Come late, come safe. Following a clarion call by the IMF to liberalize Pakistan’s farm commodity markets and remove minimum support prices from major crops, the sugar industry is hoping to rebrand itself as the bastion of free trade, demanding the abolishment of price controls. Whatever its track record, a consensus within the industry to champion deregulation deserves support—provided it doesn’t retreat to its rent-seeking ways. However, policymakers should be cautious not to let the industry have its cake and eat it too.
Like all interest groups, the sugar industry has plenty to say in its defense. The support price is too high, and the domestic retail price too low. Carryover stocks going into the 2024–25 marketing year are also high, while quotas for exports are too low. The industry's proposition: either raise the end-user price in proportion to the support price (a bluff, given the IMF’s demands) or let all prices—raw materials and end products—be governed by market forces.
The proposed solution sounds simple, but where’s the catch?
The industry knows full well that policymakers, constrained by electoral considerations, won’t willingly take steps that could cause a crash in sugarcane prices right before the crushing season begins. Calling for an “immediate decision on excess sugar stocks” is simply a euphemism for demanding unrestricted access to export markets. And who in their right mind would oppose more export earnings for the country, especially when it seems to accomplish everything?
Except, you can’t fool all the people all the time. For at least two decades, the implicit understanding between sugarcane growers, the sugar industry, and policymakers has been straightforward: no minimum support price is too high, and no amount of sugar produced is too much. As long as local market prices continue to trade at a premium to international prices, politicians are free to raise support prices to keep their farm voter base happy. If higher production costs ever affect domestic demand, exports are allowed briefly to restore balance and make up for opportunity losses.
For too long, the sugar industry has operated in a world insulated from external shocks, maintaining profitability regardless of rising costs. But the backbreaking inflation and exchange rate depreciation of recent years have dramatically—and perhaps irreversibly—upended the industry’s business model.’
After many years, the industry finds itself unable to pass on the rising costs of raw materials to consumers. The collapse of consumer purchasing power has finally shifted the demand curve backward to a point where the industry can no longer raise prices with minimal impact on demand. According to the industry, it’s now ready to adapt to the realities of a brave new world, lest it face extinction. And if you believe that economic freedom is the shortest path to prosperity, you might be tempted to support the industry’s call for deregulation. But hold on.
What about the farmers? If the ground beneath the industry is shifting, why should the farmers bear the brunt—without warning and at the last minute? The unfolding crisis would be even worse than what happened to Punjab’s wheat growers earlier this year. It would be both unrealistic and ill-conceived to expect the government to step in and cover the difference. The sugarcane crop was valued at Rs750 billion at last year’s prices. If policymakers decide that the fair market price for the current year is Rs350 instead of Rs400, the government would have to pay Rs94 billion to cover the gap. In fact, if the sugar industry is to be believed, the fair price of cane should be even lower.
It’s not inconceivable that policymakers will take the path of least resistance, allowing sugar exports until domestic inventories ease and local prices catch up. But that’s not deregulation—that’s capitulation.
So, what should policymakers, caught between a rock and a hard place, do? For starters, they should rely on data to dispel myths and inform their decision-making. While it’s true that local sugar prices didn’t rise following last year’s increase in the minimum support price, they also haven’t crashed. This suggests that while carryover inventories may be high compared to historical averages, they aren’t high enough to cause a market collapse. Importantly, while prices plateaued in 2024, they rose by 45% in 2023.
In fact, over the past seven years, as the exchange rate surged from Rs105 to Rs280 per dollar, domestic retail prices for sugar have risen faster than cane prices. Even today, the ratio between the minimum support price for cane and retail prices is lower than the long-term average from 2013 to 2018. If the sugar industry claims to have improved productivity at a faster rate than cane farmers during this period, the ratio might be even lower.
The fact that retail sugar prices have held steady despite excess inventory and high interest rates suggests that the industry didn’t offload stocks at lower prices out of distress. This implies that it expected demand to return, perhaps through more generous export quotas or higher international prices. That was a commercial gamble, one that hasn’t paid off—and farmers shouldn’t be the ones to cover the losses.
You want deregulation? Let’s start laying the groundwork today, with a plan to implement it next year. Delivering shock therapy to one vital organ—farmers—while the cancer of protectionism spreads through the entire system is not only bad economics; it’s also terrible politics.