Case for sugar trading on Pakistan Mercantile Exchange

Sugar — a seemingly simple kitchen staple — holds a complex and powerful position within Pakistan’s economy. With an annual production and consumption hovering around 7 million tonnes, sugar is not only an essential household item, but also a strategic commodity impacting national food security, industry dynamics, and government policy. Yet, for a commodity so central to the country’s socio-economic fabric, the mechanisms that govern its trade remain largely opaque, informal, and inefficient.

At present, sugar trading in Pakistan is carried out through a sprawling network of intermediaries and informal ‘exchanges’– marketplaces operating without licenses or regulatory oversight. Transactions are executed on platforms as rudimentary as WhatsApp, where truckloads (typically 12-tonne lots) are bought and sold on speculative pricing. Prices fluctuate based on these informal notations, and deals are struck without transparency, accountability, or the protections offered by centralised clearing systems. This market structure not only limits fair price discovery, but also exposes traders to defaults, arbitrary tax liabilities, and legal risks.

Utilising a formal commodities exchange — such as the Pakistan Mercantile Exchange (PMEX) — for sugar and similar agricultural products is not just a recommendation; it is a necessity.

Let’s begin with the fundamentals. A regulated commodities exchange introduces three critical elements to any market: transparency, trust, and efficiency. In the case of sugar, a formal exchange ensures that both buyers and sellers are properly onboarded after KYC (Know Your Customer), AML (Anti-Money Laundering), and CFT (Countering the Financing of Terrorism) checks. This brings the shadow economy into the formal sector, discouraging tax evasion and fostering accountability across the trading ecosystem.

More importantly, it transforms price discovery from a speculative, rumour-driven process influenced by a handful of traders into a transparent, data-informed mechanism that has participation from tens of thousands of investors and traders from across the country.

On regulated exchanges, prices are determined through structured futures contracts, in which both parties deposit a small margin (usually between 5-10%) and commit to either buying or selling sugar at a future date. As delivery date approaches, these margins escalate every day to discourage pure speculators ensuring that real buyers, sellers and hedgers remain in the market to curb speculative impact on sugar prices.

This enables a more accurate projection of market trends, allowing producers, consumers, and even policymakers to make informed decisions about production planning, procurement, and inventory management.

The role of speculation, often misunderstood, is also critical in this context. A regulated environment doesn’t eliminate speculation – it restrains it through various levers like daily circuit breakers, escalating margins close to delivery dates, broader investor participation, etc. Speculators bring liquidity to markets and contribute to robust price discovery. Whether they’re informed by satellite data on crop yields, insights from sugar mills, or international price trends, these traders inject diverse perspectives into the pricing mechanism. When speculation is allowed in a structured and monitored space, it becomes a strength – not a risk.

To understand the urgency of reform, one must consider the current challenges. Informal sugar dealers are often subjected to massive tax claims from the Federal Board of Revenue (FBR) in the absence of reliable trading history and profit and loss accounts.

A trader may turn over billions of rupees, but face net losses due to volatile market swings – and yet receive tax bills calculated purely on their trade volume. This drives many away from transparency and toward further informality. A regulated exchange solves this mismatch by recording and validating every trade, offering clarity on net positions, margins, and actual profit or loss.

Then there’s the matter of volatility and fairness. In informal setups, there is no central counterparty to guarantee performance. If a party fails to honour a deal – say, they can’t deliver the sugar they sold or pay for the sugar they bought – there is no protection for the counterparty. A licensed exchange like PMEX acts as the central counterparty, ensuring that all trades are honoured through active risk management systems and daily margining processes. It’s a safeguard for all players, large or small, and incentivises broad investor participation in commodity markets.

Of course, the goal is not merely to digitise the existing system but to modernise it. Pakistan’s commodity trading infrastructure is archaic – in some cases, unchanged for over a century. Prices vary between local ‘mandis’ and even across ‘thadas’ within the same ‘mandis’, with buyers and sellers often disconnected from broader market trends. This disjointed structure penalises both ends – farmers and consumers – as middlemen extract disproportionate margins. By integrating sugar, and eventually wheat, rice, and maize into a centralised, transparent exchange, we pave the way for inclusive, modern agricultural markets.

It’s not just about making sugar trading efficient. It’s about rewriting the country’s agricultural policy playbook. Transparent futures price signals help farmers decide which crops to plant. Government agencies can monitor supply-demand dynamics in real time. And consumers benefit from more stable, predictable pricing – especially during sensitive periods like Ramazan.

In conclusion, the case for regulated sugar trading is as much about economic reform as it is about governance, equity, and national resilience.

By shifting from fragmented, informal systems to structured, licensed platforms, Pakistan can unlock a more productive, transparent, and inclusive future for its commodity markets. Sugar may be the starting point – but the implications reach far beyond the sweetener itself.

Copyright Business Recorder, 2025