All the guns have been directed by the analysts, commentators, mediamen and officials etc against the national sugar industry, accusing it as solely responsible for the recent rise in sugar prices. The aim appears, by and large, to protect the consumers' interest.
The sugar industry is not against it, provided it is ensured the supply of sugarcane at a reasonable price. The stakeholders in sugar sector are sugarcane farmers, the industry, government, trade and consumers. It is a chain, in which one player cannot dictate its terms and not at all the sugar industry. Besides this, it would be better to know the key factors influencing the sugar price trend in a given situation.
Eight dominant features are being explained with an objective to bring an end to the on-going blame game in which the sugar industry alone is being made responsible for increase in the sugar prices.
The sugar industry is seasonal and belongs to the processing segment. Its production operations are restricted to three/four months in Pakistan. It leaves insignificant scope for higher production in the prevalent situation of no limit to higher sugarcane price, taking into consideration the clamour to contain sugar prices.
Sugar supplies tend to spread over a year by inelastic demand of the commodity. This means the sugar industry should hold stocks for a longer duration than its production time spell. Inelastic sugar demand makes the supply factor to determine the price.
Sugarcane is produced in farms while sugar is processed in the factories. This adage clearly explains that sugar production primarily depends on the volume and quality of the sugarcane crop, besides supply chain making no time gap in between harvest and crushing of sugarcane. There is no substitute raw material for sugarcane as is the case with other industries. Raw sugar is simply a supplement.
Sugarcane on average forms 70%/75% of cost component in sugar production. Variable costs in all including taxes and levies, account for about 90% in sugar production. This leaves fractional economies for containing the cost of sugar production.
FACTORS CARRYING DEEP IMPACT ON SUGARCANE/SUGAR SEASON 2005-06:
(1) The sugarcane crop in the current of 2005-06 season, by a revised estimate, is short by about 13%, to 41(47) million tons and was lower by another 13% to 47(54) million tons in 2004-05 (2003-04) season. As a result, sugar production was bound to decline.
(2) Sugar production at 2.922 million tons in 2004-05 was one million tons below 3.997 million tons of 2003-04. Other things being the same, additional 13% fall in sugar production for the current 2005-06 season, it will be 2.540 million tons. This translates into 1.430 million tons fall in sugar production in the last two seasons.
(3) Seasonal-end sugar stocks were at 759,103 tons for 2002-03, 809,357 tons for 2003-04 and reduced to 670,617 tons in 2004-05. Sugar surplus for the past five years at a stretch seems to have infused a sense of complacency in the policy-makers about sugar production in the 2005-06 season.
(4) Sugarcane crushing season 2005-06 was not feasible to commence earlier on account of: (a) short-sized and unripe sugarcane crop at the beginning of November, (b) it coincided with the month of Ramadhan, (c) difficulties in mobilisation of work force and transport arising from the earthquake in the northern area etc.
(5) Menace of middlemen has increased in the sugarcane marketing, binding sugarcane fields to the sugar factories. The proverbial free-for-all has been witnessed in the sugarcane market over the years. This has fortified the role of the middlemen, escalating the sugarcane price with impunity and frequency.
The combining of these adverse factors at one and the same time was not the creation of the sugar industry. It fell a victim to unfavourable circumstances, being beyond its control. Being a process industry the sugar production remains linked with the cane crop volume, its quality and supply.
The sugar industry has a continuous process, beginning with cane crushing to sugar production packed in bags. This inbuilt mechanism implies operations at 70% capacity for each mill to churn out bagasse adequate to generate own cost-free power.
Working below 70% capacity needs supplementing bagasse shortfall by highly expensive furnace oil to generate power. This provides a long hand to the sugarcane suppliers to indulge in restricting normal supplies and heat up sugarcane price. In it the middlemen have hijacked the sugar industry, denying it a viable working.
WHOSE FAULT?: Sowing, cultivating, harvesting, development and qualitative improvement of the cane crop is the responsibility of the farmers. The sugar industry can play a supportive role in these pursuits.
This has been set off-track since 1988, by uncommitted supply of sugarcane, under a free market dictum. Dezoning during 1988 triggered this distrust. As a result, well-managed care of the sugarcane crop, varietal development etc have been disrupted and crop quality has declined over the years.
A sugarcane yield below 50 tons/hectare on the national level during the past many years proves. Similar has been the case of sugar recovery hovering at 8% plus upto 2002-03 and at about 9% during the past two years. The cane yield is estimated at 90 tons/hectares and the sugar recovery at 12/13%.
This is achievable by a proper policy and its firm follow-up. This can supply 90 million tons of sugarcane and produce 10 million of tons sugar. Absence of a sugar policy is the reason for the persisting rot.
Reduction in sugarcane crop and, therefore, sugar production has not been the events emerging recently. Storm was coming. Pakistan Sugar Mills Association pointed this to all concerned.
The crop size and quality estimation is government's job, being performed rarely well, as is evidenced in the glaring errors of almost all crops. The latest downward revision in the cane crop to 41 million tons was officially acknowledged on March 14, 2006, when the current season's sugarcane crushing come to an end. Earlier during August 2005, the crop size was estimated at 45 million tons while the target was set at 50 million tons.
Full-fledged commissionerates exist at the federal and the three provincial levels to take care of sugarcane crop. Punjab, Sindh and NWFP provinces have full-time Cane Commissioners, with supportive staff. Above it the Cane Commissioner functions at the federal level to monitor and report on the sugar situation.
Their functions are governed by obsolete Sugar Factories Control Act of 1950. Though it should envisage crop estimation, varietal approval and development etc, nothing of sort is being performed. The Agriculture Ministry at the federal and departments at the provincial levels are supported by extension staff to take care of the crops.
Paraphernalia is wider while the work seems casual, otherwise shortage of cane and sugar would not have been as serious as is being acutetly felt at present. Where the fault line lies and who is responsible for it?
PRICE RISE:
Four factors combined to escalate sugar prices:
1. Absence of a sugar policy, envisaging otherwise periodical consultations with the stakeholders, so as to prepare safe sales each season.
2. No timely realisation about shortage of sugarcane and, as such, of sugar.
3. No access to information about the sugar situation in the international markets and its impact on Pakistan.
Shortage of sugarcane inland and of sugar abroad, shooting up sugar prices in the international market.
Short sugarcane crop coincided with global shortage of sugar. This tempted the farmers to demand high price of sugarcane, linkage with landed cost of sugar imports. No formula of linkage between sugarcane and sugar price or vice-versa has ever been chalked out in our case.
However, when it comes to lower sugar prices in the world market, will the farmers accept the price in relation to it? Mandatory minimum sugarcane price is being notified by the three provincial governments but the sugar price is left without similar insulation.
The minimum cane price being notified by the provinces is at variance with the sugar price. This conflict creates an imbalance. This has persisted for a long time and is no more bearable. It has extensively damaged the sugar industry, especially of Sindh being sufferer of arbitrary pursuits.
Sugarcane continues to be the dominant component of sugar production cost. It was in the range of 71 to 75 percent during the preceding four years. For the current 2005-06 season, it is poised to be around 90 percent. The cost of sugar sales includes 15% sales tax on this sole food item.
The capacity of the sugar industry to manage the cost component is lower at 15/20%, due to processing, assets depreciation administrative, selling and financial expenses, etc. The current sugar price reflects an unprecedentedly high cane price on an average above Rs 90 per 40 kgs of sugarcane. This is the reason for increase in sugar prices.
The psyche of the farmers needs to be changed from making quick and more money by producing short crop to higher production for cost reduction. This can usher in socio-economic flourish. For this to be realised, dedicated efforts are required at policy framing and implementation levels, with focus on reduction in cost of the crops, by cutting prices of several inputs and better service to the agricultural sector.
STOCKS VIS-A-VIS HOARDING: It has been assumed that the sugar industry is involved in hoarding of sugar. It is a poor judgement by not differentiating between the normal stocks and hoarding. Being a seasonal industry of 16/20 weeks' working, production on average per month forms 30/25 percent of the total.
The sugar supply stretches for 12 months. It means an average lifting of sugar at eight percent a month. So, during the cane crushing season, stocks continue to pile up by 22/17 percent each month. At 16/20 weeks end of the season, the sugar stocks with the mills accumulate to 66/68 percent of the total output.
This calculation can be had by insight to short seasonal spell of sugar production and long annual sale. Not releasing supplies to the market is hoarding, which sugar industry cannot practise.
The sugar industry is required to pay to the growers against supplies within a fortnight. In shortage of crop, it is instant cashdown. The sugarcane price and other costs are paid at regular intervals, barring depreciation and financial charges. Such payments form 85% of the cost of sales.
This payment cycle leaves little in cash flows for financing inventory piling up during the season. Allegation of hoarding by the sugar industry is, therefore, a baseless charge.
'Investigation' by the Monopoly Control Authority lacks justification. At present, 73 mills are functional. On average each mill's market share comes to 1.37%. Some bigger capacity mills will hold two to 2.5% share of cane crushing and sugar production.
The Law of Monopoly Control in Pakistan describes monopoly on having one-third (33%) share of goods production and distribution and not less than 20% in the case of wholesale and retail trades. Note the difference between 33% share applicable for involvement of the MCA and the case of sugar mills having at best 2.5% share within the sugar industry. There is, therefore, no justification for 'investigation' by MCA into the sugar industry's working.
The analysis given above is meant to remove misunderstanding about the current sugar price phenomenon and candidly present a correct picture, particularly for those tarnishing the image of the sugar industry. There is no reason to malign and punish sugar industry for none of its fault.
The need is to broach the subject impartially in the light of the salient features governing the sugar industry, in the background of the cane crop and its significance, so that a sound judgement can be made and a strategy can be designed to pursue it.
The sugar industry, besides being a catalyst for rural socio-economic uplift, holds elaborate scope for a variety of value-added products. For its transformation into real engine of growth, more so of the rural sector, designing of a sugar policy is a prerequisite. It has never been in place. Emerging vacuum has created too many odds, inflicting uncertain trends and eventually derailment of the sugar industry.
SUGAR FACTORIES CONTROL ACT, 1950: The Sugar Factories Control Act 1950 is more than half a century old. It has lost relevance in the situation of short crop and high crushing capacity dominating for the past several years.
The Act is spread over 23 sections in five segments, being: Sections 1 to 3 - preamble and definitions; Sections 4 to 7 - structural; Sections 8 to 15 - functional; Sections 16 to 18 - procedural and Sections 19 to 23 - remedial. Its 8 to 15 sections of functional part are not operative since 1987 by removal of sugarcane supply system through area demarcation for each mill.
This system is in vogue in major cane-growing countries. Nonetheless, procedural and remedial sections are in use by the Authority to the extent of being misused. These relate to exercise of powers by the authorities which tend to result in creating problems for the sugar industry.
The cane and sugar are issues dealt at several official forums, by the Cane Commissioners under SFCA 1950, each administering it at variance on own convenience. Besides, the Federal Agriculture Ministry and Provincial Agriculture Departments often intervene.
The sugar import and export matters are dealt by the Ministry of Commerce, interacted by the Economic Advisor/s and Consultants representing the Federal Ministry of Finance. Multilateral interaction makes the management of sugar economy problematic. When, for what and how to interact are a dilemma and to seek remedy is an issue of conflict.
COMMENCEMENT OF SUGARCANE CRUSHING: An impression has been created that the sugar industry "delays" cane crushing, supposed to begin from October under the Sugar Factories Control Act, 1950. The Act, however, says "crushing season means the period beginning from 1st October in any year and ending on the 15th April."
This refers to a period and not a particular point (date). According to the provision, cane crushing must be carried between the given two dates that is not before 1st October and not to extend beyond 15th April. Business laws must carry inherent flexibility, selecting the best timings for ensuring economic viability.
The sugarcane recovery in October tends to be about five percent and improves steadily each successive month upto March as given in the following table:
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Season : 2004-05 2003-04 2002-03 2001-02 2000-01 1999-20
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Oct -- -- -- -- -- 5.14
Nov 6.65 6.01 4.35 6.59 7.06 7.64
Dec 9.13 8.25 7.09 8.29 8.48 9.04
Jan 9.37 9.55 9.58 9.44 9.30 9.71
Feb 10.94 10.33 9.18 10.19 10.08 10.99
Mar 11.20 10.03 9.82 10.85 11.10 11.53
Apr -- 8.06 9.87 11.18 -- --
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Commencement of the crushing by mid-November, that is by its switchover to March will improve recovery and increase sugar production by five/six percent. Assuming 25/30% cane crushing a month, being eight/10.10 million tons, additional sugar by 400/500 thousand tons can be recovered on commencement of crushing during November/early December and carried to March.
Besides, it will considerably check widespread evil of intermittent supply of cane to the mills, with an ulterior motive of pushing up the cane price. This will diminish the role of the middlemen in sugarcane supply chain.
An impression is also created that the cane crushing, if not made in October, field space for wheat sowing will not be available. This is not correct since (a) sugarcane crushing season has been reduced to 16/20 weeks and does not extend beyond March and (b) the crop intensity in Pakistan is rated at 30/40% for various reasons, which means the entire farmland is not brought under cultivation at a time.
NON-EXISTENCE OF SUGAR POLICY: Policy design for sugar industry tends to be tricky, coming out in piecemeal. The minimum cane support price is announced by the provincial agricultural departments, often at variance. No single price level prevails. No minimum support price exists for sugar to insulate. No linkage between cane and sugar price exists, either by inductive or deductive method.
The sugar price in the country fares identically by free movement of sugar, with difference in transport cost from mills to the market place. The cane price is not linked properly with the sucrose content. It is being applied in Sindh alone as 'quality premium', creating adverse factor of high sugar production cost in one province.
Sugarcane price, above the minimum, is determined by the market factors, influenced by the size of the cane crop. For sugar price, affecting consumers, the government's concern is noticeable. For logical results, the scope of minimum price shall extend to sugar by linking sugar price to cane price or vice-versa.
The minimum sugarcane price is recommended by the Agricultural Price Commission (APCom), working out its cost of production. The worksheet of APCom is questionable, due to the exercise based on maximum inputs contrasted by minimum output formula being applied.
Proper induction of sugar policy will inter alia cover research and development in the cane crop which is an imperative pursuit. Due to its almost absolute neglect, the cane yield per hectare has stayed put at 48 ton/hectare for years. By supervised/careful cultivation the yield can be raised to 70 ton/hectare. This will produce 5.14 million tons of sugar.
By R&D pursuit, the cane crop yield can be improved to 85 ton/hectare, increasing sugar production to 7.24 million tons. This can be had without enhancing sugar's industrial crushing capacity. In view of this, the need to have a sugar policy is prerequisite and a priority.
Once a sugar policy system is in place, every other aspect of its fair functioning shall come on line.
(The writer is Chairman, Pakistan Sugar Mills Association, Sindh Zone.)
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