Inquiry committee report: Export behind increase in sugar prices

The inquiry committee on sugar price increase stated that its considered opinion based on documentary evidence was that the export of sugar was not justified, and with the export, sugar prices started increasing and exporters gained benefits in two ways - first, they were able to gain subsidy and secondly, they made profit from the increasing sugar prices in the local market.
The report of inquiry committee constituted by the Prime Minister, Imran Khan, regarding increase in sugar price stated that the cost of procurement of sugarcane, overhead and financial charges, taxation as well as efficiency of the mill with regards to the recovery ratio are the main determinants of the ex-mill price of sugar.
The committee notes that the calculation of the ex-mill price provided by the PSMA cannot be relied upon unless a full audit of all determinants of ex-mill price are calculated in a financial audit as explained in detail.
The major increase in ex-mill price occurred between December 2018 to June 2019, when it increased by almost Rs12 per kg, which is from Rs51.64 to Rs63.59 per kg.
This period saw no increase in sales or other taxes and the price of sugarcane, the major input, was also stable.
The only factor that stands out was the export of sugar, which coincides with this period.
With the export, the price was increased from Rs55 per kg in December 2018 to Rs71.44 per kg in June 2019, although the GST increase was implemented from 1st July 2019.
No other government, except the Government of Punjab, provided the subsidy and financial layout of subsidy was Rs3 billion.
The Sugar Advisory Board failed to take the timely decision to ban the export of sugar.
According to the report, the companies owned and controlled by Jahangir Khan Tareen, exported 17.24 percent of their total production and availed 22.71 percent of the total export subsidy amounting to Rs561,037,418.
The companies owned and controlled by Shamim Ahmed Khan, exported 29.60 percent of their total production and availed 16.46 percent of the total export subsidy amounting to Rs406,534,222.
The companies owned and controlled by Makhdum Omer Sheryar (relative of Makhdum Khusro Bakhtlar), exported 31.17 percent of their total production and availed 18.31 percent of the total export subsidy amounting to Rs452,343,696.
It further stated that it may be noted that Chaudhry Munir and Monis Elahl are partners in this group.
The aforementioned three groups of companies availed a total subsidy of 57.49 percent that amounts to Rs1,419,915,336 out of the total subsidy of Rs2,470,012,551.
The company owned and controlled by Ghulam Dastaghir Lak (Ex-MPA of PML-N 2013-2018), exported 52.50 percent of its total production and availed 6.0 percent of the total export subsidy amounting to Rs148,315,247.
The major Increase in ex-mill price occurred between December 2018 to June 2019, when it increased by almost Rs12 per kg, which is from Rs51.64 to Rs63.59 per kg.
This period saw no increase in sales or other taxes and the price of sugarcane, the major input, was also stable. The increase in retail price between July 2019 to January 2020 was from Rs.71 per kg to Rs. 74.64 per kg. The data, therefore, does not show any major effect of GST on retail price.
The sugar mills ceased operations citing the low availability of sugarcane which is not plausible as sugarcane was available in ample quantities before and after the closure of the mills. Apparently, it was an attempt to bring down the prices of sugarcane. Although there was a significant Impact on the price of sugarcane but hardly any on the sugar prices, it is expected that the mills will incorporate higher prices of sugarcane into their cost of production leading to higher ex-mill prices in the forthcoming months.
The cost of procurement of sugarcane, overhead and financial charges, taxation as well as efficiency of the mill with regards to the recovery ratio are the main determinants of the ex-mill price of sugar. The Committee notes that the calculation of the ex-mill price provided by PSMA cannot be relied upon unless all determinants of ex-mill price are calculated in a financial audit as explained in detail in the paras of this TOR. ii. The reasons of increase in ex-mill price have been explained in detail in TOR (i) & (k). iii. The major increase in ex-mill price occurred between December 2018 and June 2019 when it increased by almost Rs. 12 per kg which is from Rs. 51.64 to Rs. 63.59 per kg. This period saw no increase in sales or other taxes and the price of sugarcane, the major input, was also stable. The only factor that stands out was the export of sugar which coincides with this period.
A detailed analysis of forward contract can be carried out with the availability of full information from the sugar mills. The data, so far obtained from the sugar mills, shows that 16 mills of Punjab, 1 of KP and 5 of Sindh (data provided for only 13 sugar mills) have entered into forward contracts for sale of sugar. The details of buyers in these contracts and the mode of payment need to be analyzed with the help of FBR.
The authenticity of forward contracts also need verification. All these verifications require an in-depth analysis with all the pre-requisite Information which can be obtained through a detailed audit. SATTA on the other hand is absolutely illegal and a menace to control the prices of sugar. This requires strict legal action by the provincial governments which should be started immediately as people involved in such business are speculating a severe price hike in the Holy Month of Ramadan. The Satta rates are now about Rs. 100 per Kg for Ramadan. The Provincial Governments have Information available through their Special Branch about the Satta dealers and action can be taken immediately. The difference is of about Rs. 5-7 per kg between the ex-mill price and the retail price. The margin is at the lower side, at about Rs. 5 per kg, for the current year. The bulk of the margin, however, goes to retailer who has to bear the cost of packing and loss during the sale
Despite the availability of relevant laws (Registration of Go-downs Acts in Punjab and Sindh) no data of stocking of the sugar is being maintained. The hoarding of sugar at the level of mills is also a possibility as the mills have very large go-downs where stocks are kept after sales. The phenomenon of hoarding at the mills and the whole-sale level can only be identified by the forensic audit.
As per discussion with different stakeholders, the Agent charges Rs. 0.08 per kg. Further wholesaler or broker charges his profit which is 0.5 to 1.0 Rs. Conventionally, the margin between ex-mill and retail price is Rs. 5-7 per kg on the average.
The production of sugarcane is slightly higher than the previous year but the production of sugar is expected to be marginally lower than the previous year. Keeping in view the carryover stocks, the quantity of sugar produced seems to be sufficient for annual national consumption (as per data of national consumption provided by Statistics Bureau of Pakistan). ii. The retail price of sugar increased from Rs. 55.99 per kg in December 2018 to Rs. 74.64 per kg in January 2020. However, the major portion of the Increase was between the period January 2019 to June 2019 when it rose from Rs. 55 to Rs 71 per kg. This was well before the production cycle this year and, therefore, the correlation between less production and recent increase in price does not exist.
The API calculated the cost of production of sugarcane at Rs. 139.54 per 40 Kg. for self cultivated land and Rs. 186.74 for rented land at mill gate for Punjab. For Sindh, this cost was worked out as Rs. 147.59 per 40 Kg. and Rs. 192.63 per 40 Kg. for self cultivated and rented land at mill gate, respectively. The last increase in the support price was in 2015-2016 to about Rs.180 per 40 kg and remained the same till the start of the current crushing season where it was increased to Rs. 190 per 40 Kg. Keeping In view the calculations of API and historical data the support price seems to be sufficient. However, the timing of announcement of increase in support price was delayed and did not serve the purpose of allowing the farmers to make an informed decision.
The actual production of sugarcane Increased marginally this year and therefore, the reason for the increase in the price of about 15% above the support price can best be explained by the perception in the market about low production of sugarcane and, therefore, unwillingness of the growers to sell it at the support price. There is also another phenomenon of the mill owners also being large growers through owned or leased land. This potentially can also be the one reason for the higher than support price buying of sugarcane. There is, therefore, a requirement for proper forensic audit to examine this possibility.