Some images become etched in memory. One such memory for many Pakistanis growing up in the cable TV era may be an image of TV legend Anwar Maqsood. Back in 2005, smack in the middle of a sugar shortage that saw retail price kiss the peak of fifty-five rupees, the legendary writer came on air as part of a PSA, declaring availability of sugar at Rs25kg from discounted utility stores.
As the upward spiral in prices this summer reminded us, that was neither the first nor the last shortage of the sweetener in this country. Yet, the 2005-06 crises may have proven to be most momentous. While the milling industry forever remains in- and out- of news cycle for its political influence, that crisis reshaped the industry in a possibly irreversible way.
Before the crisis, the industry – particularly in Punjab – was already saturated with 38 units across the province with a combined production capacity of 2.5 million tons, representing 55 percent of total domestic demand at the time. Given the excess capacity in the sector, this forced ruling party of the day to instate a ban on establishment of any new sugar mills in the province, ostensibly as it also had financial interests in several mills located in central Punjab.
Fast forward to Musharraf-Aziz era and its push for economic revival of industries. By late 2002, the ban was partially lifted. However, all southern Punjab districts and Sahiwal division were classified as “negative areas” for establishment of new sugar mills, to ensure that cotton cultivation may not be substituted by sugarcane as a result of setting up of crushing units in the region.
Nevertheless, a mix of both demand and supply side gaps soon brought things to a head. On one hand, industry’s forward linkages with FMCG segment, rising income levels thanks to healthy economic activity during mid-2000s, and high population growth rate, together pushed demand for sugar to grow over four percent annual CAGR basis during 2002-06. On the supply side, poor sucrose recovery made sure that despite under-utilized capacity, sugar output remained insufficient.
And so, at the height of the crisis in July 2005, Punjab government through a special notification removed the caveat of negative areas. Licenses for several new units along with expansion of existing ones were approved during this time, until in December following year, the provincial government reinstated a blanket ban on any expansion or new investment in the sector that continues to this day.
Unlike previous cycles of expansion, the 2005-08 period was special in ways more than one. Instead of several small- and medium-sized units mushrooming across the length and breadth of the province as happened in the 1990s, the sector saw few very large investments focused primarily in one region alone: Rahim Yar Khan District of Bahawalpur division. By 2008, capacity installed in the RYK district had grown a whopping eight times as a result of investment by new entrants!
Although the central Punjab region also saw capacity increase to double its 2002 size, it also saw twice as many new units compared to erstwhile ‘negative areas’, resulting in further fragmentation of an already tightly fought market.
Unlike Faisalabad and Sargodha which are well-integrated with the urban and peri-urban markets and industrial clusters, southern Punjab, specifically Rahim Yar Khan District does not boast similar proximity to major commercial buyers such as FMCG and beverage industry. Yet, the region’s sucrose yield is on average two percentage points higher than for cane grown in Faisalabad district. The higher yield more than makes up for any disadvantage caused due to added distance from major consumption centres.
Why is the context important? Because the so-called negative areas today host close to 45 percent of total installed capacity in the province. As they are home to only 16 units, optics suggest that the southern Punjab units produce just enough output to service regional demand. Nothing could be farther from the truth.
In fact, estimated at average industry operating days, these ‘handful’ 16 units put together can service more than half of the entire domestic demand. And it’s not another case of idle capacity resulting from ambitious expansions at the height of business cycles.
Prior to last expansion, the southern Punjab districts – in particular Bahawalpur division – contributed no more than one-third of cane cultivation for the province, at just 60 thousand hectares. Within three years of ban relaxation and putting up of new units, sugarcane cultivation grew two-folds. And by 2017, it’s almost reached two-hundred thousand hectares (refer Fig 1-a to 1c).
This may not be the first time when impetus from industrial units incentivized growers to switch over to a substitute cash crop, although arguably one that makes poorer contribution to value-add export chain compared to cotton.
The edifice of millers’ argument that farmers must enjoy the freedom to deploy their resources to grow crops of own preference rests purely on right to freedom of trade & enterprise. Yet, the market for sugarcane is anything but.
Last two years saw flurry of civil suits when frustrated by diminishing supply of sugarcane in central Punjab, a group of millers tried to circumvent the ‘no new mills’ clause by applying for relocation of mills to southern region. In response, the now-thriving units of southern belt petitioned that not only the law had been flouted, but also the future of ‘cotton growers’ of the region was at stake if sugar milling capacity were allowed to be increased.
While the petitioners’ argument was upheld, the relocated mills were later instructed to temporarily begin crushing when the existing large units failed to timely procure all cane produced in the region despite assurances to court.
The stark reality is that all sides in the milling industry have tinkered with the rules to their benefit when the opportunity arises. However, the Sadiqabad-Deharki provincial boundary region stands out as it is now home to more than two-thirds of installed capacity in an industry utilizing less than half of total capacity even in bumper years by some estimates. Most of the mills in the region are concentrated with two to three groups, with one sponsor owning at least six units.
Geography, as in all agri-based businesses, remains key to the milling sector. Last year, when a group sought to liquidate its interests in sugar milling by selling of its assets (one unit each in southern and central regions), the southern unit was sold within a quarter, while the latter remains on the market despite eighteen months passing. The discounted price tag at which another unit from centre was sold this June reflects that crop dynamics in the region may have changed irreparably.
This is not a plea for zoning; in fact, the opposite. The industry needs to be set free: not only from the shackles of support price that creates preference for one cash crop over other (in absence of demand or competitiveness in export), but also from geographic restrictions that permit only selective players to benefit from high-sucrose yielding variety. Geography and proximity to source of raw material are key determinants of competitiveness. Is it a free market if competitors do not have equitable access to raw material source of their choosing? By setting a support price, why encourage cultivation of cane in regions with poor sucrose content? In fact, why have the support price mechanism at all when it incentivizes farmers to grow cane that is produced in excess over cotton that’s in short supply?
If the purpose is to safeguard the growers’ financial interest, let the millers outbid each other for the high yielding sugarcane varieties, instead of setting indicative rates. Set the cane market free!
*Sources for Fig 1a thru 1c: Acreage: PBS, AMIS annual datasets; Capacity estimates: 150 days average industry crushing season as per PSMA. Capacity is stated in Tons Crushed per Day (TCD). Capacity as of FY18 determined based on following - for listed firms: company website and notes to financials; for non-listed/private-limited: company website, where available cross-checked against capacity officially declared with NEPRA; if neither available, then PSMA website last updated capacities as of Oct 24, 2014.
For FY02: F.O Licht World Sugar Yearbook 2002; For FY08: ICMAP Research – Capacity Utilization of Sugar Mills in SAARC countries. Proceedings referred: Writ Petition no. 37 of 2016, Lahore High Court; and news item on re-opening of mills, dated February 22, 2018.
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