Nauman Ahmed Khan is the young scion of the AlMoiz group, which has commercial interests spanning beverage, sugar, power, textile and steel industries.
Nauman has a master’s degree in industrial engineering as well as an undergrad. degree in economics from Stanford University, USA. Previously, he has worked for Goldman Sachs and Pepsi Co. USA. Over the past 12 years, he has been associated with group’s businesses and holds directorship in several of its undertakings.
He is a member of The Forum of Young Global Leaders and has been a speaker at various national & international conferences representing his group. He was also the chairman of zonal committee, Punjab of Pakistan Sugar Mills Association (PSMA), for 2018-19.
Given Al-Moiz group’s footprint in the sugar sector –– and downstream value-addition including beverage and bagasse power, BR Research sat down with Nauman to understand industry specific challenges such as support price, export policy, industry deregulation, government support in the form of subsidy, retail price control, cotton-cane substitution, and environmental impact of sugarcane.
Following are the edited excerpts of the conversation:
“Cotton & cane do not compete for the same acres”
BR Research (BRR): Let’s start with the just began crushing season, where mills crushed a record-high volume in December. What is your outlook for sugar production at a time when harvested crop is expected to have fallen to a five-year low?
Nauman Ahmed Khan (NK): Due to a balanced position of sugar stock in domestic market, and better trend in retail price compared to last few years, crushing season began on a good note, where cane is being procured at 20 percent higher price than notified rate, on cash terms.
However, sucrose recovery during MY20 is expected to be lower compared to previous years; industry average may clock in under 10 percent. As a result, total output including carryover stocks may even out with demand by the time crushing closes around March. Note that sucrose recovery is largely a function of crop quality; the differential due to efficiency of extraction process is only marginal.
I would like to highlight that over the last 10 years, average recovery in the industry has increased from 8.5 percent to 10 percent, bulk of which may be attributed to millers’ working with the growers to commercialize high yielding varieties and improve production efficiency methods.
BRR: Sugarcane utilization levels in the industry vary widely year-on-year; moreover, high level of variance is observed between official sugarcane production and crushing figures. Is that symptomatic of under-reporting of output?
NK: By and large the industry is tax compliant, with low incidence of tax evasion. On sector-wide basis, under-reporting of output may be negligible.
In order to prevent tax evasion, the industry advised FBR to use ethanol production as a proxy to estimate total sugar production. Pakistan’s local distilleries face unique dynamics because almost all of ethanol produced is export oriented. In addition, because ethanol is a highly controlled substance, its movement is regulated and is kept in bonded warehouses under Customs regulations. This means that ethanol output volumetric data has a very high degree of reliability.
Nearly all domestic industrial ethanol production is molasses-based, which is a by-product of sugarcane crushing process. By my estimate, more than 90 percent of molasses is procured as raw material by distilleries, as molasses-use for other commercial purposes is very negligible (use in feed may be no more than ten percent of total).
Although molasses recovery per ton cane crushed is not fixed, it ranges anywhere between four to five percent. But it’s good enough to offer a very close approximation for a market sizing exercise so that incidence of under-reporting in the sugar industry – as is often insinuated by the media – may be scientifically quantified. In my knowledge, demand for molasses and ethanol from other consuming segments such as local breweries is also very negligible.
BRR: Industry’s claim that the country had opening stocks equivalent to one-third of domestic demand in MY18 led to opening up of export that was followed with export of 2.5 million tons of sugar over next 24 months, with generous subsidy from the government. Now the country is facing a shortage which has led to 36 percent increase in retail price over preceding three-year average. Do you agree that subsidized sugar export reflects flawed policymaking?
NK: Despite opposition to sugar export both my media and official quarters, Pakistan had managed to become the seventh largest sweetener exporter in 2019. It is incorrect to claim that sugar export is subsidy dependent, as export worth $70 million took place between Jul-Dec 2019 without any government support.
Between Nov-17 and June-19, the industry exported sugar worth $700 million with the help of subsidy, but it is important to understand its context. Inventory build-up began in the industry three years ago on the back of consecutive bumper crops. PSMA persistently requested removing of export ban to avoid a glut in domestic supply. Back then, no subsidy was needed, as 12-month international price moving average was over $460 per ton.
By the time the government relented, it was too late. When the export quota of two million tons was finally announced in MY18, international price had collapsed by over a $100 per ton. The blame for delayed crushing, delay in payment to growers, and failure to pay official rate during that season lays squarely at the altar of short-termism in policymaking.
It is unfortunate that the government allows export quota when international prices are low, meaning domestic industry is no longer export competitive and has to rely on subsidy support, and bans it when international prices improve, as is the case in the ongoing season.
BRR: Expansion of sugar milling capacity in southern Punjab is blamed to have come at the expense of cotton crop, which feeds into the export-oriented value-adding textile chain. Do you agree that sugarcane plantation should be banned in southern Punjab to encourage cane substitution with cotton?
NK: Numerically, it may be correct that cane has gained acreage in regions such as Rahim Yar Khan, Bahawalpur and DG Khan where cotton lost, but it a misnomer to assume that the two crops compete for the same acres. Cane is usually planted in kachha areas – that is, flood prone regions – where water tables are very high, and groundwater can be abstracted as quickly as just 10 feet under the soil. This is because cane has a very high tolerance for water, whereas cotton cannot resist high moisture content in the soil. Cotton needs sandy soils and irrigated lands, for which Thal region is more suited, compared to Panjnad in southern Punjab.
BRR: But sugarcane is noted to have a very high-water footprint and is thus ill-suited for a country facing intermittent water shortages.
NK: Unfortunately, even in academic & research circles, sugarcane’s high water-tolerance is misconstrued to indicate that it is a water-intensive crop. Nothing could be further from the truth.
Our collaboration with Australian researchers indicates that high water application in fact lowers cane yield. Moreover, its water footprint is also misunderstood. Compared to other major crops which are planted over four months, cane is a 12-month crop; its per month water consumption is thus equal to that of cotton. Yet even agricultural researchers simply focus on its absolute water delta, and not the duration.
BRR: In that spirit, it may be pointed out that competing industries offer better dollar return per capita of water resource consumed, whereas sugarcane has a poor value-adding potential.
NK: A useful metric to compare water footprint of competing industries is to look at water required per kg of output. Chemically speaking, water-content constitutes 70 percent of sugarcane weight. This means that 700 litres of water is generated from each ton of crop crushed. More than three-fourths of the vapours generated through the boiler process is utilized within factory, whereas the surplus may be used to irrigate agricultural lands. In that sense, sugar industry is water efficient as its dependence on public water sources is declining, as mills become more energy efficient.
BRR: Has higher remunerative returns on sugarcane not contributed to its perceived preference over competing crops, in turn leading to lower interest by growers in cotton?
NK: Our group also has interests in textile business; so I can emphatically point out that cotton’s woes stem from lack of investment in research & development of new varieties; a challenge that was faced also by sugarcane 20 years ago, but was resolved due to support extended to growers by mills.
Also understand that capacity expansion by sugar mills in southern Punjab actually helped improve farming incomes that often goes unappreciated. Because the region is not conducive for cotton and similar sensitive crops, growers previously had little choice but to plant subsistence cropping of wheat and paddy, which in economic returns terms is a poor alternative to sugarcane.
BRR: By that logic then, sugarcane has become more attractive for growers in comparison because it has a floor price in the shape of minimum support price (MSP), that is missing from cotton and other crops.
NK: But support price has been in place since before independence, but cane has become more attractive only over the last decade. More than the support price, sugarcane offered phenomenal returns to growers because until 2010-11, Pakistan was a sugar deficit country. That was also the last time when retail price of sugar had averaged over Rs 73 per kg; and mills had procured cane over Rs 200 per 40kg, irrespective of the much lower MSP at that time.
BRR: What then led to Pakistan becoming a sugar surplus country within six years, if not the exorbitant support price, capacity expansion and the following increase in cane area in traditional cotton belt?
NK: Between MY10 and MY17, sugar production in the country increased by 125 percent, whereas acreage only increased by 30 percent. The driving force in sugar output growth has been increasing sugar yield which went up by 70 percent during the intervening period – a function of both improving cane yield per hectare and sucrose recovery. Both have improved because sugar mills have heavily invested in development of new varieties and provided them to farmers for commercialization.
BRR: If support price is inconsequential, why does the industry not advocate for its abolition?
NK: Because support price has only become relevant to both growers and millers in the last two seasons when there was a substantive surplus of sugar in domestic market. Before when the country faced a deficit, sugarcane was usually traded at commercial rates higher than notified rate. Same is the case in the ongoing season.
Support price is a result of Cane Act which was enacted by the colonial rulers. Back then, it had a fruitful objective to develop the local industry; it helped encourage cultivation of what was till then a non-traditional crop; and led to establishment of the milling value chain.
However, note that the Cane Act was designed keeping in mind a controlled economy: cane was procured by mills from growers on 15 days credit terms; once crushed, the output was purchased by the provincial government, which paid the mill within two days of purchase. Crushing capacity of mills was notified by law, new mills or expansion could not take place without government approval, and sugar was available to the retail consumer through ration cards. But most importantly, economic returns were defined by the government, as cane price, ex-mill price, and retail price were all officially set.
The government cannot have it both ways; while the upstream (cane) price is controlled, downstream, especially the value-adding segment and commercial industry is deregulated; which by the way, consumes over three-fourths of total output. In this respect, it is unrealistic to hope that the government can control final price as a long-term policy.
Unfortunately, policymaking in the country suffer from path-dependence; and unless there is an emergency, no landmark legislative change is brought.
BRR: What then is the pricing mechanism for sugarcane in other countries, and are there any models that could be replicated?
NK: Because of colonial legacy, it is correct that the industry has grown in a controlled fashion almost all over the world. India, for example, has a Fair & Remunerative Price, which is similar to what we have this side of the border.
Sugarcane is not a tradable commodity due to its high gross tonnage, which means that the industry’s evolution elsewhere has also been complex. Australia, for example, operates on a co-operative model. This means that the sugar mills are in fact only processors, whereas the grower becomes the owner of the sugar that is manufactured. The legislation in the country is complicated, but effectively, it follows the principle of ‘growers’ choice to sell’, that is, the timing of transaction belongs with the grower. That is an example of what deregulated industry looks like elsewhere, as cane price is not set by the government, but is rather reflective of movement in sugar price in global commodity market.
However, given the geographical restrictions in transportation of cane due to high gross tonnage, the aspect of high bargaining power of near-farm large buyers needs to be accounted for in any sector-specific policy.
Having said that, I believe Pakistani sugar industry has made great leaps in its competitiveness and productivity in the last decade and is now ready for complete deregulation to compete with world markets.