Economies of scale cannot be achieved without allowing free export of sugar


Nov 03 - 09, 2003




Gone are the days when sugar industry was in the control of business community. Now those who are either politicians or have political connections control bulk of the installed capacity. The main raw material supply, sugarcane, is also in the hands of those who have political connections. However, over the last couple of years there has been some conflict of interest. Mainly because sugarcane growers and millers have become opponent.

In Pakistan, the agriculturist lobby has always enjoyed the biggest say or has been influencing the industrial policy. Knowing the structural weakness of Pakistan's manufacturing sector and their strong clout, farmers have often succeeded in persistent increase in support price for various food and cash crops. It is evident that Pakistan's large-scale manufacturing sector is dependent on two crops, cotton and sugarcane.

Most of the cotton growers have strong political links. At times, some are with the ruling government and others may be sitting on opposition benches. Since the interests are common they always support each other. Though, some of the politicians have entered into spinning, they have not attained a dominant role as yet. Looking at the manufacturing sector of Punjab, it is evident that politicians have stake in diversified industries.

As opposed to this, the rural economy in Sindh is almost entirely dependent on sugar mills. Farmers draw the largest percentage of their income from sugarcane growing and mills also provide significant employment, though mostly seasonal.

Most of the textile units are located in couple of large cities only. The elite of the province now wear two caps, custodian of the interest of farmers and representative of rural industries. However, at times the interests become so intermingled that if they protect their interest in agriculture there is a fear of losing government support. If they try to protect their interest in rural industries their opponents become supporters of farmers. Since the stakes are high they are often caught in a situation 'When I said that I meant this and when I say this I meant that'. Therefore, the problems often linger on and cannot be resolved.



The best example of prevailing situation is the on going crisis of sugar industry in Sindh. Millers have refused to commence the next sugarcane crushing season due to the piled up inventory. At the same time farmers, that include some of the sponsors of sugar mills operating in Sindh, are putting pressure on the provincial government to force the mills to start crushing. While some of the mills are not willing to pay higher price of sugarcane, the millers enjoying political clout, who are also the largest producers of sugarcane, are not willing to let the government fix lower support price of sugarcane.

The largest vote bank of interior Sindh also comprise of sugarcane growers. Therefore, the custodians of farmers' interest are not allowing the government to bid farewell to fixation of sugarcane support price as well as quality premium. Therefore, they are demanding commencement of season at the earliest, fixing the sugarcane support price and continuation of payment of quality premium.

However, due to their hypocrisy they are gradually losing the ground and millers are attaining the power. The millers have told the government categorically to bid farewell to fixing support price and payment of quality premium. They are demanding these on two grounds, at present the government does not fix support price of cotton and the payment of quality premium has been stopped in Punjab after the judgement of Punjab High Court.

The millers also say that in case the government allow increase in support price of sugarcane it should also allow the millers to increase ex-factory price of sugar. They have a valid point because if there is an increase in cost of raw material there should also be a corresponding increase in cost of finished product. However, the government does not seem to ready to accept this point. The key reason for this refusal is that price of locally produced sugar is already high as compared to imported sugar.

The key reason for higher cost of locally produced sugar are two, high cost of raw material and low capacity utilization. Sugarcane growers are not ready to increase availability of sugarcane fearing a decline in its price. The inadequate supply of sugarcane results in poor capacity utilization, as low as 50%. Therefore, a more plausible option, to bring down the cost of production, is to achieve higher economies of scale.



However, economies of scale cannot be achieved without allowing free export of sugar. However, the GoP does not seem to be ready to make this crucial decision. For the last three years sugar production has been much above the local consumption. The absence of sugar export policy has resulted in huge inventory of sugar at the mills and delay in payment to farmers. The situation has attained a level where the millers in Sindh are not willing to commence the next crushing season. If the government is serious in resolving problems of millers and growers it must announce a clear cut sugar export policy immediately.