NEED OF A NATIONAL SUGAR POLICY
Diversification and use of by products is yet another step in the positive direction
By Prof MOHAMMAD ALI SHAIKH*
Nov 29 - Dec 05, 2004
Sugar industry in Pakistan comprises of 78 sugar mills with an installed crushing capacity of over 55 million tons which can produce about 5.00 million tons of sugar. However, the industry does not operate at full capacity due to shortage of raw material and lower demand and the production is far less.
The overall situation in the industry points at the fact that the growth has remained unplanned and ill conceived. The industry with enormous scope for by-products and potential for becoming a substantial export earner and GNP contributor is languishing behind and is becoming a burden.
The prevelance of present crises are the result of unplanned capacity, raw material shortage and higher cost of production and little emphasis on by-products. The industry comprises of a mixture of new and old mills. Capacity-wise they vary—small, medium and large. Thus the basic problems are:
•Raw material supply and prices
•Cost of production
•Lack of by-products
However, the basic issue is the lack of an overall integrated sugar policy. Although recognized by all the stake holders, followed by efforts in this direction, no concrete result has been achieved so far on this particular issue. The sacrifices required to be made by various stakeholders may be the real cause for delay. Recently, a good and healthy development has taken place in this direction, i.e. a high powered task force has been appointed. It is believed that this force will work towards goal of framing a national sugar policy. The National Sugar Policy should address the issues stated above.
The growth of the capacity during the last decade was phenomenal. A summary is given below:
NO. OF SUGAR MILLS (ADDED)
CRUSHING CAPACITY (ADDED) (TCD)
*Includes Rahwali which is now closed and Bachani & Kashmir Sugar under implementation.
The effective estimated crushing capacity is over 55 million tons (about 5.00 million tons sugar at 9% recovery).
Another feature of the industry is its high fragmentation with 64% of the capacity below 6000 tcd.
Below 4000 TCD
No.of sugar mills
4000 to 6000 TCD
No. of sugar mills
6000 and above TCD
No.of sugar mills
No. of sugar mills
More than 50% of the capacity is in Punjab where sucrose content is about 1-2 percent less as compared to Sindh.
However, the actual production of sugar has remained far below the capacity resulting into collosal wastage of national resources and lower profitability (or losses in many cases).
The following table shows the capacity utilization of sugar mills.
NO. OF UNITS
ESTIMATED CRUSHING CAPACITY
Against the national averages, the capacity utilization in Sindh steadily decreased from 75.43% in 1992-93 to 43.18% in 2002. The PSMA SZ claims that it is mainly due to the drought persisted over the past few years.
The capacity increase during the past has remained unplanned. On the pretext of achieving of self-sufficiency and the desire of many people to own sugar mills, capacity kept on increasing without simultaneously taking measures to increase the supply of sugarcane and the domestic demand.
As against the total capacity of about 5.0 million tons of sugar the demand is at around 3.2 million tons. The problem are two-edged: On one hand, the raw material is not sufficient (as explained later in this article) and on the other hand the demand is also much lower than the installed capacity. The industry, therefore operates at much lower capacity. This is further aggravated when the crop is bad and not even sufficient to meet the demand of 3.2 million, forcing the government to import sugar, in order to maintain prices.
The two factors combined together have resulted into lower capacity utilization which averaged between 52% to 78% during the last 8 years.
It is, therefore, obvious that any further addition to the capacity will increase the supply-demand gap for sugar and further aggravate the problem of raw material supply. Therefore, all efforts should be concentrated to consolidate the position.
Now, that the capacity is there, efforts should be made to make its maximum use. At full capacity operation, there is clear potential of about 2.0 million tons export. Our cost of production being higher, this will mean that at least the cash cost of production will have to be brought in line with international prices.
Although the sugar manufacturing capacity is far in excess of demand, the raw material is also not sufficient to allow it to operate at full capacity. The strategy appears to be in favor of increasing the area under cane cultivation which may not be possible to be perused further. Yield is another factor which should be focused now. Past record, is summarized below:
AREA UNDER SUGARCANE
UTILIZATION OF SUGARCANE BY MILLS %
Sugarcane is key raw material and constitutes more than 50% of the cost of production. Its availability, prices and quality influences the cost of production. The industry requirement is summarized below:
AT FULL CAPACITY
TO PRODUCE 3.2 MTS
Total crushing required
Crop needed (keeping 25% for other uses)
The issues are:
Area under sugarcane, yield and varieties
It seems that 3.2 million tons is the sustainable level of production which means about 64% of the capacity. For achieving full capacity more cane will have to be produced. Through coordinated R&D, if we are able to achieve the international average yield of 72 tons per hectare then the land requirement will reduce to 1.03 million hectare for full capacity operation which presently allowing 25% for seed and gur making. This is possible as well as desirable. In order to ensure full supply, yield has to be increased through introduction of better varieties. Increasing sugarcane supply through horizontal expansion will be at the cost of other crops which may not be adivsable in the long-run and may be economically unviable. Increasing yield will also increase the return to the farmers and decrease the overall sugarcane prices.
SUGARCANE PRICING AND QUALITY
Sugarcane pricing is very sensitive issue. Floor prices are fixed by the government. However, actual prices range far above these floor prices. This is dictated by the market forces as there is short supply and more demand for sugarcane. This will continue till the equilibrium between demand and supply is achieved. If prices are related to quality and the standard is uniformly applied across the country, not only distortions can be minimized but overall quality can also be improved.
One reason for distortions in the supply and pricing pattern is the current marketing system. The sugarcane is bought not directly from the farmers but through one or two stages of middlemen who through their power of liquidity try to control the situation and the mills that are relatively financially weak have to take the brunch. These weak mills in turn again fall victims to the market forces for selling their sugar stocks due to lack of holding power. These distortions in the system can only be removed through the cooperative attitude and efforts to be taken by the sugar mills themselves. Recently the zoning system was introduced to ensure supply of raw material to mills and develop good varieties. Due to the problems prevailing at that time such as farmers' dependence on one customer, lower prices/return to farmers ets., it was discontinued. The returns to the farmers have no doubt increased (although a greater part of it is shared by the middlemen) but other problems have crept up (the return to farmers can also be increased other wise through increase in yield). There are still many arguments for and against the system. A via media free from exploitative forces has to be evolved.
To salvage the situation, the government and the private sector mills should develop an intensive program for developing new varieties with higher sucrose content and increasing sugarcane yields. The crushing season should be restricted to peak recovery period. The sugarcane pricing system may be reviewed and based on recovery as benchmark. Prices should be based on the sucrose content.
R & D IN AGRICULTURE
The R&D is insufficient and unorganized. Globally, it is funded by the industry. It should be the practice in Pakistan as well. Unless R&D is established region wise problems relating to efficiency, recovery, yield, good varieties etc. will not be resolved. The expansion of the industry has already occurred, Now is the time to consolidate and 2002-2010 should be the decade of consolidation.
At least three research & development centers in the private sector be established. These centers may be funded partly out of the sugarcane cess. These centers should do basic research on development of varieties with improved yield and higher recovery.
Although unplanned in the past, the growth of the industry has occurred and capacity far in excess of our domestic requirements has been created. Operating it at two-third of the capacity will create problems in the long run. All efforts should be concentrated to increase raw material supply and reduce its cost. The measures suggested above, if adapted will reduce the over all cost of production, making exports possible. Diversification and use of by products is yet another step in the positive direction. In order to move in the positive direction, the industry badly needs a national sugar policy and that will be followed in letter and spirit.
1. Sugar industry in Pakistan: Proceeding of the 1st National Conference on Sugar Industry organized by Resource Development Foundation (RDF), Institute of Business Finance and Industry (IBFI) and Institution of Engineers Pakistan (IEP), April-2000.
2. Report of the SBP's coordination committee for revival of sick units -sugar sector headed by Mr M. A. Khoja Managing Director PICIC,March- 1999.
3. PSMA SZ annual report 2002.
*The author is professor of Engg Economics at the NED University