Raw sugar production has had a rocky ride this season, as millers delayed sugarcane purchase complaining of excessively high support price. As a result, 10MFY18 output has declined by 16 percent over the same period last year.
While the millers’ dilatory tactics seem to have delayed the production cycle, full year output is expected to clock in a similar trend.
Historically, raw sugar production peaks during the 4-month period from Dec-Mar, as last quarter adds less than 10 percent of annual production.
Based on the historical trend and 10-month PBS reported statistics, annualized production of raw sugar for FY18 is expected to clock in at nearly 6 million tons, continuing the 16 percent decline.
The decline in annual production seemed inevitable as the country’s annual output had peaked in FY17 touching the 7-million-ton mark, without any substantive recorded increase in local consumption. Furthermore, the support price embedded in miller’s production cost trickled down towards retail price, keeping domestic consumption at stable 5 million ton per annum.
Surprisingly, the excess supply does not seem to pose any challenge for the millers who have negotiated a substantial subsidy from the government to remain competitive in the export market. During the 9MFY18, raw sugar export tonnage has recorded six times growth crossing the 1-million-ton benchmark first time since FY13.
But the exporters should also take some pause to think, as 526 percent increase in export tonnage was only accompanied by a 300 percent in earnings (see “Tons of Sugar, but no Love” published on June 2018 in this column). While this may be explained away through declining global raw sugar prices, but that only further questions the logic of an export subsidy.
However, the export subsidy is here to stay as political governments are used to negotiating with the agriculture sector with a gun to its own head.
The millers are very much aware that governments are beholden to farmer votes’: the manufacturers threaten to exercise their to refuse purchase of excess stock, and any hint of sugar cane crop going to waste is enough for the government to give in.
At the same time, BoP statistics of sugar based confectionary exports also tell an interesting story. Value added sugar-based exports only increased by 65 percent during the 10-month period, adding earnings of less than hundred thousand dollars over previous year.
More surprisingly, value-added exports contributions to total sugar-based exports earnings has remained less than 40 percent over the past 5 years.
The number is paltry and questions all logic of value-addition.
If the government wishes to seriously address the BoP crisis and support the industry, incentivizing the value-added sector is one way to look.
A coherent policy to support the sector should be formulated that rationalizes the benefit to millers at the cost of farmers and governments’ kitty, and results in actual benefit to Pakistan’s export earnings. Let the debates begin!
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