EDITORIAL: Finally, the story of long simmering tensions between the Punjab government and sugar mills has a happy ending.
The tussle, which began over the fixing of cane prices, turned into a media war in recent weeks over otherwise routine matters such as announcement of the crushing season, availability of sugar stocks in the market, and final price to the end consumer. Reportedly, the industry and the authorities have now mutually consented to a price of Rs 140 per kg, bringing a month-long drama to an end.
What may, however, appear to be a sweet relief for the public is a dramatic sleight of hand because in the first place, price has been agreed only to the extent of stocks to be sold by mills directly to the provincial Food Department for subsidised sale to the public through various sasta bazaars and similar distribution channels.
Second, with less than two months to go before the next crushing season, the agreed price may not remain in force for too long, while the quantum is also unknown. But most importantly, the mutually agreed rate is Rs 40 per kg higher than the previously notified rate of Rs 100 per kg, which was announced earlier this year in April.
The much-hyped ‘relief’ is a false flag and is a classic example of how over-regulation eventually culminates in policymakers benefiting vested interests in the name of public welfare. The government has now notified the retail rate officially; in coming months this rate will act as a benchmark or floor for market prices.
This means that even if the industry produces a substantial surplus during the upcoming crushing season, market prices will not be allowed to adjust below the new floor (which would have taken place naturally due to forces of demand and supply bringing down prices due to a glut).
Most likely, the industry has agreed to the new officially notified rate after taking into account the cost of production at the support price fixed for the upcoming season (at Rs 425 per 40kg), which means it will register significant inventory gains on selling carryover stocks from the previous season when the support price stood at Rs 300 per 40kg.
Although Punjab’s and other provincial governments fix prices in the name of consumers, it is the industry and the growers who are the primary beneficiaries of this benevolence. Growers receive above-market prices for plantation of cane when compared to profitability in other competing crops.
The minimum price not only offers inflation protection but also guarantees revenue, which means market risk is minimal compared to other crops. It is worth noting that sugarcane is the favourite crop of large-scale landholders in southern Punjab and Sindh as it is more capital intensive, which explains why farmers in central Punjab and other regions – where average landholding size is significantly smaller as compared to other regions - have switched to alternates, albeit with higher risk.
On the other hand, the industry is equally at fault. Although it pretends to demand market-based competition and access to exports, the commercial interests within change colour every season.
Whenever the government raises support price by an abnormal percentage despite high carryover inventory – industry lobbyists lament how the industry is over-regulated and that the government should get out of the business of fixing prices. If the inventory build-up causes local market prices to slide, the association changes its tack, and begins lobbying for export to be permitted, often with subsidy.
If that results in a shortfall in the domestic market, leading to import of cheaper sugar it demands protection through high tariffs by insisting that imports would wipe out the farmer’s profitability. If the area under cultivation declines, it insists on raising support prices so that sugarcane production can be revived.
Pakistani commentators and decision-makers have watched this scenario played and replayed time and time again, unfortunately, however, no one asks why dragging government into setting industry’s policy is necessary. In the last two years when prices of everything from farm eggs to meat to basmati rice have increased by 60–75 percent, rise in sugar prices receives disproportionate share of chest-thumping on prime time TV and outer pages of newspapers.
And while we are at it, why does the honourable court concern itself with fixing price of sugar but not of farm eggs, which are arguably a healthier source of nutrition of Pakistan’s growing young population? Why, for example, the talkshow hosts on prime time concern themselves with a hike in sugar prices far more often than the hike in prices of milk and meat?
The truth – though unpleasant – is that sugar prices have little to do with consumers. According to HIES data, direct consumption of sugar by households is no more than 15 percent of total national demand. At least 80 percent of sugar produced is consumed by (industry) B2B users, from aerated drink manufacturers to confectionary businesses. And it is these special interests that also have access to both corridors of power.
Thus, whenever sugar prices increase abnormally, it is these businesses that take a hit on their margins, and raise a ruckus in the name of public. Ordinary Pakistanis may love sweetening their tea with sugar; but broadly speaking, it is one of intermediate goods no different from steel rebars used in construction or coarse grains such as maize used as livestock feed.
What this means is that while some percentage is directly purchased by consumers, it is largely used by other B2B industries. If pricing is fixed, the government will benefit one stakeholder at the expense of the other, enabling the latter to demand relief. If profiteering is rampant, the Competition Commission of Pakistan (CCP) must attend to it, not superior courts and chief ministers.
In a country battling twin crises of rampant erosion of purchasing power and a mushrooming rise in preventable coronary diseases, incentivizing sugar production and consumption is terrible policy for public health. Whether the industry is truly competitive or not can only be gauged if it is left to its own devices and allowed to stand on its own two feet.
If it can rise to the occasion and earn foreign exchange on a regular basis – and not just when international prices are on the rise – then by all means let it flourish and enable farmers to convert land to cultivation of cane crop. If, however, it is only competitive due to favourable pricing policies, then allow farmers to make cropping decisions independently based on market conditions and risk appetite.
But that cannot happen as long as policymaking is made by those beholden to special interests on all sides. Last but not least, a few months ago, the caretaker chief minister of Punjab had vowed to revive cotton area in the province. Whether cotton has a chance of revival will only become known if it is allowed to compete against cane and other crops under free market conditions.
The profitability enjoyed by cane farmers and sugar millers is already sweet enough. It is now high time to take the crutches of guaranteed prices away.
Copyright Business Recorder, 2023
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