Commenting on the spectacular performance of major crops in the ongoing kharif season, the Special Assistant to the PM noted that sugarcane crop is set to chart new heights, “and may touch 102 million tons”. If true, this performance will at least be a quarter higher not only than last year, but also 22 percent higher than highest ever crop witnessed in 2017-18. Are we there yet?
SAPM’s claim is not entirely without basis. According to provincial Crop Reporting Services, national area under cane cultivation – which swings between 1.05 – 1.35 million hectares every three to four years – is trending upwards for a second year in a row. Moreover, it appears that yields have been helped not only due to favourable weather, but also thanks to higher profits for growers over the past two seasons which usually enables farmers to invest in productivity enhancing factors.
Given SAPM’s vantage point as country’s de facto agri-czar, a fresh ‘highest-ever’ for cane crop may very much appear to be a foregone conclusion. But the claims have faced criticism from market players, who believe forecast of crop breaching into triple digits (102 million tons) is disingenuous, and an attempt to put a dampener on market prices of sugar. What is exactly going on?
It is hard to separate fact from fiction when government and private businesses decide to engage in information warfare. Given acreage – as reported by officialdom – is flirting with past peaks, national average yield would require a quantum jump of 14 percent over last year to meet SAPM’s output forecast. Can that happen?
Considering how positively cotton crop has responded to a favourable change in weather this season, a double-digit increase in productivity of cane crop – which is far more resilient than cotton – is not beyond realm of possibility. However, politicians are often given to getting ahead of themselves when they come bearing gifts (or good news). So, it may only be natural for independent sources such as USDA to treat official claims with a pinch of salt at this stage.
But why has SAPM’s claims left the milling industry grinding their teeth in fury? Turns out, the SAPM went on to forecast that record cane crop will translate into 9 million tons of refined sugar production, equivalent to 1.5 years of national requirement and 53 percent higher than last year’s production!
Of course, anything can happen in Pakistan. But a massive surplus in output is rarely good for producer’s profitability, especially when a quantum leap in raw material supply does nothing to reduce raw material prices. So far, there is no indication that the PTI government has any plans to reform sugar industry’s regulatory framework or rid the industry off of price floors (i.e. minimum support price). In fact, sources from within agriculture department Punjab confirm that the ministry may even recommended an increase in support price, taking it up to Rs 225 per 40kg (12.5 percent increase over last year).
If the crop size is indeed going to chart new heights, the milling industry can do little save accepting it as fait accompli. But a surplus output at even higher cost of production will achieve precious little in reducing market prices. Small mills may either refuse to operate due to liquidity problems, while others may be forced to offload their inventory in open market or force-sell it to public sector procurement agencies to repay farmers within 15 days of procurement, as stipulated under law. But an output equivalent to 1.5 years of national consumption is very far from equilibrium conditions for any industry, let alone sugar. Will the government then end up creating more problems for itself than it set out to resolve in the first place?
That depends on variables beyond PTI’s control. If international commodity prices continue to rally over the next 12-18 months, a surplus of sugar in domestic economy will offer a perfect opportunity to not only cancel out imports made over past 1.5 years, but also win some brownie points with the industry right before the general elections by giving it a chance to mint foreign exchange at peak world prices.
However, that PTI administration will be able to muster the courage of allowing sugar exports once again appears unlikely. One, the action will be fraught with political risks, especially if the crop performs poorly in the following season (for example, due to adverse weather). Two, mis-timed sugar export during 2018-19 (and the domestic price spiral that followed) is why the industry landed in government’s crosshairs in the first place.
Instead, it appears more likely that – if the massive surplus as forecast by SAPM indeed translates into reality – the administration may take the route of strategic reserve building, as has been hinted by FM and SAPM on various occasions. That would definitely be an improvement over the current strategy of building reserves through imports at peak international prices. And if that’s the road government actually ends up taking, the country may witness Food departments and TCP lifting sugar from mills at a unilaterally fixed ex-factory price (as has been witnessed over the last year), against promise of timely payment to growers. A win for farmers at the expense of millers?
Chances are that mills may complain overtly, but an ex-factory price fixed on average cost-basis (and using minimum support price as its basis) may in fact prove to be a godsend for the industry. Especially when compared against 2017-18 season when surplus raw material supply crashed refined sugar prices in the local market. As the general election season draws close, here’s to hoping that sugar mill industry and political elites will make friends again (tongue-in-cheek). Check-mate public; welcome command economy!
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