All is quiet on the sugar front. At a time when reports of a demand slowdown should have put prices in reverse gear, the market is particularly quiet. What is keeping the sugar market in stasis?
At some level, the rangebound behavior of this peculiar commodity could be termed a success of public policy. Not only has the government been successful in using sugar policy as a tool to maximize returns to farmers, but it has also managed price stability for the final consumer.
Since 2021, sugar has witnessed one of the slowest rates of increase in prices of kitchen essentials. As per SPI, retail sugar prices recorded an average increase of just 20 percent per annum since 2021, compared to 43 percent for wheat flour, 35 percent for basmati rice, 30 percent for daals, and 28 percent for cooking oil.
Meanwhile, the base price for raw materials – otherwise known as the minimum support price – has doubled from Rs 200 per 40 kg during the 2021 season to over Rs 400 in the ongoing year. Compare this to just a 56 percent rise in the retail price of sugar during the same period.
Although the producers have been unable to pass on the full impact of cost inflation to the consumers, unlike previous years no subsidy has been rolled out to mitigate the ‘loss in their profits’. In addition, GoP is also collecting sales tax of Rs75 billion per annum, compared to nil collection just five years ago.
The producers may not be too happy about the apparent ‘loss of influence’ but seem to be taking it in stride compared to yesteryears. No strike or shutdown of operations has been heard of recently. News reports also suggest that sugar demand has particularly suffered in the aftermath of the anti-smuggling drive that commenced late last year. Have the industry’s wings finally been clipped?
That’s certainly one way of looking at it. Another is that the prices should have actually been receding, and the industry has successfully fended off against all such pressures. Market reports indicate that the industry is facing a severe demand collapse, magnified during the peak demand season. Anecdotal evidence supports this: the manufacturer of a popular sweetened/squash concentrate has recorded its first-ever sales decline in Ramzan in over three decades.
Yet, in spite of the reported surplus, prices have not receded during peak production months. Typically, high borrowing rates exacerbate the already skewed cost of inventory financing of the sugar industry, which forces producers to offload the maximum quantity into the market sooner rather than later, bringing down the final price. Instead, despite historic markup rates, prices have remained remarkably constant since the beginning of the crushing year 2024.
This does not mean there is a need for administrative coercion. Using administrative measures – a favorite pastime of the khadimeen in Centre and Lahore - to bring down prices of one commodity when the cost of everything else is inflating at double-digits would only make things worse. However, it could also indicate that things could take a turn for the worse by the third quarter of 2024.
Past evidence suggests that whenever the sugar industry finds its profitability threatened as a result of unfavorable government policies, the market soon finds itself either in an unmanageable shortfall or a surplus. If high inventory financing costs eat into mills’ profitability amid demand slowdown, mills could be forced to strike against crushing in the coming season.
Before things come to a pass, it might not hurt to unscrew the tap of sugar exports, possibly little by little. Peak demand would soon be behind us as B2B procurement by commercial producers for the summer season eases, while the extent of surplus would also become obvious by mid-April. That would be a good time to let off some steam, especially if the administration in Pindi-Islamabad is confident that it would continue to keep the smuggling in check.
However, if the future of leakages across the western border is uncertain, all forecasts and policy recommendations could come to naught. But such are the perils of ‘pragmatism’ in policymaking.
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