all previous records, national crop output will still decline by anywhere between 5 – 10 percent based on lower acreage alone. Meanwhile, as the country enters election year, even the caretakers have generously bestowed a 36 percent increase on sugarcane growers, taking the average minimum support price in the country close to Rs410 per maund. Surprisingly, this hefty increase in MSP has been readily agreed to by the milling industry, which is usually a sign that market players can foresee a raw material shortage and high degree of competition for procurement (had a lower MSP been announced).
A decline in raw material supply and a significant increase in MSP together are enough reasons to foretell a price spiral in the local market. This has already been confirmed by the trend of rising prices in the retail market during the current month, which has rarely occurred during the last decade (or, has only happened during the years when the market was clearly in a deficit).
The only hope – amidst all this gloom – is that sugar prices are finally stabilizing in the global market, after a bull run lasting nearly one year. If the global market remains in balance or surplus, there could be some hope that prices in the domestic market will not go out of whack, as the pressure for outward pressure will dissipate. However, short of a surprise by sugar yield (sucrose recovery) exceeding historical averages, be ready for domestic retail prices to finally cross two hundred rupees during 2024.
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