What explains the more than one-third increase in retail sugar prices during June-19? Populist media has for long been pointing fingers at the “hoarding mafia”, and in recent days politicians have also followed suit. Does that term refer to the producers – the mill owners, or wholesalers, who procure commodity at low prices and then jack up prices once supply slows down?
More importantly, even if retail prices have shot up, is that a function of expected decline in upcoming production season (as explained here)? And does that necessarily qualify as exploitation? Afterall, hoarders do perform a useful market function, aiding in price discovery.
However, critics may point out that were it not for the 40 percent excise duty on import, prices would not rise in anticipation of a decline in domestic production, as the commodity is trading at an all-time low $327 per ton in international market, compared to retail equivalent price of $500 per ton domestically.
That excise duty is a distortion, protecting sugar producers and resulting in consumer loss. But so is the indicative price of cane, the raw material, which is also kept artificially high to incentivize growers. Afterall, if domestic market were to be flooded with cheaper imported sugar, governments could no longer chant their mantra of increasing returns for farmers, the ever-besieged community of the country.
But in all the noise, hard numbers and their objective analysis are first to face demise. For example, little attention is paid to that Pakistan’s cane utilization level - defined as annual sugarcane produced that goes toward crushing and processing into sugar – has a very erratic pattern. On country-wide basis, utilization has risen to as high as 94 percent in FY17, a season when stocks were already piling, and been as low as 66 percent in MY09 even though a shortage was anticipated due to rebound of prices in both international and domestic markets.
As a case study, BR Research performed a micro-level district-wise analysis of cane production, crushing, and raw sugar output for Punjab province for FY17, when annual domestic sugar production crossed the ever-highest 7 million tons.
Why Punjab in particular? Because it is intriguing that the province where half of all mills in the country are located and has a share of over two-thirds in domestic cane production, only utilized (or crushed) 89 percent of cane – even when utilization in Sindh exceeded 100 percent.
Does that mean excess cane was transported from Punjab to Sindh for crushing? Maybe, but basic arithmetic and geography may point otherwise. Mills in crushing region of southern Punjab nearest to Sindh border (such as Bahawalpur) itself procure cane from Multan division. Southern Punjab districts, defined as Multan, Bahawalpur, and DG Khan Divisions, have an aggregate utilization level of 99 percent, contradicting possibility of export of cane to other districts, let alone neighbouring province.
It comes as no surprise that southern Punjab districts have a very high utilization level. Afterall, the biggest players in the sector have their largest crushing capacities installed in the region. Fourteen mills in total in the three divisions of Multan, Bahawalpur, and DG Khan have a share in provincial cane crushing of 56 percent. This is against region’s share in provincial cane production of 50 percent, which as was noted before, is nearly fully utilized.
Which begs the question why the remaining 31 mills located in northern & central Punjab region under-performing? Afterall, farmers in the region are responsible for the remaining 50 percent of provincial sugarcane output, of which only 80 percent was utilized towards crushing.
It is hard to imagine that cane from northern and central Punjab travels all the way to mills in Sindh, where there seemed to have been a shortage of 1.39 million tons. Even if that were true, it would only explain a fraction of central Punjab’s surplus cane crop of 5.2 million tons, defined as the difference between region’s production and crushing during that season. Similarly, mills in KP also operate below capacity (i.e. production greater than crushing), and thus cannot explain the anomaly.
Another possible explanation, of course, could be use of sugarcane as feedstock, or saving of crop as seeds for next season. But surely the practice of cane consumption as feedstock must extend to other regions as well and cannot be unique to central Punjab farmers alone. Similarly, saving 20 percent of season’s crop for next season plantation appears too high a number. If its prudence, how come farmers of southern belt are not equally concerned, selling their entire crop for crushing and then some?
It may be worthwhile to note here that of these 31 milling units; only 9 belong to companies that are publicly listed. Majority of unlisted players are mid-sized units, about which information is hard to come by. Some are known for political affiliation, but more importantly, most are also closely integrated into value-added inter-group operations such as production of juices, syrups, cola/carbonated beverage bottlers; and chain of confectionary and bakery items – all operations where white sugar is used as a key input.
Without naming names, it may seem worthwhile to ask the following question. If the regulator and price control authorities are truly invested in curtailing “purported” hoarding of sugar, it may be wise to ask the mill owners of central Punjab with forward-integrated operations as to why they operate under-capacity, even in years of bumper crop, when other regions are operating at full throttle. Under-reporting of inter-group sugar sales may be the answer, some might reckon.
That may also solve the mystery of abysmally poor cane recovery rates (compared to other regions) in an otherwise fertile – and mind you, irrigated - soil of central Punjab.
Surely, the revenue authorities have access to appropriate beneficial ownership information of such business groups, politically connected or otherwise. What is stopping them?