The rational expectations theory in economics posits that public’s expectations about future influence what actually takes place in the future, even if not accompanied by changes in supply-side fundamentals. While macroeconomic fundamentals suggest that food staples prices are so far insulated from currency devaluation (read “Correcting inflation computation”), inflationary expectations in the economy seem to be seeping into domestic commodity prices.
Consider the curious case of refined sugar. The country has been producing a sugar surplus for at least past seven years, with available stocks reaching historic proportions of 9 million tons against domestic demand of 5.2 million tons during last season. Average monthly retail price during 2018 declined to five-year low of Rs53.6 per kg, remaining subdued even in Ramadan/summer season when consumption usually picks up.
To arrest the falling price of sugar, federal government announced export quotas for three consecutive crushing seasons, hoping to offload excess supply in export market with substantial subsidy (Rs10.7 and Rs5 per kilo for mills in Punjab, and Rs20 and nil per kilo in Sindh for MY18 and MY19, respectively).
Inventory buildup with sugar millers for past several seasons finally began to reflect itself in sugarcane crop numbers during the latest kharif season, as growers reduced area under cultivation, leading to decline in crop output by almost 20 percent over previous year.
Yet, reduced crop output and export quota seemed to have done little to ease the situation, evidenced by opening stocks close to half of annual domestic demand. This forced millers to delay cane crushing well into second week of December-18, for the first time in recent memory. As a result, July-Jan sugar production was down by 19.13 percent on a year on year basis, as per Large Scale Manufacturing figures published by PBS.
Ordinarily, given the high opening stock levels, delay in crushing should have given no cause for concern viz domestic availability of sugar. Moreover, given trends observed during last several seasons, crushing is expected to continue at least well into May 2019. Moreover, despite overall decline, at 68 million tons, sugarcane crop this season remains in excess of domestic requirement.
Yet, if March-19 CPI numbers are any guide, average retail price of sugar has inched up by 19.13 percent on annual basis. This is surprising on two accounts. For one, sugar stocks in the country remain high as export volume has remained poor at only 127,487 tons (till Feb-19) since export quota of 1.1 million tons was announced late last year.
Two, if daily commodity rates from Lahore Akbari Mandi are any guide, retail prices have picked up at a time when sugar crushing season is at its peak; historically, month-on-month sugar prices are at their lowest once crushing season kicks in. Moreover, day-to-day upward swing in sugar prices seems to be showing no signs of abatement either.
Add to this, news published in this newspaper on April 4, 2019, noting that the Punjab government has asked federal to constitute a ban on sugar export without delay.
This is a cause of concern because peak sugar consumption is just around the corner, with Ramazan and summers perfectly overlapping this year. Even by industry’s own estimates, which in November-18 projected production to be down by 18 percent on annual basis, the country should record supply in excess by over 30 percent – even when accounting for the overly-optimistic case where export quota is utilized in full.
The best explanation for the persistent inching forward of sugar retail prices then seems to be the general inflationary outlook, which is feeding into retail prices despite any shift in supply side dynamics.