BR Research recently sat down with Pakistan Sugar Mills Association (PSMA) Chairman Javed Kayani to hear his take on Pakistan's sugar industry. Mr. Javed is a veteran of the sugar industry and possesses considerable experience of the overall value chain of sugar production. He is also the CEO of Chanar Sugar Mills Ltd located in Tandlianwala, Faisalabad. Below are edited transcripts of a very candid but insightful discussion.

<B>BR Research: How are some mills like JDW still managing to turn a profit?</B>

<B>Javed Kayani: </B> Their operation is located in Southern Punjab, which is climatically conducive for sugarcane crop with abundant availability of water. Sugarcane recovery in southern Punjab is more than 2 percent compared to central and northern Punjab. Recently they have gone in power co-generation and exporting electricity to national grid, which is contributing to one third of the company's revenue. Sugar mills will need to diversify in order to survive.

As the current trends in the sugar industry depict, it is very necessary to diversify and come up with additional revenue streams such as power generation and ethanol production. The sugar industry has been facing a difficult scenario over the past few years because of international glut situation that led to subdued sugar prices. The biggest difficulty that the industry faces is the support price of sugarcane that is fixed by the government, which has been increasing over the years.

This has led not only to the area under cultivation increasing disproportionately, but also makes the sugar industry uncompetitive. The yield in Punjab currently stands around 550-660 maunds per acre, whereas if modern farming techniques are used the yield can cross 1000 maunds.

<B>BRR: Sugar cultivation is replacing cotton and we are looking at another short cotton crop this year. What is your take on this?</B>

<B>JK:</B> We need to focus on agriculture by encouraging growers as we are an agrarian economy. Government is making all out efforts to promote agriculture in the country. The recent reduction in fertiliser price would help reduce production cost. Sugarcane is a cash crop and more remunerative for the growers. Sugar industry directly supports the farmers, and is doing all the research and development to promote sugarcane crop, whereas textile industry does not deal with the growers directly, which is why no direct support to cotton farmers is extended - a prime reason of decline in area under cultivation of cotton. Moreover, support price of sugarcane is also an incentive for the growers compared to returns on other competing crops.

<B>BRR: What steps has the PSMA taken to increase yields of sugarcane crop?</B>

<B>JK:</B> The PSMA has engaged the Mauritius Sugarcane Research Institute, which has been in existence since 1893. We are trying to replicate that model here as well to induce research and development in farming practices pertaining to sugar cane cultivation. But due to certain bureaucratic hurdles, developments on this front have been subdued. However, in some areas we have still managed to achieve significant milestones and are encouraging farmers to adopt these practices. A good example is farming done by our company, Chanar Sugar, where we have managed to achieve yields of 1300 maunds per acre by implementing modern sowing techniques.

<B>BRR: How much should the support price of cane be in your opinion?</B>

<B>JK:</B> There are always policy guidelines given by the Agriculture Policy Institute, Islamabad with regard to sugarcane price, which are shared with the provincial governments. API analysis is based on market research, cost of inputs, price of sugar and its inventory levels, but provincial governments have been increasing the support price to secure the rural vote bank. Government should always consider the prevailing market price of sugar while fixing the support price so that the industry remains viable to survive. Higher support price of sugarcane and reeling prices of sugar adversely affected the sugar industry; resultantly a number of sugar mills have gone bankrupt and sold their units.

<B>BRR: What is the situation of sugarcane growers? We often sympathise with the growers but at such an exorbitant support price, aren't the growers making a killing?</B>

<B>JK:</B> Sugar industry paid in excess of Rs230 billion to sugarcane growers this year which is a direct support to the rural economy. We want that growers should get a reasonable return but the problem starts when in a surplus year they expect us to clear their dues in fifteen days as per the obsolete Cane Act of 1950. At that time government was buying the entire sugar from the industry and sufficient cash flow was available to pay to the farmers in 15 days; but today, we are producing over five million tons of sugar, which is sold throughout the year according to a consumption pattern and surplus is to be disposed of for making payments to growers.

During the last four years, support price was higher, and it was impossible to export without seeking a subsidy from the government since higher support price also resulted in more cultivation of sugarcane. The industry is obliged to crush the entire sugarcane crop; resultantly, surplus is not made by choice as a consequence of regulatory environment, therefore, the industry is also justified to ask for rebate. All allegations of getting an undue favour are farcical.

The export rebate is meant for payment to sugarcane growers. There was a gap of Rs10-15 per kg between our cost of production and what the industry could retrieve by exporting in the international market which was at a level of USD 390-USD430 per ton at that time.

<B>BRR: Why is there disparity in the provincial support prices?</B>

<B>JK:</B> There is no disparity as such Punjab and KPK follow the same price, whereas Sindh is higher by Rs2/per 40kg. A year ago, the millers were agitated because in view of the then prevailing price of Rs47/48 per kg of sugar it was impossible to pay to sugarcane growers at a support price of Rs180/182 per 40 kg.

The logic behind this move was to ensure the break-even to pay to the farmers on time and without delays. Based on industry's case only Sindh government issued a notification of Rs155/40 kg. Similarly, in Punjab and KPK, the industry also took up the matter with their provincial governments as there was a price disparity of 27/40kg but due to political exigencies, it was not reviewed and brought down in Punjab and KPK. The sugar industry in Punjab and KPK also pleaded to the government for a soft loan for five years to meet the deficit arising from sugarcane price disparity to pay to the growers but it was declined.

Growers and millers in Sindh eventually had a consent order issued by Honourable Sindh Court wherein they agreed at a price of Rs172/40 kg out of which Sindh government doled out Rs12/40kg to the growers and Rs160/40 kg were agreed to be paid by the mills. Punjab and KPK remained at a disadvantage in terms of cost of production and were not in a position to bridge the deficit which is still impacting the balance sheets of the mills.

<B>BRR: Are the export subsidies shared between the province and the centre? How much of the mills' money has yet to be released?</B>

<B>JK:</B> According to the ECC decision, the subsidy allowed for export of sugar was to be shared between the provinces and the federal government on 50:50 basis. The provincial portion of 50 percent ie, about 1.6 billion is still unpaid against this year's export, while one third of the federal share is also outstanding, which is approximately over half a billion. In addition, 2.6 billion is payable to industry from TDAP for the last four years against inland freight subsidy that is being delayed on one pretext or another, while the sugar industry is blamed for delays in payments to the growers.

<B>BRR: Give a breakdown of all the taxes on sugar industry and what are they - FED, GST, what else? Recently, the FY17 budget had also introduced a new measure. What does it mean and what is its implication?</B>

<B>JK:</B> The sugar industry is paying eight percent GST, which is worked out on the basis of an assessable market price determined by FBR from time to time to ensure maximum collection of revenue. We are also paying an additional two percent tax on sales made to unregistered persons. We pay one percent turnover tax and corporate tax is 35 percent.

<B>BRR: What is the current stock of sugar in the country? How much strategic reserve does the government need to maintain on an annual basis and why aren't appropriate steps being taken to get rid of the surplus? Are there any issues with storage of the sugar?</B>

<B>JK:</B> We have an estimated stock of over one million tons as on 30th September. According to an ECC decision of 2006, a minimum of 500,000 tons of strategic reserve must be maintained in the country through Trading Corporation of Pakistan, which can be utilised for open market intervention in the event price of sugar spirals in the market, and to meet requirements during the holy month of Ramadan, and to cater for USC.

Sugar has become a political commodity and government is always apprehensive that price of sugar would go up in the local market if it is exported, but they do not realise that the surplus cannot be consumed by the domestic market. Consequently, growers' payments also remain outstanding because of erratic policies of the government.

The government must also ensure a reasonable price of sugar in view of the stipulated support price of sugarcane. There are no issues with storage of sugar.

TCP in the past has been keeping and monitoring stocks in the mills, which were off-loaded to stabilise the price when it escalated. Government should consider adopting TCP mechanism again so that they have the strategic reserve at hand.