The Pakistan Sugar Mills Association (PSMA), in its annual review, has predicted 3.5 million tonnes of sugar production in 2006-07, season, one million tonnes more than the last year's 2.5 million tonnes.
The last year shortfall in sugar production and the gap of 1.4 million tonnes in demand and supply had left the government in total disarray. Desperate authorities took a number of decisions, mostly in haste, to increase supply and bar the profiteers from fleecing the consumers.
The PSMA said that keeping in view higher cane prices, sugar rates in 2006-07, will stay over Rs 38 per kg at retail level. It had presented the annual review in its AGM held in Lahore last Sunday. Its details are as follow:
OUTLOOK 2006-07: As per data provided by the Ministry of Food, Agriculture, and Livestock (Minfal) there is 14 percent increase in the plantation area of sugarcane. The cane production had dropped significantly in the past two years in a row limited to 44 million tonnes. The increase in the plantation area with promising weather conditions ie supply of irrigation water and rains, the sugarcane production is expected to over 50 million tonnes, which ensures the increase in the sugar production to about 3.5 million tonnes.
Though sugarcane production in 2006-07 shows better prospects yet the utilisation of sugar mills will remain around 50 percent capacity provided 40 million tonnes supply is made to the mills.
The Punjab government has already announced indicative minimum price of sugarcane as Rs 60/40-kg, which means that delivered price at the mill-gate with the inclusion of transportation, cess and price competition would be around Rs 70/40- kg on average. The Sindh government has also recently announced Rs 67/40-kg and NWFP Rs 65/40-kg.
With such enhanced sugarcane price, the production cost of sugar cannot be less than Rs 34/kg ex-mill ie retail price expected to a minimum Rs 38/kg. Confusion prevails over the price structure due to the following reasons, which have been brought to the attention of the Government of Pakistan at a higher level. The 2005-06 a deficit year of sugar production by one million tonnes ended with a surplus of over one million tonnes.
Crushing season 2006-07 starts with a carryover stock of 1.2 million tonnes. The season 2006-07 producing 3.5 million tonnes will have availability of 4.7 million tonnes against a consumption of 4 million tonnes.
Major stock held at the end 2005-06 belongs to the Trading Corporation of Pakistan (TCP) which the government intends to offload at a highly subsidised rate to the market threatening the domestic sugar price.
International sugar market prices are down whereas the government has yet to clamp down any import duty to stop further inflow. While the industry bears a strong feeling to pay better sugarcane prices to ensure a better sugarcane crop in future there is confusion as how to maintain a balance in the minimum indicative price and a matching production cost. The government has been approached at several occasions explaining these issues of utmost importance.
Despite these hurdles, the Sindh government has already issued directions for an early start of crushing on October 1, 2006. As a regular phenomenon every year millers are pressurised for an early start of the crushing with the plea to vacate some portion of the land from sugarcane for the sowing of wheat, whereas the millers resists to accept the plea for the reason that the sugarcane quality at the early season is of very low recovery, the fact is very well known to the all ministries concerned and the growers as well who irrespective of the facts force for the early start as the payment system of sugarcane has still continued based on the weight and not the quality.
As per our estimates early start of the sugar mills with the low recovery is causing a loss of minimum 150,000 tonnes of sugar costing mills billion of rupees, which is a phenomenal loss to the industry and the country.
Overlooking the technical and the positive aspects in favour of the late start, the main cause can be spelled out as the row between the growers and the millers over the price-hike and the non-availability of the crop. Shortage and the immaturity of the crop in the beginning normally result the early closure of the season at the higher recovery period. An adverse step for achieving the optimum production.
The continuation of the last year's short production, the frost-attack further deteriorated the situation. As usual, the sugarcane price immediately sparked the situation, with the result that sugar market started reflecting the production cost, which had always been a sensitive issue for the government.
Right in this meeting last year, a million tonnes shortage of sugar was forecast based on the official information for production of sugarcane crop. The need for the import of raw sugar was also ascertained to supplement the production. The severe frost attack on sugarcane crop in Northern Punjab and NWFP further disturbed the supply of quality sugarcane. Besides the above loss, the lucrative business of Gur making flourished as the demand was high at home and Afghanistan seriously hurting the mill sector.
Overall situation remained below average as 30 million tonnes of sugarcane was utilised by the mills to produce 2.58 million tonnes of sugar, supplemented by 372,500 tonnes refined from raw sugar and a marginal addition of only 8,700 tonnes from beet. Thus, the total production was registered at 2.964 million tonnes, apparently below 50 percent of the production capacity of the mills, thus Pakistan experienced second crop disaster in a row.
The Sindh government later revised this price to Rs 60.00. However, during the entire season the price fixation remained a volatile issue between the growers and the millers. The growers refused to sell the cane at the official price and millers in some areas of Punjab and Sindh were forced to delay the start of crushing season.
The miffing sector ended up bearing the bulk of the risk when the circumstances changed. While the support price varies significantly when there is shortfall during a particular harvest, there is no similar level of adjustment when the harvest is good and cane is in abundant supply.
With intermittent stoppages the season's sugarcane price averaged to Rs 80.00 in Punjab and up to Rs 95.00 in Sindh resulting in a significant rise in the production cost to above Rs 32.00 to Rs 34.00 per kg without addition of 15 percent sale tax which was immediately reflected in the market sentiments and retail sugar market shot up from Rs 38.00 to Rs 40.00.
The unprecedented increase in the minimum support price in the province of Sindh triggered the situation in the whole country. The increase of sugarcane price twice in the same crushing season by about 50 percent encouraged the growers to further dictate cane prices and cartel supplies.
As a result of the situation, the sugar market immediately started reflecting the trend in sugar prices, the sugar production was also termed as deficit by about a million tonnes.
The disturbance in the sugar market was immediately noticed by the government, which labelled the millers as profiteers involved in cartel under declaring the sugarcane procurement and production of sugar.
The government was informed of the situation and the deficit of sugar for the season to arrange import of the required quantity of sugar, which besides duty-free import of raw and refined sugar approved the import of about 850,000 tonnes of sugar by the TCP for sale and distribution through Utility Store Corporation (USC) outlets, with an obvious objective of subsidising the sale to bring the market prices down.
The import of refined sugar to the tune of 1.5 million tonnes along 0.5 million tonnes of raw sugar already refined has now converted one million tonnes deficit year into a million tonnes surplus year.
The situation thus developed hampered the economy of all concerned and the oversensitiveness has resulted the year ending with large stocks held by the TCP, mills and by the traders who imported sugar at high price. Ironically, the international prices started subsiding as soon as Pakistan had enough of self-dumped sugar.
The sugar crises during the year caused the industry face the blame game with all government agencies actively involved. In this connection few actions are being mentioned without going into details.
The Monopoly Control Authority (MCA) charged the sugar mills for cartel of sugar and registered cases against mills for their sale being below the desired assumed percentage by the MCA. The National Accountability Bureau (NAB) was asked to investigate corrupt practices leading to the sugar crises in the country. The investigation was later withdrawn.
The CBR appointed customs-armed staff at the mill's gates to supervise and monitor procurement of sugarcane and the sale of sugar looking for tax-evasion and sale to unregistered buyers. The monitoring was withdrawn with the end of crushing.
The State Bank of Pakistan (SBP) imposed 50 percent margin restrictions for financing against the security of sugar stock and instructed for immediate adjustment of all advances against the security of sugar stock. The final date for adjustment was later extended from July 31 to October 31, 2006.
After hectic meetings at the PSMA with the government officials concerned some of the restrictions have eased down. The government intervention for bringing down the import duty, subsidising the supplies through its outlets and blaming the industry hardly matters without taking necessary measures to support production of a better crop in a competitive environment.
The past experience and record showed that the sugar prices moved up and down inversely proportional to stocks and the same was the effect on the price of Gur where no factories are involved, contains impurities and remains tax-free.