The last time sugar industry produced nearly half of its seasonal output during Q1 was 2007-08, it was followed by a dramatic price spiral that saw retail prices double in less than a year. Protests by the industry have raised concerns that the 2020-21 may be another such season, as the upward pressure on national retail prices refuses to relent.

A debate has ensued between stakeholders whether enforcement of early crushing has led to an opportunity loss, as mills claim loss of sucrose recovery percentage due to premature crop harvest. So far, available data neither confirm nor deny position taken by the industry, but interesting information has surfaced that demands emphasis.

For example, sugar output in the Large-Scale Manufacturing index (QIM) witnessed its third consecutive monthly highest-ever, as the months of November, December – and now – even January saw highest month-wise sugar production volume. But the industry insists that early start of crushing means it will also come to an abrupt close prematurely, with the loss of production in February far outstripping the volume gained in November and December.

But it may be still too early to call it a day on crushing season MY21. On one hand, notification of crushing season was 15 days earlier, meaning the industry should lose crushing days in late March, rather than February. Moreover, data from the Office of Cane Commissioner shows that industry has achieved output of 5.5 million tons during first 120 days of operation, which places Feb-21 production at 1.4 million tons – easily greater than 5-year average for Feb.

Then why are sugar prices continuing their relentless rise? If management commentary in Q-1 financial reports of listed players is to be believed, growers have been successful in extracting hefty premium over MSP from mills despite forecasts of improved crop – a development that makes little sense. So, what is really going on? Three factors appear to be driving the market sentiment this season, despite forecasts of smooth sailing.

One, because the crop was in early phase of maturity when mills fired-on their factory boilers, growers were slow to turn up at mill-gate with their trolleys full of sugarcane, starting a price war for cane procurement between mills that quickly turned cane into a seller’s market. Mills control their variable cost by minimizing the number of days for plant operation, which would no longer be possible if farmers refuse to line up outside mills.

Two, the regulatory requirement for payment against cane sale-purchase to be only made through bank accounts appears to have added friction costs, as per preliminary discussions – allowing opportunist middlemen to swoop in, adding to final price of cane.

Three, reports of weak recovery by two industry giants – JDW (in South Punjab) and Chashma (KP) early into the season. If median sucrose recovery level as reported by listed players during Q-1 is any guide, there appears to be no across the board decline in sucrose recovery. However, since the two industry players together represent at least 20 percent of the market, the reduction in their sucrose recovery during Q-1 seems to have been extrapolated to overall industry performance.

Read together, available information indicates that sugar output in the ongoing season may be higher by 15 – 20 percent over last year. Alone, that’s little reason for retail prices to continue their upward trajectory, unless the 25 – 50 percent premium over MSP for raw material procurement is taken into account. Sure, that may represent better profits for farmers, but should this have happened in a season when official surveys had reported a crop surplus?

If a policy decision was made to allow farm economy to maximize its returns, there is little point in raising hue and cry over extra burden shared by end-consumers (in the shape of high retail prices). On the other hand, if the raw material crop was insufficient for domestic consumption – justifying the premium paid by mills over MSP – those who misreported crop estimates must be held accountable.