The annual statistics from Pakistan Sugar Mills Association for 2017-18 are out and make for a frank commentary. While the millers have complained of a bad year, the future does not appear to be as bleak.

Recall that in MY17, domestic sugar production grew like there was no tomorrow with an annual increase of 38 percent. This was at a time when domestic demand saw nominal change whereas international market was also witnessing record low prices.

With limited export potential, MY18 began with a surplus opening stock of 2.5 million tons (October 2017), roughly 48 percent of reported annual domestic demand. Any other industry would have seen a decline in raw material demand, but given the election year ahead, smart farmers knew that the incumbent government could not afford to mess around with the support price levels. And it didn’t.

As a result, despite surplus stock, area under sugarcane cultivation grew by more than 10 percent, to a highest ever 1.3 million hectares – forcing further decline in area under cotton plantation. Sitting at surplus inventory, millers refused to begin procurement and crushing well into October 2017, until the GoP announced substantive subsidy to make sector export-competitive (Read: Export that cost billions, published in these pages on January 22, 2018).

Hence, millers’ claim that the industry on average failed to breakeven appears exaggerated, given subsidy of Rs 20 billion, and exchange gains on rupee devaluation. Furthermore, cane utilization level remained at one of lowest rates in the past decade, just under 79 percent compared to 94 percent the previous year. Given 83 million tons of cane production last season, that’s crops worth roughly Rs 80 billion that went to waste. This also indicates that extending subsidy to the sector did not really help take the excess crop off the market.

And so, it appears that given government’s inaction on support price, millers have finally managed to teach growers a lesson. During MY19, area under sugarcane cultivation is expected to decline to a multiyear low of 1.1 million hectares, with sugarcane production expected to decline to MY15 levels – a 20 percent decline over last year.

Policymakers should not expect cane utilization levels to increase substantially this year either, considering that Sugar Advisory Board has failed to heed across-the-board calls for review of support price mechanism.

If there is no change in crop yield, expect no increase in sugar production levels either; considering the current crushing season has also opened with surplus stock of 2.4 million tons. And label what one may the sugar lobby, there is slight chance of another round of subsidy on exports. Domestic cost of production is estimated at $80 per ton higher than international sugar prices. Thus, exports cannot be expected to maintain last years’ level despite announcement of export quota, unless the provincial governments begin picking winners.

Falling cultivation and production may sound like a bad thing, but regular readers will note that this column has long argued for reduction in sugar production levels. In the past five years, sugarcane plantation has grown at the expense of cotton, adding to the misery of an already troubled textile sector.

The methods adopted by the industry may appear disagreeable, but it looks like sanity shall finally be restored to the sugar market, with production returning to equilibrium levels over the next two years. Given government’s failure to remove distortions from the market place, millers seem to have taken care of their self-interest themselves. Albeit after making half a million dollars at ex-chequer’s cost in the process. Hope this government learns from mistakes of the past rulers.