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Coronavirus
VERY HIGH Source: covid.gov.pk
Pakistan Deaths
27,206
7124hr
Pakistan Cases
1,223,841
2,58024hr
4.69% positivity
Sindh
450,126
Punjab
421,800
Balochistan
32,757
Islamabad
104,114
KPK
171,072

For several years now, commentators and experts alike have insisted that Pakistan produces white sugar in surplus, often at the expense of more value-adding crops such as cotton, leading to industry seeking government support in the form of subsidies to offload its stock in the export markets.

Finally, this is coming to an end. After two consecutive years of bumping crops which saw annual domestic sugar production exceed 7million tons (MY17), domestic sugar stocks are fast depleting.

Signs of sharp reversal in sugar availability already became visible earlier during the year when average monthly retail price jumped from Rs55 per kg in early January to Rs65 by April-19. Now that the peak Ramazan/summer season is close to over, prices have stabilized at Rs75 per kg, with industry representatives insisting that the worst is over for the domestic consumer.

Far from it. Sugar prices in domestic market have historically followed a perfect sinusoidal relationship of troughs and peaks between the crucial three-month period of October and January. This marks the beginning of sugarcane harvest season, when clarity establishes on crop availability for upcoming crushing season, setting the tone and direction for sugar prices for the remainder of the year based on procurement price paid to farmers for sugarcane.

Recall that sugarcane production in the country peaked in MY18 with output of 84million tons, but high level of carryover stock of sugar from previous year discouraged millers from ramping up crushing in the following months.

As cane utilization level declined from 94 to 78 percent between MY17 and MY18, faced with payment delays, growers responded with decreasing crop cultivation by 20 percent in the MY19 season. Thus, sugar output in the ongoing MY19 season has dropped to a multi-year low of 5.2million tons, round about the official annual domestic demand level.

Enter exports. In the thirty months since Mar-2017, a total of 2.6million tons of white sugar has been exported in response to several rounds of intervention by the government to take off surplus stocks off the hands of the millers by offering freight subsidy on export and to incentivize start of crushing, ostensibly with the intent to avoid crop losses and payment delays to farmers.

It appears that the relentless utilization of export quotas is finally yielding results, with month-end stocks projected to drop below 450 thousand tons for the first time since November 2015 (start of MY16 crushing season). Retail sugar prices increased by 26 percent in the following 12 months, as sugar production had also remained modest that year at close to 5million tons.

So far, official estimates of sugarcane crop cultivation for MY20 season are still awaited. However, with sugarcane cultivation target of under 1 million hectares, even with above-average yield (due to improved water availability), crop output may not exceed 62million tons, and projected sugar output of no more than 5.6million tons at optimistic crop utilization level of 90 percent.

Consider that average monthly domestic demand is estimated between 440-450,000 tons by the industry association, whereas month-end stocks are estimated to fall below that level come November 2019.

Consider also that sugar prices are already up by 25 percent in eight months since January. Any delays in beginning of crushing season beyond mid-December could see white sugar stocks touch dead level.  Whether that may send prices on another double-digit upward spiral come calendar year-end appears likely, especially if farmers insist on higher-than indicative price rates for their crop by exploiting the decline in plantation. Happy crushing!

Source: CPI for monthly national average of retail sugar price. Month-end sugar stock estimated by using PBS-based monthly foreign trade volumes and monthly LSM figures. Average domestic consumption used in the estimate as per PSMA Year Book.

 

 

 

 

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