On November 24, 2020, the then federal minister for Industries & Production declared victory against sugar price spiral. “Ex-mill and wholesale price has declined by Rs 12 per in the last 11 days”, he noted, attributing the success to “timely start of cane crushing”. The minister was right; national average retail price indeed fell by 16 percent by December 2020, largest month-on-month decline in at least 10 years. Early crushing had indeed paid dividends, or so it seemed.
Soon after, the country recorded its highest ever sugar output for the month of December, as estimates from Federal Committee on Agriculture indicated a bumper sugarcane crop. Commenting on the upbeat dynamics, this section noted that “it appears national sugar prices have reached an inflection point and may witness a downward momentum going forward”. That did not happen. By early January, retail sugar prices had rebounded nationally, reverting to their pre-December levels, and digging their heels around Rs 100 per kg.
Much has come to pass since. The minister has had his portfolio reshuffled twice since, while the federal government has declared cane output of 81 million tons in outgoing financial year as “second-highest ever”, a mystery that refuses to resolve itself. So far, the administration doesn’t seem bothered by the fact that while cane crop was only 1.5 percent shy of its 2017-18 peak, at 5.6 million tons sugar production is lower by a whopping 20 percent (compared to that year)! Industry sources claim to have crushed only 72 percent of the 81 million tons crop, raising suspicions at the significant quantum possibly absorbed elsewhere, such as in the informal gur-making segment.
So, was 2020-21 a win for the policymakers? Hardly, considering the loss of potential output that the industry resolutely blames on early start of crushing. Absence of “surplus” sugar production – which would have been the case had higher sucrose recovery levels been achieved – might certainly make the politics easy. Why? Because a surplus output would have created pressure to allow export of tradable surplus given the rising trend in international prices, a political landmine for PTI as the party is still hounded by the ghosts of 2018-2019 export policy.
The first lesson from the outgoing year then is to remember that future can never be known with certainty; and maintain humility before declaring victory based on forecasts. The sub-par sugar production has established industry’s claim that early crushing leads to loss of sucrose recovery. Even if the government has gotten the estimate of cane crop wrong, at 5.6 million tons, national sucrose recovery level would come out at 9.57 percent, lowest since 2011.
Two, the relative calm in retail sugar prices for the past 12 weeks – which has also outlasted the peak demand season of Ramzan and Eid – indicates that sugar prices may have finally plateaued. But with six more months of consumption to go before the next crushing season, a short-lived price spiral between Aug – Oct may still be lurking around the corner. Except of course if consumers – both commercial and household - have adjusted their consumption levels in response to new price levels. And considering that sugar prices have nearly doubled since their peak consumption year of 2018, that assertion may not be widely off the mark.
What’s the lesson then? Between 2010 and 2016 when domestic sugar supply and demand were largely in balance (barring minor trade surpluses in two years), national sugar consumption increased by over 7 percent annually. This was also the period when both international and local sugar prices had begun to climb down after commodity boom of late 2000s fizzled out.
Going forward, if domestic sugar prices remain stable despite mediocre production of the outgoing year (and nil opening stock balance from the previous year) then a sea-change may be currently underway in domestic sugar demand, and the policymakers better watch out!
How come? Considering the broad consensus that between 75 – 80 percent of sugar produced is consumed by commercial and industrial manufacturers in various value-add segments of food industry, price stability despite weak supply means demand may be shifting to substitutes of cane-based sugar. This becomes particularly significant if lower sugar output has in no way impacted the output growth of value-adding industries, another unknown. Similarly, no evidence exists to determine whether commercial users such as sweetmeat makers have substituted sugar with safe-for-humans alternatives such as high-fructose corn syrup, or with lab-based compounds such as saccharine.
If sugar industry’s mismanagement over past three years has indeed dealt a setback to its growth, it may still not be too late. For starters, the government can ensure course correction by not enforcing early crushing in the upcoming season.
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