Wednesday January 19, 2022

The sugar crisis

May 30, 2020

In recent weeks, I have followed with great interest stories about the disappearance of flour and sugar from the market and the surge in their prices.

In the case of sugar, apparently it was allowed to be exported with a subsidy at a time when there was a shortfall in output to meet the domestic demand. The exporters obviously made a killing in the market thanks to the export subsidy and the devalued rupee. But the sugar problem is far more serious than what has appeared in the press so far.

The structure of production of sugarcane and sugar in Pakistan has been a drain on society since at least the mid-1970s. I recall a research study I did some thirty-five years ago – it was published in Food Policy (Vol 11, Issue 3, August 1986, pp 253-258).

According to my estimates then, there was a high private return on investment in sugar, but the industry was not profitable for society. I found that, given the disparity between the domestic and international prices, there was a welfare loss of Rs5.48 billion (in 1986 prices), but producers made about Rs2.36 billion in profits and the government gained Rs321 million in revenue. I also estimated that about one-third of the sugarcane area could have been used for other crops.

My conclusion was that Pakistan should focus on increasing the yield level and the sucrose recovery rate at the same reducing the area given to sugarcane. In the meantime, Pakistan would have been better off importing sugar than producing it at home at a much higher cost.

The situation today seems not much different. First a few facts about the sugarcane grown in Pakistan. Pakistan produces 20 to 30 percent less sugarcane per hectare than the average reported for other countries. Second, the varieties of sugarcane grown in Pakistan have a 15-20 percent lower sucrose recovery rate than in the major sugarcane-producing countries.

Third, sugarcane uses a lot more water per hectare than any of its competing crops and it occupies the land area for a longer period in the year. Fourth, for the farmer, it is a far more profitable crop than its competitor, thanks to the price support and subsidies on inputs (water in particular). Fifth, the average price received by the sugarcane grower is higher than the international price by a significant margin while there has been no significant increase in the output of sugarcane per hectare. (On the other hand, the competitive crops have shown increased yield levels and their domestic price has not been higher than the international price.)

In light of these facts, Pakistan would be far better off by reducing the land area used for sugarcane. The focus should be on improving the yield level and the sucrose recovery rate and on reducing the price subsidy going to the growers.

In the sugar-making industry, government support to the owners of nearly 91 sugar mills comes in many forms, including cheap bank loans, subsidised import of equipment, zoning of mills for sugarcane, and a guaranteed return on equity. The mill-zoning system gives to each mill a monopoly to receive the cane grown within the zone. This deprives the grower from choosing a mill for fair price and convenience. In fact, the cane growers are dependent on the mill owners for loans, inputs, and extension services.

The result of all this is that mill owners make a hefty profit, the government acquires substantial revenue in taxes, but the consumer ends up paying a price significantly higher than the international price of sugar. Considering the welfare loss to society, the government should discourage the production of sugarcane in the country, particularly in Khyber Pakhtunkhwa and parts of Punjab, and allow import of sugar to compete with domestic producers.

The government should reduce the tax burden on domestic sugar – which in any case falls on the consumer – and use a flexible tax regime on the export and import of sugar. It should remove the sugarcane zoning requirements and reduce the availability of cheap bank loans and other subsidies to the mill owners. There is no reason to grant new licences for mills and a guaranteed return on equity. The need is to promote efficiency in the production of sugar and price stability in the market.

As a short-term policy measure, the government should liberalise the import of sugar. This will soften the domestic market and provide competition to the local producers, helping them to become better users of the country's resources. Imported sugar at the world market price could be sold with an import tax as a source of revenue to the government as long as the selling price is somewhat lower than the domestic producer price.

A policy of liberalised import, with duty on the imported sugar, would allow the government to reduce the current high tax on domestic sugar, and hence benefit both producers and consumers of sugar in Pakistan. In the long run, public policy should aim at reducing the area used for sugarcane, increased productivity – which means higher output per hectare and higher sucrose recovery rate, reduced dependence on subsidised inputs (water in particular) and a support-price regime in line with the border price.

Along with this policy, the government should dismantle the zoning system for sugar mills, make the licencing system competitive, limit access to cheap loans, and give no guarantee of return on equity to the mill owner, but create market conditions that give a fair return on investment. Frankly, for too long have consumers of sugar been held hostage by sugarcane growers and owners of sugar mills. It’s time the government came to the rescue of these hostages.

One last point for consumers to ponder: too much sugar and salt is not good for anybody's health. Governments should help people learn to consume less of both.

The writer is professor emeritus, Simon Fraser University, Canada.