In yesterday’s column on MNFS&R’s proposal to introduce indicative pricing mechanism for cotton, it was noted that the similar experience of imposing support price for sugarcane has not been encouraging.
But it stands to reason why the support price has remained in place when ostensibly; the measure has received criticism from both growers and mill owners. Malik Afaq Tiwana, CEO Farmer Associates Pakistan (FAP), explains that the indicative pricing mechanism is a clever ploy by millers to show notional increases in their cost of production, allowing them to demand subsidy at export stage.
Prima facie, the argument seems to hold water as millers did receive substantial subsidies during last marketing season to offload excess stock. However, the evidence supporting “miller’s grand design” to make a fool out of government is at best, vague.
For one, while smaller in quantum, freight subsidy extended to sugar millers has proven to be another circular debt. As per PSMA officials, more than 60 percent of the Rs20 billion announcement by the government has not been so far disbursed. Sindh based millers claim that a far greater percentage of the additional subsidy announced by the provincial government is stuck with the finance department despite approvals.
Second, while availability of sugar in excess of domestic demand has persisted for at least past seven years, whereas, provision of subsidy on export has primarily been unpredictable; based mostly on political considerations.
For example, good use of export quota could have been made circa MY13-15 when price of sugar in global commodity market were very high; at that time, export would have proved feasible even without subsidy. Yet, subsidy was only announced in the election year by the outgoing government, when global sugar prices had dropped to all time low, and to great cost to exchequer.
Moreover, under the arcane Sugar Factories Act of 1950, millers are required by law to pay a quality premium to growers for any incremental sucrose recovery rate beyond 8.7 percent. The premium “at such rate as may be determined by the government, from time to time”.
Thus, even if in absence of minimum support price, growers should have received market set rates that sufficiently compensate for the quality premium, as average national recovery rates have since climbed by 130bps above 8.7 percent. In MY18, for example, less than one-fifth of the 80 members of PSMA reported recovery rates below 8.7 percent rate.
The failure, then is, and will continue to remain at the implementation stage. Arcane as the law maybe, it also mandates that the sale and purchase of sugarcane may only be made directly between grower and miller. Yet, the pre-dominant role played by the arthi in the supply chain is an open secret, with famous tax expert Shabbar Zaidi, in an interview with BR Research, going so far as to say that whole economy is run by arthis.
As accompany graph notes, the ratio of support price to retail price of sugar has gone from under 1.6x in mid 2000s to up to 3.4x times in last season, making the crop attractive to farmers, well reflected in growing area under sugarcane cultivation.
Yet, between MY05 and MY18, domestic sugar demand has grown at an annual CAGR of 2 percent, even as minimum price for sugarcane has increased over 3 times. While it is laudable that subsequent governments have looked after the interest of farming sector, to what end is sugarcane growing being incentivized, when the demand for the product is clearly sticky.
Moreover, with national sucrose recovery levels way below global average of between 12 – 15 percent, does the quality premium not serve as a perverse incentive to not invest in improving yield? Little wonder then that the area under crop cultivation continues to grow,
The sector is blighted with problems, of which support price is one. Yet, olicymakers have maintained the traditional sub-continent fixation on “available culturable land”. It is about time to get their heads out of sand.