An interview with Aslam Faruque, Chairman Pakistan Sugar Mills Association (PSMA)

Updated 23 Dec, 2019

'Price-fixing of cane monetizes inefficient agricultural practices'

Aslam Faruque is a renowned figure in local corporate world. He is the face of Ghulam Faruque Group which has commercial interests spanning cement, packaging, renewable energy, hydropower, engineering equipment, information systems, CNG, air conditioning, ethanol and biogas, and of course, sugar milling.

He is currently serving as CEO of Mirpurkhas Sugar Mills Limited, Unicol Limited, UniEnergy Limited and Mirpurkhas Energy Limited. He also serves on the Board of Directors of Greaves Airconditioning (Pvt) Limited and Greaves Engineering Services (Pvt) Limited.

Beyond his engagements with GFG group entities, he has also served on the Central Executive Committee of Pakistan Sugar Mills Association for past several years and is currently serving as the association’s pan-Pakistan chairman.

In the past, he has also served as the Chairman PSMA – Sindh Zone, and Director, Sui Southern Gas Company Limited, State Life Insurance Corporation of Pakistan, and Pakistan Industrial Development Corporation (PIDC).

BR Research sat down with Aslam Faruque in Karachi in his capacity as PSMA-chair to understand industry’s official position on support price, trade policy, export competitiveness, government support in the form of subsidy, retail price control, and environmental impact of sugarcane. The meeting was joined by Ahmed Ebrahim Hashim, Director Mehran Sugar Mills; and Dr. Tara Chand Essarani, CEO Sindh Abadgar Sugar Mills Limited. Following are the edited excerpts of the conversation:

BR Research: Let’s start with the demand side. What does the sector-wise distribution of domestic sugar consumption pie look like?

Aslam Faruque: Twenty five percent of total annual domestic offtake of 5.4 million tons is consumed by households; whereas the lion’s share goes to industry.

BRR: When you say industry, does that include commercial consumers such as mithai, bakeries and others in SME segment?

AF: Yes. The seventy-five percent includes every user for commercial purpose whether it is halwai, biscuit and confectionary manufacturers, pharmaceuticals, among others.

Here I would like to point out that the industry largely follows a seventy-thirty rule when it comes to commercial versus household consumption share. There has been no formal survey or study conducted, as such. But the number is derived from market intelligence based on information from the value-chain: distributors, wholesalers and institutional customers.

BRR: If the primary buyer of the commodity is non-essential industrial users, why is retail price of sugar such an emotive issue?

AF: That is exactly our point. If the government wishes to subsidize, regulate or control the price of sugar in any way, it is in the right to do so but only so far as domestic household consumers are concerned. Any blanket control over price will only distort the market to the benefit of industrial consumers, at the expense of millers. Why should one profit-motive enterprise profit at the expense of other?

BRR: You mentioned institutional customers. Are B2B sales made directly or through brokers?

AF: Distribution channel with B2B buyers consists of direct sales as well as through brokers. Large corporations buy from mills on monthly price terms or even longer contracts, whereas small processors usually take the broker route as the are able to secure flexible quantities and credit terms. Most mills sell their product on cash terms.

I would like to add that some mills do not prefer direct sales to institutional customers, as many B2B buyers seek fixed rate for the entire year. Moreover, since we are dealing with a commodity, contractual sales are the easiest way to encourage price-wars, as mills are forced to undercut each other in order to secure large contracts.

Thus, many mills find it preferable to sell through brokers as price-volatility can then be taken advantage of based on demand-supply outlook.

BRR: Does lack of direct institutional sales and statistics thereof not contribute to the ‘alleged’ misinformation that has plagued the industry?

AF: I agree. In the long term if the industry is to mature, it needs to undergo some fundamental changes. That would also include mandating direct institutional sales, so that commercial consumption of sugar can be better understood.

Price of sugar and sugarcane has lost all correlation in recent years. In the past, the ratio between retail price of sugar and minimum support price for sugarcane was close to 48:100 (one kg of sugar to one maund of sugarcane). Today this has come down to 36-37 percent due to unabated increases in support price.

The sugar industry has made several presentations to stakeholders including the relevant ministries, policymakers, bankers and the industry. We are the third-largest exporting group after textile and rice, and the export potential is several times the existing level!

Unfortunately, the industry is plagued with archaic regulation from 1950s and before: whether it is minimum support price or mandatory crushing. Why should there be any support price on cane? Traditional crops with no price control such as rice or cotton have generated healthy exportable surpluses for the country. The price of cane should be set free in the same fashion.

BRR: But there appears to be fear among some millers that if support price is removed completely, it may result in drastic reduction in acreage leading to cane shortage in some regions. Do you agree that growers may shift to competing crops in absence of minimum price guarantee?

AF: Here is the misnomer: cotton and cane do not compete. If you look at official statistics from Economic Survey, the average one million hectares acreage of sugarcane has nothing to do with cotton. Cane area has remained consistent over the years, indicating that output has primarily grown as a result of increase in yields and not due to acreage.

If you analyse the numbers, maize has eaten into lost cotton acres, as it has gained closed to four hundred thousand hectares of area under cultivation between FY03 to FY19, almost equal to the reduction in cotton area. Acreage under cane on the other hand has remained intact; growth in cane output during the period has primarily come on the back of higher yield.

We make this point not to blame maize or any other competing crop for cotton’s demise. Growers have lost interest in cotton due to poor returns. Farmers who used to achieve 35 maunds per acre in previous years have only managed to achieve 4-8 maunds in the ongoing season. Cotton’s challenge is due to climate change and poor seed varieties, and I fear that in the next season few farmers may be interested in planting cotton at all.

BRR: The overarching trends that you draw are correct. But the traditional cotton growing districts of southern Punjab (in Bahawalpur and DG Khan divisions) saw cane acreage grow by over three times in the last fifteen years.

AF: Let me stop you right there. The “traditional cotton districts” you refer to are not a legal concept. Should growers not have a right to switch between crops based on farm economics and financial returns? We cannot remain stuck in “tradition”; after all, the farmer is king and entitled to grow crops of his own choosing.

Moreover, the southern Punjab region is not best-suited for cotton only, it is the region where most traditional crops - whether cotton, cane or maize – give the highest yield and top quality due to soil fertility and optimal climatic conditions.

This season when sugarcane acreage recorded a retreat in southern Punjab, growers switched back to cotton due to improved demand outlook. But as I said previously, the atmospheric conditions and changing climate patterns have yielded a very poor cotton crop, and farming community is reeling under losses.

In addition, sugar mills in southern Punjab have become very efficient in their production processes, which allows them to make timely payment to farmers. This has made sugarcane a very lucrative crop in the region.

BRR: The southern Punjab region also saw four times increase in cane crushing capacity during this period. What has led to the mushroom growth of mills in this region?

AF: The regions of northern Sindh and southern Punjab has seen a switch to sugarcane mostly due to high crop yield. This is helped by optimal geographic conditions - cultivable land is close to rivers and has preferable climatic conditions such as sandy soils. As a result, the region produces 35 to 40 percent of total domestic sugarcane and sugar output.

And as I pointed out earlier, the healthy business relationship and direct connectivity between miller and growers in the region has yielded positive results leading to increase in cane plantation.

BRR: But sugarcane produced in that region also has higher sucrose content on average compared to other regions such as central Punjab and KP. Has higher recovery level not played a role?

AF: Not from the farmer’s perspective, because price of sugarcane is not linked to its sucrose content, but to its weight. Thus, it is of little concern to grower whether the sucrose content of his produce is higher or lower. His farm revenue is based on crop tonnage, which is maximized if the yield is higher.

However, it has played an indirect role. Higher recoveries have allowed mills in the region to make timely payments at the notified rate. Which in turn encourages cane plantation.

Millers benefit if they provide growers with high quality seed-variety. Interestingly, varieties growth in the region give good farm as well as factory yields.

BRR: Why does a high degree of variation exist between region-wise sucrose recovery levels?

AF: If we go back 15-20 years, southern Sindh consisting of Thatta, Badin and TM Khan districts had the highest sucrose recovery levels due to suitable atmospheric conditions, and favourable temperatures. Over time, the optimal climate pattern has shifted to the Rahim Yar Khan and Ghotki area.

Sugarcane has two optimal plantation seasons, based on optimal weather. Crop is sown in southern Punjab and Sindh beginning September due to temperate weather – 25C to 30C - in these regions at the time. The September crop in turn also gives higher yield and higher sucrose content, as it enjoys favourable temperatures to reach maturity for a longer stretch of time.

In contrast, September and onwards is foggy season in central Punjab, thus plantation in the region begins in February or later. In turn, crop in central Punjab has shorter period to reach maturity, and lower average temperatures. As a result, the crop in southern belt gives better results compared to that in north.

BRR: The impression in public sphere - especially among heavyweights in policymaking - is that sugarcane is a political crop and its cultivation in Pakistan makes ‘no economic sense’. If cane cultivation is purely driven by farm economics, why has the negative perception persisted?

AF: That is for the critics to answer. All I can tell you is that sugarcane is the only crop that growers treat as ‘cash’, a natural hedge against vagaries of nature. During the floods of 2010 when all other seasonal crops failed, cane crop stood tall in standing water for over six weeks.

When all else fails, sugarcane serves as farmers’ insurance. It is a defensive crop which is important for every farm portfolio. Its harvested leaves are also used as fodder for livestock and the fact that it cannot intercrop with onion is also a huge advantage.

BRR: Price of sugarcane cannot be linked to international market because it is not a tradable commodity unlike rice or cotton. If the price of sugarcane were to be set by market forces, what factors other than cost of inputs and opportunity cost would determine its price?

AF: Before I answer that, understand that under the existing mechanism, minimum price of sugarcane is set after monetizing the inefficiencies in agriculture.

The cost of production calculated by governmental bodies are based on inefficient application of inputs, whether it is irrigated water, fertilizer, or other expenses. This then is used to calculate cost of production against average and not optimal yield.

It must be emphasized that better yields in recent years is a result of mills investing in seed variety and demonstrating to growers the optimal potential in tandem with efficient agricultural practices. Sadly, kamdaars still manage to bungle the effort by crossing between varieties, as a result of which optimal varieties are lost over subsequent generations.

Because a large percentage of cultivable land in the country is leased, it is interpreted to mean that cost of production estimate must take into account cost of lease, which further distorts the support price level.

BRR: But land-use whether leased or owned has an opportunity cost. Why should rent payment not be reflected in cost of production?

AF: Sure. But that theoretical rent needs to be realistic. The land rent cannot be calculated at 20 or 25 percent of asset value!

And this takes us to a more important point. If growers are entitled to the opportunity cost of their land-use, are millers not entitled to demanding an opportunity cost of putting up a five billion rupees worth project? Which other industry has operated on an average ROE of under five percent or gross margin less than ten percent for the better part of last decade?

BRR: How else should a fair price of sugar be decided that is acceptable to both growers and millers?

AF: In the 17 out of last 20 years, millers have paid a higher rate to growers compared to the notified price. The challenges witnessed with price-setting and delays in payment have only taken place in the last three years, when a glut was recorded in global sugar supply.

Setting the context straight here is very important. Back in 2016-17 when price of sugar had averaged over $550 per ton, the domestic notified price was also revised upwards in tandem. As a result, cane production grew from 65 to 75 million tons (and 83 million tons the year after due to ratoon crop).

By the time crushing began, price in the international commodity market crashed, finally setting in under $330 per ton by mid-2018. The country sat at 8 million tons of sugar supply against domestic demand of 5.4 million tons.

In a free market, sugarcane should also have been priced downwards in tandem with price of sugar. But that did not happen, because our provincial lobbies do not have the will nor capacity to reduce cane price.

In the last sixty years, minimum price of sugarcane has not ever seen a downward revision. Yet it is alleged that sugar mills are owned by political families. If that is true, why have millers not been able to secure a reduction in notified price even once?

Until ten years ago, wheat and sugarcane support price were at a multiple of 10x – when wheat price was at Rs600 per maund, sugarcane traded at Rs60 – which has since declined substantively due to preferential increases in notified price of cane. That is no ordinary trend. Instead of politicizing the industry, this is what the policymakers should focus on.

Sadly, the association with political families in popular imagination leads to a policy inertia, as subsequent governments have dithered from policymaking for the industry.

BRR: Are you making an argument that a substantive number of sugar mills are not owned by families with political affiliations?

AF: No, I am turning the argument on its head. The 80 odd milling units are owned by 50 – 60 distinct groups/families, few of which may have political affiliation. But when it comes to price-setting of sugarcane, authorities find it easier to unfairly treat these fifty people than to antagonize thousands of farming families that grow sugarcane. This explains why price of sugarcane is never revised downwards.

BRR: In private conversations some millers admit that other players in the industry short-change farmers by paying far less than the notified rate?

AF: It is an industry with 50 – 60 distinct players, and it cannot be claimed that all operate in a similar fashion. Moreover, understand that when there is a shortage of sugarcane, everyone wants to pay the notified rate.

But the economics of milling cannot be ignored. Some mills are operating at 11.5 percent recovery and 24,000tons capacity (tons crushed per day) whereas other players in the same industry are operating at 8.5 percent recovery with a capacity of 4,000TCD. The smaller player is caught between the devil and the deep blue sea – that is, his only choices are to incur a loss by paying a notified rate or simply go out of business.

Moreover, it is incorrect to assume that all cane growers are small landholders. In fact, in southern Punjab and Sindh where average land size is larger, growers include many jagirdars, local politicians, even bureaucrats and members of police service.

Any miller who dawdles in timely payment or pays less than notified rate would be served a legal notice pronto. The problem you allude to probably infects no more than seven percent of cane area out of one million hectares. Yet when such news makes it to the media it is as if the issue is endemic to the whole industry.

BRR: Assuming that the smaller players have recovered the payback on project cost in preceding years and crushing being a seasonal hundred days business anyway, mills are free not to operate if the economics are not reasonable.

AF: That is incorrect. The Sugarcane Act instructs that a miller must begin crushing as soon as the government notifies the crushing period and continue crushing until the last cane in the mill’s home region has been sold by a willing buyer at no less than the government notified rate. If the miller fails to meet any of these conditions, the cane commissioner can exercise his prerogative and issue arrest warrants of mill owners.

BRR: The picture you have presented makes it appear as if subsequent governments have followed anti-sugar milling industry policy. Yet delayed payment against cane procurement became an endemic problem circa 2017, in response to which the last government announced the largest export subsidy (after textile) to ease the liquidity problem faced by millers. Competing crops such as rice or maize that also produce exportable surplus enjoy no such benefits.

AF: But the lack of export policy is precisely why we got here in the first place! Since 2011, the country has been producing sugar in excess of domestic requirement. Despite these surpluses, no substantial quotas for exports were announced, leading to an inventory pile up with every subsequent season.

Mills operate for four months on average and then carry the inventory for the remainder eight months. The cost of carrying inventory coupled with financial charges led to the liquidity crisis. On top of that, the notified price was increased in 2017 which brought matters to a breaking point. That’s when subsidy on export was announced, even though it was a completely avoidable outcome.

BRR: How could the competing objectives of timely crushing, timely payment to growers, and easing inventory pile-up be avoided at a time when global sugar prices had bottomed-out?

AF: Back in 2016 price of sugar in international market was over $550 per ton. At that time, the industry had two million tons of opening stock that could have been exported without any support from the government. But the commerce minister at the time refused to allow exports as he feared inadvertently creating a shortage in domestic market. Later, once the global prices crashed, the government had to announce a subsidy in face of farmer protests when millers refused to begin crushing.

And let’s not forget that most ‘beneficiary’ mills are sitting on a subsidy-payable with an aging over one year now. In contrast, millers are required to pay farmers within 14 days or court arrest. Yet we are repeatedly told it is a subsidy for millers not farmers.

BRR: What are the contours of a policy the industry is seeking from the government? Is there consensus within industry on the major talking points?

AF: Government protections do not exist for any industry’s benefit, but to protect the feedstock producer which in this case is farmer.

If the government wishes to fix the cane price, then the ex-factory price of sugar should be fixed with the same 25 percent ROE built-in as it is in calculation of minimum cane price. Otherwise, the price of cane should be set free along with retail price of sugar.

Second, give the industry competing space in export market, and we will give you the world! The government should stop regulating export quotas and allow sugar export just as it does in case of other primary commodities such as rice or cotton. Afterall, there are no restrictions on cotton export despite Pakistan being a net importer.

Third, on the import side, the industry should enjoy same tariffs as do other industries such as automotive or steel rolling mills. We do not seek to ban imports, but at the same time don’t wish to be put out of business by countries with lower cost of production due to more favourable climate for cane plantation or higher yielding varieties.

Pakistan has the one of the highest sales tax rates on domestic retail price of sugar and has the lowest retail price of white sugar compared to other major sugar producing nations. For 18 months during 2017-18 when white sugar was retailing close to Rs 48-52 per kg, the government insisted on collecting GST at Rs 60 per kg from the millers.

This year, the Punjab government has notified retail price ceiling at Rs 70 per kg which has no basis in supply-demand dynamics. To insist that any government past or present has operated on an industry-friendly policy is an unfortunate misnomer.

BRR: Are there any technological constraints that do not allow domestic mills to produce ethanol directly from raw sugar juice instead of producing it from by-product molasses?

AF: Pakistan has one of the most efficient sugar milling units in the world. To put up a plant that processes raw sugar juice directly into ethanol is no big deal. The problem, however, comes back to price of sugarcane.

The price of sugarcane in Brazil is so cheap that the country can choose to switch between ethanol or sugar based on global demand outlook. In Pakistan, the price of cane is inflated so high that sugarcane cannot be processed purely for export purposes. Domestic players do a great job at processing by-product molasses into ethanol and catering to export demand as a result.

BRR: If the cane price is left fully to market forces and settles around Rs 100 per 40kg - with cost of farming inputs as it is - what do you foresee will happen to domestic output?

AF: No miller who has set up a unit worth Rs 5 to 10 billion would try to fleece growers in one season. He may successfully pull it off once or even twice because the grower must offload his crop, but beyond that, farmers will simply switch to competing crops.

Entrepreneurs with billions tied in project investment plan long-term. In the ongoing season when there is a shortage, the commercial cane rate in Sindh is trading at Rs 210-220 per 40kg whereas mills are procuring crop on cash payment. That’s because retail price has also increased in tandem, so millers do not have to worry about inventory pile up.

Problem only arises when support price is set too high, which creates a glut, leading to depressed domestic retail price with no export policy.

BRR: How does the industry respond to the perception that sugarcane has a very high water delta and is ill-suited to arid countries such as Pakistan with intermittent water shortage?

AF: First, sugarcane is an annual crop compared to cotton-wheat, rice-wheat, or maize-wheat combinations. Thus, comparison of its absolute water delta with other crops is misleading. The cumulative water delta of crops sown in both seasons should be compared against sugarcane, and any policymaking decision be based on economic value-add of the two mutually exclusive set of choices.

Furthermore, water footprint should be analysed from the perspective of requirement per kg of output. Value-addition in cotton requires application and consumption of water at every subsequent stage: ginning, spinning and weaving. On the other hand, water requirement of mills is fulfilled from water extracted from cane.

That water is then turned into steam that is used to produce electricity. Most efficient mills use zero electricity from the grid, unlike other industries that operate on imported RFO or RLNG based grid electricity – with its added carbon footprint and burden on import bill.

Even the ethanol distilleries operate on bagasse- and molasses-waste powered electricity, with its $500 million contribution to countries export. Which industry then is more efficient?

BRR: In absence of any private sector research and negligible government sponsored effort for development of sugarcane varieties, do you believe the industry can remain competitive in the export market given current (and increasing) differential in sucrose recovery rates compared to other major producing countries?

AF: A small percentage of revenue from every sugar mill should be allocated for funding of research and development of high-yielding cane varieties. If the industry believes in long-term survival it will have to take its recovery levels up to 13 percent, which are easily achieved elsewhere.

This has become ever more important given the water shortage; joint public-private efforts should focus on developing drought resistant varieties, so that yield is not affected due to depleting water.

Currently, poor-yielding varieties are a major bottleneck, which is why competing area under cane versus cotton becomes such a bane. Imagine that even the corporate farms are not able to achieve recovery levels significantly higher than regional average, because the varieties are so mediocre.

New varieties need to be brought in from countries such as Australia and be used to develop hybrids suited to domestic environment. A private sector fund set under the auspices of Pakistan Sugar Mills Association can be tasked to develop these varieties.

Those who insist that Pakistan should have no domestic sugar industry should consider this: the seventy units combined have put together an investment of no less than $3 billion in plant and equipment. Either the country can decide to sell those units at scrap value, or double down by spending money on research, improving yields, produce exportable surplus of both sugar and ethanol, with a 2,000MW indigenous electricity generation potential.

Copyright Business Recorder, 2019

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