The only real option for the government, growers, and millers is to quit quibbling over short-term pricing issues and develop a concerted strategy to export sugar
As a tactic, the latest salvo by sugar mill owners in Sindh delivered: it was unexpected, inexplicable and has rightly confused enemy troops. Unfortunately, there seems little coherent strategy behind this move to stop sugar production for an indefinite period.
The millers insist that they’ve consistently been racking up losses since the price of sugar does not defray the costs of producing it. As such, their demand is straightforward enough: reduce the sugarcane support price or subsidise production costs. Their reasoning, however, leaves a lot more to be desired.
In the last few years, inflation and high energy costs have bolstered input costs across the country, a situation further exacerbated by floods. Further, say growers, millers do not factor in the price of sugarcane by-products -- molasses and bagasse, primarily -- in support price negotiations. Accordingly, agricultural lobbies inside and outside the federal and provincial legislatures -- led by the Punjab -- arm-twisted higher support price commitments from the government. But while the support price is strictly adhered to across the Punjab, the politics of Sindh prevents a similar outcome in the province.
Punjab, for example, has been implementing the Rs180/40 kilogram rate for sugarcane with some millers paying over and above the support price for premium quality crop. In Sindh, however, the politically well-connected millers kept the support price at lower levels: for 2014, the rate was maintained at the 2013 levels of Rs172/40 kilograms.
In November 2014, the Sindh growers managed to wangle a rate commitment of Rs182/40 kilograms from the government for the year 2015. However, when the millers erupted in fury, the government backtracked swiftly and without checking with the growers, announced a rate of Rs155/40 kilograms.
The situation rapidly created a political stink. Among the first murmurs to arise was that former president Asif Ali Zardari was the beneficial owner of seven or eight sugar mills and was using his clout to deflate the support price. The growers, meanwhile, were furious at the government’s high-handedness and insisted that the commitment made to them be honoured.
But the clincher was actually the intervention by the Punjab: worried that cheaper sugarcane from Sindh would flood their market, growers in the Punjab lobbied the federal government to get the Sindh government to play fair.Thus trapped, the Sindh government agreed to stand by the Rs182/40 kg rate for 2015 but, on the ground, the millers continued to get sugarcane between Rs150/40 kg and Rs155/40 kg rates.
Even so, they’ve continued insisting that their cost of production comes to an average of Rs60 per kg while the selling price works out to something in the range of Rs49 per kg. To top it all, given the high production costs in Pakistan, prices in the global market prevent the export of sugar as a viable business.
Current prices hover in the $390 per ton range while would-be exporters from Pakistan say they’d need $480 per ton at the very minimum. While the government has now announced an export subsidy of Rs10 per ton, those in the trade say it is too little. India, for example, offers a $55 per ton subsidy to its exporters. And, to top it all, India has also set aside INR 600 to provide easy mark-up loans to potential exporters.
And this is why the Pakistani millers are now pressuring the government to either concede on the support price or to offer a subsidy on production.
However, those familiar with the dynamics of the local market say that the circumstances did not merit this show of force by the millers in Sindh, not now at least. At the time crushing began in November 2014, the millers were sitting on a surplus of one million tons of sugar. Further, a bumper crop of 5.7 million tons is expected in 2015 while domestic demand hovers between just 4.6 million and 4.7 million tons. By next year this time, say these analysts, the industry will be flush with some two million tons of sugar. Finally, and most tellingly, the ‘sugar crisis’ seems to have hit Sindh only, further casting shadows over its authenticity.
Given that the domestic demand for sugar is mostly static, the only real option for the government, growers, and millers alike is to quit quibbling over short-term pricing issues and develop a concerted strategy to export sugar.
But those aware of the workings of the international markets say that a lot of work will need to be done on this front. First, Pakistan is not a regular on the sugar export market and to create an inroad, it will first need to compete on price.
Second, while the government has okayed export of 6.5 million tons, this window for exports is available for two brief periods: before the commencement of the crushing season at home and for a short while after its conclusion. In order to effectively utilise this facility, potential exporters will have to do their homework -- the letters of credit, the requisite correspondence with the State Bank of Pakistan, etc -- ahead of time.
Finally, growers will also need to do their bit to improve their product, as the growers in southern Punjab have done. The recovery rate -- the amount of sugar extracted per unit of sugarcane -- varies according to the sugar content available in the sugarcane. While Sindh has recovery rates close to 9.7 per cent, Punjab’s were lower. Now, however, while central Punjab still has recovery rates between seven per cent and nine per cent, southern Punjab is boasting rates between 10 per cent and 11 per cent. And the reason for this is the fact that growers there have worked extensively on seed development.
As the recovery rates improve, obviously per unit cost of producing sugar will decline. And this decline will help Pakistan secure a foothold in the international commodities market.
For now, however, the pressure mounted by the agricultural lobbies have left the government between a rock and a very hard place, that too at a time the demands on its purse are many and its funds are low.