Sugarcane crushing season is upon us; and if interim financials of millers are any guide, the coming year does not look too good either. For the upcoming crushing season MY18-19, sugarcane production is forecast to decline by 14 percent compared to MY18, when the sector recorded highest ever output estimated at 83.2 million tons based on estimates published by USDA.
Recall that performance reported by sugar divisions of listed mills remained subdued last year on account of supply exceeding demand by almost 30 percent. Delays in export permits helped made matters worse.
A quick snapshot, of listed players’ last full year financials, reveals that of the top 17 firms, seven reported bottom-lines in the red, led by double digit decline in top-lines. Interestingly, the worst performing players were all located in Sindh.
Poor performance in a record production year led Sindh-based players to vehemently protest support price set by the province at the start of MY17-18 crushing season. Millers’ refusal to operate factories and delay procurement of sugarcane took the matters to court, which, finally set the per maund price of sugarcane at Rs160 per 40kgs, more than 12 percent lower than price set by KP and Punjab provincial governments. Taking cue from millers’ strategy, it appears that sugarcane farmers finally read the signal, leading to 10 percent lower area under cultivation for the current season MY18-19. Based on this, it appears that sugarcane production will finally fall back to MY17 levels for the upcoming year.
The government of Pakistan chooses to remain reactive to the sugar glut in the domestic market, and it has no one but itself to blame for the self-created crisis caused by delay in sugarcane crushing. If lower cultivation of sugarcane during the ongoing season is any guide, farmers are very much capable of responding to market signaling by switching to other crops.
Carryover stock from the last two marketing years left the government no choice but to incrementally increase the export quota. Even in this matter ECC’s approach remains largely reactionary as it announced marginal increases to export quotas when faced by the wrath of millers who refused to operate factories even as crushing season for next year drew close.
Millers remain unhappy still as the latest export quota is not accompanied by subsidy and Pakistani sugar output remains uncompetitive in global market due to low sucrose recovery rate. Government is perhaps rightly of the view that given the 27 percent devaluation in rupee Jan-18 to date, millers should be able to get by.
At the same time, if export numbers for the first quarter FY19 are any guide, local mills have barely managed to export “sucrose in solid form” worth $48 million, which barely translates to roughly 150,000 metric tons in volume, at the prevailing international market rate of $350 per ton of white sugar as per ISA. Little surprise then that most of country’s export were made to war-torn regions of Myanmar and Afghanistan, which have little agricultural output of their own to boast of. Total allowable exports as of yesterday’s ECC decision stand at 1.1 million tons.
It remains to be seen whether the regulators in the Naya Pakistan will adopt a forward-looking approach to an industry which is much maligned for its political influence but remains severely distorted due to government’s misplaced interventions in the marketplace. Even SBP in its latest annual report on State of the Economy has noted that “keeping in view delay in payments to farmers and the high cost of the export subsidy on sugar, a rationalization of indicative pricing mechanism is needed”.
Governments, both provincial and federal, need to appreciate that farmers will never say no support prices, and neither will millers to freight subsidies on export. But sector’s performance during the last two years has clearly established that government intervention has caused nothing but adverse distortion to no one’s gain. Millers scaled back output in response to high MSP, and in turn farmers are scaling back cultivation. This is ample proof that markets eventually approach equilibrium levels of output despite government’s noble desire to do well. Is it time for ECC to read the writing on the wall?
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