Sugar prices: A bitter pill to swallow

According to a news report, the Trading Corporation of Pakistan has awarded a contract for 50,000 tonnes of sugar to an international trading house, Cargill, at $505 per tonne C&F Karachi. And, the Swiss firm is obliged to deliver the total consignment within 30 days of opening of letter of credit.
TCP has been mandated by the government to import 200,000 tonnes from international sources to beef up the existing stock as officials are estimating a shortfall of 800,000 tonnes before the next season commences in November 2006.
In FY04, when Pakistan sugarcane production peaked to 53.8 million tonnes, around four million tonnes of sugar was produced. Since the carryover stock from the previous season was 800,000 tonnes the total availability was 4.8 million tonnes. With domestic demand at 3.6 million tonnes, the country had a carryover stock of 1.2 million tonnes.
In FY05 sugarcane production slipped to 43.5 million tonnes. As a result sugar production fell to 3.1 million tonnes. But the large carry-over stock from previous year beefed the availability of sugar to 4.3 million tonnes - still higher than the domestic demand of 3.7 million tonnes leaving a carryover stock of 600,000 tonnes.
According to the Ministry of Food & Agriculture, for two years the farmer suffered due to low sugarcane prices. As a result the sugarcane cultivation dropped from 966,600 hectares in 2004-05 (production 2,92,225 tonnes) to 900,000 hectares in 2005-06 with the production dropping to 2.6 million tonnes. Now with local sugar selling at Rs 38.50 per kilogram the value of 2.6 million tonnes of sugar crop is Rs 100.1 billion.
Grower's average selling price is Rs 52.5 per maund fetching Rs 40 billion; middleman is making Rs 5.14 per kg valued at Rs 13.01 billion; miller's take is Rs 14.42 per kg thereby the sectorial earning is Rs 37.04 billion; the wholesaler's earning a commission @Rs 1.50 per kg there by netting Rs 4 billion and retailer's commission is Rs 2 per kg, giving Rs 5.01 billion to them, says MINFAL.
There may be instances of some farmers selling their sugarcane at Rs 70 or even Rs 90 per kg but they will be paid six to eight months from now. But MINFAL says growers as a community have earned Rs 3.26 billion less in 2005-06 compared to FY2004-05, while the middleman as a group have made Rs 4.68 billion more than last year.
And, the millers have been the biggest beneficiary - earning Rs 12.88 billion more this year compared to last year. The government is getting the blame for high sugar prices in the country and within the government various ministries are blaming each other for mishandling.
The sugar crisis started with the 2004-05 season. ECC allowed private sector and the TCP to import raw and refined sugar without any restriction on quantity and without any custom duty and withholding tax. Utility Stores Corporation quota for sugar from TCP stocks was increased from 22,000 tonnes to 32,000 tonnes. And, USC sale price was enhanced from Rs 23 to Rs 27.50 per kilogramme.
Imports from India through road and rail were allowed. Why did sugar imports not materialise despite the incentives? Why did the private sector hesitate to import raw and refined sugar when it knew that local production will be 2.6 million tonnes?
With 200,000 tonnes of stocks from previous year the overall sugar availability was short by 800,000 tonnes - domestic demand being 3.8 million tonnes. And, if the private sector was hesitating why did the government not step forward to import this quantity through TCP?
The confusion arises because we are running a mixed economy. We do not allow the market economy to work. The Government through TCP is still trading in cotton and sugar and through USC operating retail outlets. Private sector does not want to be caught on the wrong foot. If they import sugar and the government decides to continue selling TCP stocks (locally bought or imported) at subsidised prices they will not be able to sell their stocks. It was only when sugar prices peaked to Rs 40 per kg that the Prime Minister directly implored commodity traders for help to jack up imports.
They did oblige, but the international price was high and the landed cost, even from the cheapest source (India), was Rs 35.50 per kg. TCP even now continues to sell to USC @Rs 25 per kg and USC sells at Rs 27.50 per kg. On 200,000 tonnes of imported sugar, government subsidy from the budget would be Rs 2.1 billion. Private sector certainly cannot be expected to do the same.
Sensing the shortage, the farmers demanded higher price for their sugarcane. The mills first resisted them by delaying the crushing. But later realising the opportunity to fetch higher price due to world-wide shortage, aggressively lifted the sugarcane but slowed down the monthly disposal of sugar.
Obviously, the millers in a better financial position were able to hold on to larger stocks for longer time. Does this constitute hoarding? Agreeing to fix a price closer to international market price, smells of collusion and cartelization.
But then Rs 35/36 per kg is a fair price for sugar in the world. The Monopoly Control Authority will be hard pressed to prove violation of anti-trust laws. There are 79 sugar mills in the country of which 73 are operating with existing working capacity of 5.3 million tonnes per year.
We still need to import 800,000 tonnes of sugar to last until end November 2006. TCP cannot be burdened with this. USC has only 550 outlets country wide. The maximum it can sell is 10 percent of the domestic monthly needs. Second, can the government provide Rs 8 billion in subsidy from the budget? The Federal budget does not have the cushion for this.
Presidential and Prime Ministerial assurances given to the private sector whether millers or traders, not to let the Monopoly Authorities press charges or conduct investigation for any unethical practices, and pleading with business to reduce profit margins and not indulge in excessive profit taking will not bring sugar prices down from present levels; fair prices have to prevail. High prices means more profit.
Bigger profit attracts fresh investment leading to more production. Farmers have had a good year from sugarcane. Hopefully, they would increase acreage and production next year. Higher earning for millers should translate into investment and diversification into value added products such as ethanol. That is how people respond with more production.
In a free market mechanism, cartels and unethical practices are checked by regulators not ministers. The failure of Monopoly Control Authority to check and break the cement cartel has certainly emboldened other businesses. The job of the government is not to appease or beg or cajole businesses but to create a competitive environment so that market forces came into play to keep prices low through efficiencies in the value chain.
Lower sugarcane production, both in Pakistan and world-wide, is the primary cause of high sugar prices. It was anticipated in September last year. However, the monitoring and follow-up was poor and reasons for imports not materialising despite fiscal incentives needed to be countered.
The time to be proactive was prior to December '05 and not in February/March 2006. Now sugar prices will remain high until the next season. It is a bitter pill to swallow.