Price inflation works curiously through the economy. Four years ago – right after PTI came to power at the center – a 30 percent increase* in retail price of sugar was all anyone could talk about. Four years later, retail price of sugar has risen by 50 percent (*calendar year to date), yet the spiral hardly makes news.
May be justifiably so. At a time when price of kitchen essentials such as wheat flour and rice have risen by 80 and 60 percent, respectively, it is probably only natural that sugar no longer makes headlines. Sugar producers insist that up to 80 percent of demand emanates from B2B consumers, not domestic households. Thus, there is little reason – in their view – for a price spiral to raise alarms of food security. After all, refined sugar is not classified as a kitchen essential in many developed countries due to its widely known harmful effects on human health. However, in a food insecure nation like Pakistan, it is often seen as an inexpensive source of calories, even if not healthy nutrition.
Whatever your view on sugar’s classification in need human diet, the ‘non-essential’ label need not rationalize an unwarranted price spiral. A 50 percent increase in price of any commodity within six months can only be justified if the demand-supply position in a given common market is seriously out of whack. Although sugar production during the latest crushing season most certainly fell (by 15 percent over the preceding year). At 6.7 million metric tons (MMT), national output substantially exceeded industry’s own estimates of annual national demand of 6 MMT.
Of course, claiming a shortage of sugar would not be in the industry’s interest, as it would open doors to import, which are practically prohibited as of today. Moreover, at a time when the macro economy is witnessing inflation averaging above 30 percent leading to a massive erosion of purchasing power, the price spiral should have only a caused a slowdown in the demand for a ‘non-essential’, from the industry’s point of view. And definitely not an over indexed rise compared to the change in price level across the broader economy, which is at 20 percent, and the food basket in particular, which has increased at 23 percent calendar year to date.
If it isn’t a demand spike, is the industry suffering from a massive rise in the cost of production? The cost-push version partly explains why the substantive rise in retail prices is warranted. The support price of sugarcane was increased by an average of 25 – 30 percent over the last year, raising the cost of production for processors, but not nearly enough to justify a 50 percent increase. And although cost of energy – the second most important expenditure after raw material – have risen abnormally across the broader economy, the industry relies on raw material residue to run its boilers, thus has been mostly insulated from the energy price spiral.
Then, what gives? The explanation most likely may be found in inventory carrying costs. As interest rates have exploded to never before seen levels, the industry has predictably responded with offloading its inventory in cash to avoid debt servicing burden. Because the sugar industry produces up to 80 percent of its annual output in less than a calendar quarter, it only makes sense to carry inventory all the way till the end of the (marketing) year, if it foresees a shortfall in the upcoming season. With the elections around the corner, support prices for raw material are set to rise by as much as 50 percent by December 2023, which could lead to a bumper cane crop. That would mean a massive slide in market prices in next season.
Thus, the industry has every motive to make hay while sun shines. And amidst all the political upheaval and crazed spirals in prices of essentials such as flour and rice, there aren’t many out there to raise alarm over the market behavior. Ride it while it lasts!
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