The sugar industry is in the news again. The industry wants a license to export surplus stocks; the government wants guarantees that the consumer-end prices won’t rise as a consequence. Media pundits are taking sides: taking bets whether exports will lead to another domestic ‘shortage’. The industry is threatening to default on bank loans and cease operations next season. A story as old as time. Has anything changed at all? At least the industry isn’t demanding subsidies on exports (at least, not yet).
A clear-cut case exists for exports. Sugar has been trading in the international market at a premium to domestic market since March 2022. Even though international market prices have crashed by over 30 percent over the past six months, the premium between local and international prices is still estimated at 35 – 40 percent. Despite the third highest production year in history, mills are witnessing slowest offtake in at least 5 years, owing to weak domestic demand.
Moreover, many mills are reportedly struggling to break even at ex-factory prices of Rs140 per kg, no thanks to the record rise in minimum support price – doubled over the past two seasons -. While the record markup rate of 23 percent isn’t helping matters either, considering the high levels of unsold inventory, and statutory requirement to discharge farmer liabilities within 15 days of cane procurement.
Does the sugar industry deserve our sympathies? May be, but honesty helps, and the industry certainly doesn’t believe in being candid. The last two times export quotas were issued, sugar prices in the domestic market rose by 45 percent (CY22), and 26 percent (CY20) on average. In fact, speculative activity in the secondary market kicks in as soon as deliberations over export become public. If export permissions are issued in the months to come, prices in the domestic market will almost certainly rise. That’s because a rise in domestic prices is the objective of exports.
Why? Because when your case for exports is based on ‘we are selling at a loss otherwise’, the whole point of exports is to lower the carryover inventory so that domestic prices can rise again. During 2022, the industry exported less than 5 percent – yet local prices ended up rising by 45 percent. This is not an export-centric industry: simply because the output is finite and cannot be scaled up just because the international market is offering attractive prices. That can only happen if barriers on trade – both imports and exports – were lifted. This is neither what the industry is demanding, nor what the government is ready to offer.
Thus, the industry is busy offering false assurances that the ‘ex-factory’ price for the domestic market will remain unchanged in the event exports are allowed. That of course is no guarantee that consumer end prices won’t rise, which is what an inflation-haunted government is – rightfully – concerned with.
The government is also haunted by the skeletons in its closet – namely, the infamous commercial interests of the ruling families – both the Sharifs and Zardaris, in addition to many other political families – in the sugar industry.In fact, it is now well known that up to 42 out of a total of 90 mills in the country are politically affiliated, with politically affiliated owners mills accounting for half of total domestic output (a list, by the way, first made public by this author for BR Research in 2019, long before the PTI era inquiry into the industry).
But the harsh truth is that this affiliation is no longer helping. Because exports would – as they should – directly lead to a rise in domestic prices – politically connected commercial interests would rightfully be seen as having benefited their own at the expense of the ordinary consumer. Sugar is selling at par with international prices in the domestic market is not the worst in the world. However, unless barriers on import were also permanently lifted so any abnormal increase in domestic prices is avoided due to unforeseen supply volatility, any politician remotely concerned with public welfare would think twice before indulging commercial interests at the expense of the poor.
Which brings us to the million-dollar question: is the industry ready for global competition? It is unclear. Over the years, the industry representative association has failed to make any active efforts to seek industry deregulation. Although the industry is generally considered to be competitive, it is likely that it is afraid of losing out on the captive plantation of cane acres if the minimum support price were removed. So, it puts up with an artificially inflated floor price on raw material purchase, so long as it is guaranteed that it can pass on the periodic increases in cane price onto the domestic market – which faces no foreign competition. Of course, this equilibrium is periodically disrupted each time supply exceeds demand, and retail prices fail to keep up with the politically motivated increases in raw material prices.
All this can come to an end. If the industry leader truly believes that they can compete in a global market, they must come out and break free off the shackles of the statutory benchmark price, exposing themselves to volatility in supply of raw material. That demand will not find many takers, because the commercial interests of the politically connected cane farmers far outstrip the vested interests of the milling industry. The support price on cane is a political tool to reward rural voting blocks, which mostly works for all three: politicians, voters (farmers), and industry (mills), until it doesn’t.
The reality is that the status quo is far too beneficial for just enough stakeholders to ever be disturbed. The industry isn’t going to demand liberalization, and therefore it doesn’t find many takers for its plight either. But such is the cost of playing in the big leagues.