Sugar exports not losing momentum

PBS monthly export performance scorecard is out, and sugar exports have proven to be the tortoise in the race. Despite 34-month low domestic stock position, export of 46 thousand tons of sugar, even if it appears to be a decline on month-on-month basis.

Sweetener commodity exports sustained momentum should come as no surprise as commodity price in the international market has stabilized in recent months. In fact, per unit price fetched has jumped to $397 per ton from the multi-year low of $274 per ton in Dec-18.

What is surprising, however, is the continued momentum despite ostensibly higher returns in the domestic market. Even though the PBS dollar value reflects FOB prices, the rupee equivalent per kg rate for export comes out close to Rs 61.5 per kg, opportunity cost of bank-charges and any trade financing loans taken notwithstanding.

Two competing theories exist for millers continued love for exports, even as 6-month average retail price in the domestic market has shown no sign of abating below Rs 72 per kg, 33 percent higher than same period last year.

The obvious, of course, is that the ex-factory price of sugar in domestic market is still much lower than Rs 61-62 per kg, the average equivalent export value. This endorses the industry view that ex-factory rate is no higher than Rs 58-59 per kg, with the remainder difference reflecting wholesaler and retailers’ margin, and buoyed by speculation over domestic stock position, and declining crop output over last two seasons.

The second, while possible enters into the realm of conjecture. It should be noted that with nearly six hundred thousand tons already exported as per PBS between Jan-Oct, coupled with continued pace of export orders approved as reported by SBP, the country will begin the upcoming crushing season with lowest stocks in three years.

The last time this happened was in Dec-16, except sugar production that season came in at 7 million tons all thanks to bumper crop, which brought retail price down from Rs 71.8 in Nov-16 all the way down Rs 54 within 12-month period.But history may not repeat itself this time. Gone are the days of bumper sugarcane crop, which is set to come in at 64million tons, lowest since 2015 as reported in this newspaper two days ago. This means that seasonal sugar production may be barely sufficient to meet domestic requirement, which shall probably be a positive outcome considering the fiscal and political costs associated with excessive cane and sugar production in the form of support price, loss of area under cotton, and subsidy on exports.

But let’s not digress. Because cane production is expected to be sufficient for coming season, the continued momentum on exports may ensure that retail price of sugar in domestic sugar may not come crashing down with the beginning of crushing season in December and following critical Jan-March when the market is flooded with surplus supply due to peak production.

Thus, low opening stocks due to exports, lacklustre crushing compared to previous years, and sticky domestic consumption (at 450,000 tons per months) shall ensure that effect on domestic price is only a trickle. Moreover, with forty percent duty on import of the commodity, even an apparent shortage will not make import attractive, given international prices are on an upward trajectory.

It stands to reason then that the country is looking at a prolonged period of white sugar retailing in the band of Rs 70-80 per kg in the retail market. The third competing explanation – that exporters fulfil foreign orders despite higher returns in domestic market to maintain customer relationships – does not make a lot of sense as sugar export quota is heavily regulated. Which means that fulfilling buyer requirements in the ongoing period may bring little benefit in future as future exports are dependent on government announcing quota.

Whatever the explanation may be, few-large players dominating the exporting market at a time when domestic market is also attractive means that those capitalizing on both markets – a function of sheer size - are bound to record windfall profits in the ongoing season. So, look out come annual result announcement for the sector beginning December end.