“Average cost of production for sugar is Rs 51.93” according to CCP, as per a headline in this newspaper last weekend. That appears to be true, as per a back of the envelope calculation by this section (see illustration) but may be grossly inapplicable for upcoming crushing season.
Word from the industry is that ex-factory price is ranging between Rs 65-67 per kg, giving retailers a margin anywhere between Rs 5 –8 per kg. Because this rate is theoretically inclusive of GST at 17 percent or Rs 12 per kg, price at mill-gate (net of GST) comes out at Rs 55, leaving only a Rs 3 per kg margin for millers.
Except that margin declines further if one subjects it to tests of numbers quoted from the ground. For one, millers insist that they have been paying above market rates since last season, with commercial rate for cane in KP of Rs 190 per 40kg, and as high as Rs 220 per 40kg in Sindh.
Holding average sucrose recovery rates constant, the Rs190 commercial rate would barely allow KP millers to breakeven. Whereas in the backwaters of Sindh, even a recovery rate higher by one percentage point would mean that mill-gate price alone is over Rs 67 per kg at commercial rate of Rs220per40kg, raising questions on the very logic of why mills should be operational in this region at all?
Evidence is mixed on both accounts. For one, if cost of sugarcane in Sindh has been so much steeper compared to other provinces, than that should have reflected in an equally higher retail price gap compared to other regions. That does not appear to be the case, because PBS weekly SPI trends show that retail price in major provincial cities is at par with other regions.
On the other hand, higher cost of sugarcane in the southern region appeals to logic, considering crop for the MY2018-19 season was 20 percent lower compared to the year before due to semi-drought conditions.
Similarly, millers in the southern province have shown little interest in export quota for ongoing calendar year even as Punjab and KP mills have exported as much as 0.7million tons without subsidy. At Rs220 per 40kg commercial rate of cane, cost of sugar for mills in the province comes out at $434 per ton, much higher than the prevailing three-month ISO rates in the band of $330 - $350 per ton in the international market.
While the standard truth in the industry is that millers rarely paid the full support price rate of Rs 180 per 40kg in yesteryears of bumper crop, millers claim that the market rate has since risen makes sense considering two consecutive seasons of declining crop.
Consider that domestic crop output expectations for the current harvest season – which is yet to enter full swing – are close to 64 million tons, down from peak of 84 million tons in 2018. If CCP must estimate the average cost of production to advise ministry of commerce for industry-specific policy measures, it would be wise to take in to account the changing ground realities since and region-specific variations. A 50basis point change in recovery rate can add or subtract as much Rs500million from mill’s bottom-line, if estimates from sector expert Dr. Shahid Afghan are to be believed.