Earlier this week, a video clip of a farmer cursing sugar mills in southern Punjab went viral on social media. The farmer can be heard grieving in native language that his ‘harvested cane crop is decaying wating outside mill-gate, as mills in his area have reportedly gone on strike’.
Surprisingly, no news of a province-wide strike has been reported in the print or electronic media. However, sources from both milling association and growers confirm in off-the-record conversations that some mills have in fact halted crushing for the last ten days, albeit blaming each other for the impasse.
This is worrying considering that the crushing season had begun in early December amid much fanfare. At that time, both interest groups had confirmed that cane procurement trades were taking place against cash payment at minimum of notified rate or higher.
Shortage of cane, higher retail price of sugar, and increase in minimum support price to Rs 190 (per 40kg) had led to competition between mills to secure high sucrose raw material early into the season. In fact, in an interview with BR Research, PSMA chairman Aslam Faruque had confirmed that mills in the southern province were in fact procuring cane at commercial rates north of Rs 215 per 40kg, a welcome sign for farm incomes compared to wrangling over rate and delays in payments seen in yesteryears.
It can be easy to cast aspersions on mill owners for trying to exploit ‘helpless’ zamindars. Afterall, if the mills remain shut down for long intervals, growers may feel compelled to sell their crop at rates dictated by buyers, fearful of letting crop go to waste otherwise. But powerful as the mill owners maybe, they are only partly to blame.
Some context, however, is important first. Traditionally, cane grown on farms within ten to twenty-mile radius of a unit is usually captive to buyer determined rates. This works for both parties, as mills can count on consistent supply whereas the seller can avoid the high cost of transportation to competing units located at a distance.
But for most of the crop grown on farms at a distance from milling units, transactions are entered in a competitive marketplace at commercial rates where mills try to outbid each other for high quality cane. This is especially evident in two clusters of the province – Faisalabad and Rahim Yar Khan – each of which have five units owned by various competing sponsor groups.
A thirty percent increase in price of sugar in retail market over last year has also played a pivotal role. This space had previously estimated that sugar stocks in the country as at end of November-19 were barely enough to meet one-month domestic requirement. Conversations with growers now reveal that once crushing began, demand-side pressures forced millers to pay commercial rate exceeding notified price by as much as 15 percent.
Because overall crop is in short supply, mills appear to have banked on the fact that they would be able to pass on higher cost of production down the value chain. This was further corroborated in off the record statement by a PSMA member who projected that retail price of sugar may settle around Rs 90 per kg in the CY20.
Alas, it was not to be. Fears of retail price of sugar spiralling out of control appear to have kicked in the primal instincts of district administrations. Back in mid-December, DC officers unleashed colonial lessons of crackdown on wholesale bazaars, to bring down prices of ‘essential’ kitchen items under control.
The babus were not to be blamed either, as they were only trying to do their masters’ bidding after reports surfaced of a cabinet meeting where the PM had been miffed over spiralling food inflation. Never mind sugar industry’s insistence that over 80 percent of product is in fact consumed by B2Bs players in the industrial and commercial segments.
Fast forward to December end, and monthly CPI confirms that DC efforts have borne fruit as retail price has stabilised, declining 2.11 percent over the previous month. Sugar millers could no longer pass on the higher production cost on to their buyers. Afterall, when B2B buyers can procure sugar in bulk from wholesale at lower rates – where price may at times be lower due to sales tax evasion - why go to the source and procure ex-factory?
The price control efforts effectively put an end to the short-lived bonanza for zamindars of entering transactions at competitive rates. Mills which were previously competing against each other to procure quality cane are now forced to collude, swearing each other into paying no higher than the government set price floor of Rs 190 per 40kg.
Legally speaking, firms are not violating any rules of the game. In distant past, mills were required to procure all cane within seventy-five-mile radius at price higher or equal to notified rate, but this is no longer the case since zoning was abolished in 1990s. And while Sugarcane Act binds factories to continue crushing until the season end is notified by cane commissioner, mills have technically not stopped crushing. Ostensibly, they continue to offer growers the notified rate of Rs 190 per 40kg, only that the growers believe that their product is worth more.
Like any commercial enterprise, farming is also exposed to inherent and unavoidable business risks. So, it is only a matter of time before the impasse is resolved, depending upon which player blinks first. In a free economy, sugar millers would also hold the right to stop production if the unit economics is no longer attractive, even if the legislation dictates otherwise.
It is said that the road to hell is paved with good intentions. That’s exactly what government’s actions to control complex business transactions in a free marketplace has led to. Nevertheless, while the milling association will forever be reluctant to admit this, some fault also lies with them.
In 2017, several milling units from central part of Punjab applied for regulatory approvals to shift units to the southern region. Over the years, yield and sucrose content of sugarcane had fallen in Faisalabad and its adjacent areas due to increasing urbanization and falling water tables. In contrast, Bahawalpur region still boasted sugarcane of highest quality, which led to the region becoming the sugar powerhouse in the country with over fifty percent of domestic installed crushing capacity.
However, a ban on establishment of new sugar mills in country’s cotton-belt meant that the shifting of these units was struck down by the courts. Never mind that the rules were previously changed quietly for a brief period in mid-2000s to selectively allow some players to install largest capacities in the industry. Also never mind that instead of lobbying to change/abolish the arcane ban, the applicant firms – despite being owned by the political family in power at the time – presented the shift as ‘transfer of existing capacity’ – and not new establishment.
Why is this important? Because despite their ostensible pleas of ‘protecting Punjab’s vanishing cotton-belt’, established players in the Rahim Yar Khan region petitioned courts to have up-and-coming rivals declared ‘unfit’ to play, in effect monopolizing the high quality cane crop produced in the area – which by the way is grown in excess and is often sold to mills across the provincial border owned by the same folk.
While the ruling decreed by courts was obviously in line with existing law, neither of the parties had argued in favour of right to free trade at that time, or lobby to have the law amended to make it more commerce-friendly. Grower associations who had joined in the petition are also to blame, of course. Had the competition been allowed in at that time, zamindars would not have suffered today from collusion of some players. But now that the chickens have come to roost, everyone wants a free market, at least for themselves.
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