It has become a yearly occurrence now. Just before the crushing season sugar mills take to protesting the support price imposed by the government for procurement of raw sugar-cane from the farmers.
This year is no different with the Pakistan Sugar Mills Association (PSMA) publishing an appeal to the government in leading newspapers to reconsider the recently imposed support price of Rs180 per 40kg in Punjab. The sugar industry association believes the cost of production of sugar to be around Rs63/kg which it deems to be too high because of the high support price of sugar-cane which represents almost 80 percent of overall production cost.
Recall that the by the end of the last crushing reason sugar mills had already warned of their inability to pay more than Rs120 per maund for the sugar-cane procurement this season. The PSMA cited a severe supply glut as the reason and claimed sugar mills would still have almost 55 percent surplus stock even after accounting for annual domestic sugar demand. (Read: “Sugar supply glut persists” published on 14 September, 2017)
According to industry sources, there is an excess supply of 2.8 million tons compared to the domestic demand of 5.5 million tons. The government has to provide a subsidy to the sugar mill owners for in order to make exports viable given the price differential between international sugar prices which are lower compared to domestic prices.
While the government has failed to come up with an adequate mechanism to regulate sugar-cane prices, it has also failed to stem the rise in the number of sugar mills operating in the country. As things stand currently, the installed capacity of the sugar industry in Pakistan is 13 million tons which has come about due to a failure to prevent more sugar mills being set up. In the last thirty years, the number of sugar mills has tripled from 30 to 90 due to the political patronage afforded to the industry.
In a recent interview with Business Recorder, Iskander Mirza, Vice Chairman of PSMA pointed out that cotton production and consequentially the textile sector is bearing the brunt of incentivisation of sugar-cane in fertile cotton producing areas of South Punjab. This column has also highlighted the issue previously. (Read: “Addressing crop price distortion” published April 15, 2018 and “Sugar thrives, cotton dives” published on January 11, 2018)
The current policy is a loss for all stakeholders involved. The farmers are unable to actually sell their sugar-cane crop at the government notified support price and deals are often struck with middle-men at lower prices. Sugar mills produce excess sugar as a result which cannot even be exported without costing the national exchequer billions in subsidies.
Instead of treating sugar like a political commodity, a market based mechanism is the best way to set the price of sugar-cane. Failing to do so will only result in persistent supply glut of both sugar-cane as well as sugar.
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