Sugar roundup (II)

Elementary economics dictates that when input prices increase without a commensurate increase in output price, supply should fall. Not so in Pakistan’s sugar industry. During the last marketing year, sugar milling sector increased production by 38 percent, even as retail price of sugar remained unchanged.

Was it the export potential of domestic sugar that led to the ramped-up production? Not unless foreign buyers love procuring the sweetener selling at roughly 30 percent premium to prices in international market. Like its physical form, domestic demand of white sugar is sticky too; which is probably a good thing considering no causal relationship has been discovered in increase in consumption of sweetener and economic growth of nations.

Sugar millers privately hint that actual domestic demand may be underreported by as high as 20 percent. And millers are forced to report lower output and show losses because the minimum support price is detrimental to their business. Granted, but the high levels of year-end inventory reported by almost all listed players cannot just disappear from the go-downs.

But look closely, and one may notice nice segmentation of market among players, big and small. While the available data is limited to major listed players, listed players constitute on average 40 to 50 percent of total sugary output in Pakistan. Year on year increase in output by these players increased on average by 46 percent over the last two reported marketing years; barring Habib Sugar, which recorded a two percent decline. Why would every player ramp up production only to be forced to dump its stock at depressed retail price in absence of any demand growth?

While output level naturally varies year-on-year, market share (in terms of share in production) of most listed players records little variance over the years. The biggest dog in the neighbourhood has an average share of 11 percent, which deviates less than one percentage point during the five-year period under review. The next two players have a similar story, with on average 4.5 and four percent share of the market, respectively.

But even if the industry players have neatly segmented the market amongst themselves that is of little benefit when supply exceeds demand, and domestic retail prices refuse to budge. However, one miller provides a hint: the segmentation has little to do with the domestic market as at current levels of output and price, there is little money to be made catering to the local demand.

Millers ramp up production in expectation of receiving subsidy on export quota, which is partly determined on the levels of output. Thus, while no miller wishes to increase ‘reported’ production so much that it is penalized for inordinate increase in absence of forecasted demand growth; every player has an incentive to at least maintain its market share at previous year’s level, such that its export quota does not decline.