Pour some sugar on exports!

Once again, the sugar mills are making hue and cry over an alarming situation. Friday’s Business Recorder saw the entire back page of the newspaper being taken up by a notice from the PSMA, informing that there has been a bumper crop and the country is flush with sugar that is lying unsold.

This year, the production of sugar has surpassed seven million tons. Recall that the domestic consumption is around five million tons. Now usually, the sugar mills are given a subsidy in order to be able to export the surplus – and that’s exactly what happened in 2015 and the first few months of 2016. However, the months after that is a different story.

As the graph indicates, international sugar prices rose significantly during 2016, narrowing the gap with local retail prices. While the graph shows that the domestic price of sugar has always been higher than the international price, note that this is the retail price, which takes into account sales tax and the margins of the retailer and wholesaler.

Former Chairman of the PSMA told BR Research that at the ex-factory price, sugar exports become viable at $550 per MT. He said that Rs50 is the cost of the sugarcane alone, and the further cost of production is around Rs6-7. The graph indicates that for some time in 2016 as well as this year, international sugar prices have been at the level where our sugar industry could have exported without a subsidy – and that’s what happened in 2017; the graph shows that February and March of this year brought around 67,000 MT in sugar exports, no subsidy needed.

Why only two months of exports? That’s because sugar mills need permission from the centre to export. They had asked for a quota of one million MT, but were given only 225,000 MT until the end of March. Later, after failure to meet the target, a quota of 200,000 MT was allowed for export within 60 days after approval by SBP or by May 31, 2017, whichever came first.

Now, this regulation is understandable, given that sugar needs to be kept affordable to the general public. Exporting would reduce the domestic supply, sending up the price. This is part of food security, and makes sense – especially given the crises in Ramadan in the past. However, what doesn’t make sense is 1) keeping the price of sugarcane unreasonably high in the first place and 2) giving a time limit to the exports when there is already a quota in place. In fact, if we addressed issue number one in the first place, none of this would even be necessary!

Sugarcane is increasing in popularity, particularly as a substitute to cotton. The ex-PSMA Chairman told BR Research that the coming crushing season gives a preliminary forecast of 8 million tons – an unprecedented amount for a country that consumes just five million. Like it or not, sugarcane as a cash crop is increasing and the right policies are needed to ensure its economic viability.