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For economists, there are no prizes for getting predictions of a recession right. Same goes for a commodity price shock, especially when an upswing creates emotive public response.

Pakistan is currently in the throes of a food inflation crisis, with weekly SPI closing in at 20 percent. While most commentators are finding fault in immediate term failure of administrative governance, the stew has long been slow-brewing.

For almost a year, the upswing in sugar prices has been predicted in this space. For more, read ‘Get ready for sugar-flation’, published on April 04, 2019; ‘We have been here before’, published on 25 June, 2019; and ‘D-day for sugar in December’, published on September 16, 2019.

The day of reckoning is finally here; and the Prime Minister and his merry band is facing a politically laced backlash for finding joy in the company of sugar producers.

Cost of sugar production
Basis
Support price (Rs/40kg) A 190
Price of sugarcane (in Rs/kg) 4.75
National recovery sugar (%) B 10.0
National recovery molasses % B 4.5
Price of molasses (in Rs/kg) C 15.0
Calculation (Rs per kg)
Raw material cost 47.5
Add: Processing cost @ 30% D 14
Less: Byproduct molasses E 6.8
Rs/kg cost of sugar (ex-factory) 55.0
in tons (Rs)  55,000.0
ex-factory cost in $ per ton  354.84
Assumptions:
A) Support price set by Punjab & KP govt.
B) Average sucrose & molasses recovery rate as per PSMA Annual Report 2018
C) Average export price per ton of molasses for FY19 as per PBS (in Rs)
D) as per Rs 14 per kg quoted by PSMA-KP zonal chair; includes transportation & road cess
E) as per B; thus, 10kg sugarcane produces 1kg sugar & 0.45kg molasses

But truth be told, sugar millers are always in power in Pakistan – one way or another. In fact, going by share in production, over the last two decades, over fifty percent of sugar produced domestically has been processed in mills owned or associated with political parties in power.

Any commentary can now either take the usual route: criticize political parties for being sponsored or run by sugar barons. But, the more serious-minded reader may find herself more interested in analysing the underlying forces at play.

That the retail price was bound to jack up due to over-zealous administrative machinery was explained in this space earlier this month; for more, read ‘Sugar, price-control disaster in action’, published on January 09, 2020. But is the shortfall real?

 

No, because the crushing season has just entered its full swing, as south Punjab mills are back in operation. Two, because crop output is lower than last year, but still enough to service domestic demand for the next 11 months. And third, above-support price rate means that cane utilization level will remain on the higher side, as growers will be more inclined to sell their stock to mills rather than utilizing it for feed or gurr making purposes.

Does that mean the price hike is justified? Partly, because global sugar prices are on a rise since August last year after two-year long bears rule. Moreover, rupee depreciation has made matters worse for the domestic consumer, as for the first time in many years, local sugar has become export competitive: production cost is clocking in at $360 per ton against ISA price crossing $400 per ton barrier.

Beginning 2020, the federal government has re-instated ban on export, which means that sugar exporters who in previous years were dependent on government subsidy to offload surplus inventory can no longer take advantage of their newfound competitiveness in global market. So, they must extract their pound of flesh somewhere else; in domestic market. And at $400 per ton rate in international market, they are comfortably protected against imports, with custom duty of 40 percent.

That brings us to the million-dollar question: whether the prices will stabilize? Not at least in near term. Or at least not below the current Rs 75 per kg barrier. Counter-intuitively, the sure shot way to stabilize the price is for the government to do nothing. High retail price in peak crushing season means growers will be able to extract higher price for cane from the mills, incentivize greater cultivation and investment in inputs in the coming season.

Meanwhile, if efforts are made to constrain the ex-factory price, mills will find justification in short-changing growers by paying lower rate or delaying payment, which in turn will only push farmers away from the crop; possibly leading to a greater shortage in the next season.

Yes, wholesalers and speculators will make hay. But the alternative of turning a seasonal shortage into a chronic shortfall is worse.