Understanding Sugarnomics

This year sugar production has been more than the local demand but there are growing fears that its price will go up during the holy month of Ramadan. Over the last few years the country has experienced the worst sugar crisis, when its retail price hovered around Rs100/kg. Even the Supreme Court order fixing the price at Rs40/kg was flouted. The situation really got worse when Competition Commission of Pakistan raided the mills, warehouses and even the offices of Pakistan Sugar Mills Association. Some of the quarters termed the crisis an outcome of 'strong sugar cartel' and others attributed it to disruption in 'free market mechanism'.
However, sugar sector experts say that the hike in sugarcane price, myopic policies of the government and presence of groups having vested interest, are responsible for the dismal condition. The allegation that millers alone are responsible for the crisis is incorrect and misleading. In fact the feudal lords, having access to power corridors are also responsible for the prevailing situation. In fact the feudal lords wear many caps i.e. growers, middlemen and the millers. The role of bureaucrats has also been disappointing because they are efficient in maintaining cordial relationship with all the groups but are least bothered about the industry termed 'driving engine of the rural economy'. Though, nearly a dozen ministries at the federal and provincial levels claim a role in developing policies governing sugar industry, none seems to understand 'sugarnomics'.
Pakistan has a long history of efficient operation of sugar mills, when staff used to get around six bonus and shareholders were paid up to 45% dividend. It was mainly because mills were not liable to pay excise duty on sugar produced above the stipulated number of days. At that time mills used to operate above 200 days. As against this, crushing season has been reduced to around 125 days because of an acute shortage of sugarcane. Neither the government nor the growers seem interested in enhancing sugarcane production.
According to the experts sugar industry in Pakistan is capable of producing 9 million tonnes refined sugar but production has been hovering around 3.25 million tonnes. If the mills operate at optimum capacity utilization Pakistan can earn millions of dollars by exporting surplus sugar. The added attraction will be higher export of molasses but best will be production of bio-fuel to save billions of dollars spent on import of motor gasoline.
Sector analysts say that growers want to keep sugarcane supply short so that they could squeeze more money from the millers. They also say that farmers hardly make an attempt to increase production and productivity. Sugarcane yield in Pakistan is nearly half of the yield achieved in India. In Punjab lower yield is because of cultivation of sugarcane in 'cotton growing belt'. These areas have dry and high temperate climate which is suitable for cotton but harmful for sugarcane. At an average yield as well as recovery in Punjab are far lower as compared to Sindh.
Over the years sugar industry has remained 'single product' industry which is the main reason for high cost of production. Though, lately efforts were made to add new product, industry has not been able to make best use of molasses and baggase. Bulk of the molasses produced in the country is exported and sugar mills hardly operate the distilleries. The government is keen on popularizing use of blended petrol (E-10) but neither the mills nor the oil marketing companies are ready to go for massive marketing/sale of E-10 despite being more efficient and environment friendly.
Similarly, government has failed in offering an attractive bulk power purchase tariff to the sugar mills, capable of delivering up to 3,000MW to the national grid. While the government encourages creation of IPPs and even the RPPs it is not willing offer an attractive tariff to the sugar mills and granting them IPPs status. All the sugar mills have attached power house where steam is produced by burning baggase. The delay in finalizing the tariff is because Ministry of Water and Power is not ready to offer sugar mills a rate being offered to IPPs and RPPs. These mills have the capacity to deliver electricity closer to the point of actual consumption. This can also help in containing transmission and distribution losses.
Cost of sugar production has spiraled because of persistent hike in support price of sugarcane. If the government is serious in bringing down cost of production it has to ensure optimum capacity utilization of mills, encourage production of wider range of products from molasses and awarding sugar mills the status of IPPs. However, none of these can be achieved without doubling sugarcane output in the country. The country need not bring additional area under sugarcane cultivation but to improve yield.
Since increasing sugarcane production will take longer time under the makeshift arrangement mills should be allowed to import raw sugar. An incentive may also be provided by announcing a policy that mills can export half of the quantity of raw sugar imported after refining it. Mills may also be allowed to retain the foreign exchange earned from export of refined sugar to finance raw sugar import.
Experts are of the view that retail price of sugar could be reduced to half over the next five years by adopting the above stated policies. All the attempts to import refined sugar must be discouraged. The government has been committing the mistake of importing refined sugar at higher prices and at a wrong time. The government must ban import of refined sugar and facilitate import of raw sugar.
The government should also stop fixing sugarcane support price. If the government stopped fixing support price of cotton decades ago why it is adamant on fixing sugarcane support price? The policy of pricing on the basis of weight should also be discontinued and the new benchmark should be recovery percentage. The proposed policy would bode very well for the sugar mills operating in the cotton growing belt.
The government has constituted 'Sugar Board' which has failed in come up with suggestions to increase sugarcane output and bringing down cost of indigenously produced sugar. A new Board must be announced at the earliest.
It may also be kept in mind that during 2011-12 both production and yield are expected to improve further mainly due to adequate supply of water. The government should also not insist on starting sugarcane crushing in early December to attain maximum recovery. Starting early crushing and closing intermittently is worse than running the mills for shorter duration. If other countries can achieve higher production at lower cost why should Pakistan be a lager?