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SUGARCANE CRUSHING (Sugar mills to carry huge stock)

Added problems are increase in sugarcane procurement price and inability to acquire additional fund to pay the growers

Oct 29 - Nov 04, 2001

Sugar mills in Pakistan are expected to commence 2001-2002 crushing season in November but country has around 0.65 million tonnes sugar mainly comprising of imported commodity. Mills in general will not be able to pay sugarcane growers in time. On top of this government has increased sugarcane procurement price which will further increase the cost of locally produced sugar.

Sugar industry experts say that only government can be blamed for the current crisis, because traders were allowed to import sugar, particularly from India, against the advice of Pakistan Sugar Mills Association (PSMA). On top of this, government also lowered duty on imported sugar. Therefore, a lot of funds of mills are stuck in huge inventory of sugar. Though, the government is insisting on starting of crushing season in early November, mills will find it very difficult to make timely payment to growers even if they commence sugar production next month.

Sugar industry experts say that since the current situation is the outcome of government policy, the government should help sugar industry. They suggest two alternatives: either the government should buy the remaining sugar produced during last crushing season or the central bank allows commercial banks to lend additional funds to sugar mills.

The government has allowed Trading Corporation of Pakistan (TCP) to intervene in cotton market to ensure minimum return to growers. Therefore, TCP may also be given a mandate to buy sugar and subsequently sell it in the local market. However, some financial sector analysts do not approve this policy. They say that since additional funds have to be arranged for the TCP, it is not a prudent approach. Therefore, additional funds should be extended to sugar industry.

As regards, additional funds for sugar mills, the option does not seem workable under the current policy followed by State Bank of Pakistan. The central bank has little control on commercial banks when it comes to extension of credit. Banks have to make their own decisions and also hedge their risk as per prudential laws. The only way out could be relaxation of these rules for a specified period.

Analysts, believe that a large number of mills have already borrowed to the maximum possible limit and even if they are given additional funds, their financial charges will be too high and out of proportion. There are some chronic cases also. These are: mills not having positive CIB reports and those which have recently concluded rescheduling agreements.

In a recently held meeting of PSMA members with Governor State Bank, Dr. Ishrat Hussain had assured of sympathetic attitude of banks. However, he also warned that sugar industry should not expect any exceptional favour at this time.

There was a suggestion in the past that central bank should allow a general moratorium of one year for all the sugar mills. Some analysts, were of the opinion that moratorium should be allowed only to those mills which suffer from financial crisis. Whereas, other oppose this policy because it penalizes those who follow good governance. Therefore, they suggest that if a moratorium has to be given it should be for all the mills.

Analysts believe that since the GoP is following the policy of bring down average lending rates, sugar mills would also be the beneficiary of this policy. However, this policy would only yield results in the long run, whereas the mills need the funds now.

According to some sector experts, the GoP has not been able to envisage and implement long-term sugar policy. At the best, efforts being made now or made in the past are only adhoc measures. Therefore, the GoP must develop a long term policy in consultation with all the stakeholders.

The GoP is fully aware that sugar industry mainly suffers due to less than 50 per cent capacity utilization. This has a direct bearing on cost of production. Therefore, unless availability of sugarcane is increased in the country mills will never be able to achieve optimum capacity utilization and curtail cost of production. The way out is, improving sugarcane yield at farm level and sugar recovery at mills. Both the objectives can be achieved by cultivating high yielding varieties and improving sugarcane procurement system.

Dr. Ishrat has hinted towards the right solution. In his opinion, mills should act as mediator between sugarcane growers and commercial banks. This is not a new philosophy as the policy was followed in the past. However, after zoning system was abolished, mills decided not to act as mediators because farmers were not bound to sell sugarcane to specific mills.

Each policy has its pros and cons, but by and large zoning system had played a very important role in increasing sugarcane production and improving recovery in the country. Mills have once again given a consent to implement this policy. Now it is the responsibility of the government come up with a policy which can minimize exploitation of farmers by the mills and the banks.