The Trading Corporation of Pakistan had already bought half of the total 400,000 tons of the surplus sugar

Mar 01 - 07, 2004

Pakistani sugar industry is going through a unique crisis over-production that undermines the agriculture sector on the one hand and would cost billions of losses to the exchequers on the other. The industry is not only sitting on heavy carryover stocks which it is finding it hard to dispose off but is also looking at record production this year. The substantial sugar stocks have become more of a liability than asset because it can not be absorbed by an already saturated market locally, at least immediately, and also have little chances for exports due primarily to incompetitive prices way above the international prices.

While the exchequers are made to absorb the losses that would cost the government billions of rupees, they have been deprived of any benefit that the falling ex-factory prices may have offered. The retail price of the commodity have failed to depict any proportionate reduction at the retail level despite heavy surplus which is in the process of being enforced by arrival of fresh stocks. That, however, has not deterred the Pakistan Sugar Mills Association (PSMA) to successfully convince the government to buy the surplus stocks laying with its members at prices way above international prices as well as continuing falling ex-factory prices within the country.

By early this month, the Trading Corporation of Pakistan had already bought half of the total 400,000 tons of the surplus sugar at the demands of the PSMA at around $ 265 (around Rs 15,370) per ton. The lifting of the commodity, which is still laying at the producers godowns, would cost an additional $ 10 per ton in transportation and handling charges to push the buying price to $ 275 per ton price if and when lifted by the TCP.

The decision by the government to bail out the sugar industry would cost the exchequers millions in losses of which they had no part whatsoever. The TCP bought 200,000 tons of the commodity at $ 265 per ton way above the international price of $ 230 per ton thereby causing an initial loss of $ 35 per ton or $ 7 million (Rs 406 million) for full 200,000 tons. But with the declining international prices, which stands receded at $ 196 per ton, the loss would inflate to $ 69 per ton or $ 13.8 million (about Rs 800 million) for the 200,000 tons of the surplus purchased by the TCP. In fact, the lifting of the 200,000 tons of the stocks bought by the TCP would cost an additional $ 2 million (apprx. Rs 116 million) in transportation and handling charges thereby pushing an already heavy losses. Needless to say, TCP's losses would be doubled if it decides to buy the remaining 200,000 tons of the surplus as demanded by the PSMA.

The TCP is, thus, sitting on a huge stock of 200,000 tons of sugar which has little chances of exports even at break-even prices. On the other hand, the local market also stands saturated thereby only able to absorb any more quantities of the commodity over a period of time. With the arrival of fresh stocks, and record production expected, the situation would worsen even more the worst victims of which would be the growers who usually sell sugarcane on credit to the sugar mills.

It is a catch-22 situation for the TCP the incompetitive prices make it impossible to export the surplus stocks even at break-even price of $ 275 per ton. The question is how long the TCP could afford to hold the stocks financed by the banks that costs it considerable amounts in interests and service charges.

While no decision has yet been made by the government to dispose off the 200,000 tons of the commodity, both the TCP and the PSMA have been in contact with the government to dispose it off at the earliest possible because carrying such a large stock costs immense monies. The TCP has reportedly asked the federal government to decide what it wants to do with this huge quantity of sugar use it to build a buffer stock or sell it. The PSMA, on the other hand, has asked the government to export the surplus stocks at the earliest possible because its members need space for the fresh stocks.

The PSMA asked the government earlier this month to provide a subsidy of Rs 2-3 billion to help export 400,000 tons of the surplus sugar. It also asked the government to establish a "sugar export development fund" under which an additional levy of Rs 0.60 per kilo would be collected from the consumers over and above the retail price to help finance its proposed export subsidy. While the sugar industry has failed to pass any benefits to the consumers, the ex-factory price of the commodity has come down to as low as Rs 15.50 per kilo, contrary to all free-market norms it has seen it fit to finance export subsidy running in billions from the pockets of the consumers.

The "crisis of the surplus" casts heavy shadows at the Pakistani sugar industry, particularly with reference to high production costs which makes it almost impossible to compete in the international market. It poses a number of valid questions: Are we producing more sugarcane than necessary? Why is the cost of sugar production so high so as to make it highly improbable for exports way above the international prices? What justifies the production of sugarcane, a highly water-intensive crop, way over and above its demand, particularly when high sugar production cost makes it impossible to export? What explains the lack of such value-added diversification as baggas, molasses and industrial alcohol?

It's time to find answers to these and all other relevant questions because subsidising the sugar industry at the expense of consumers goes against the very grain of free-market economics that the sitting government is so relentlessly trying to promote. It makes all the more sense to address these questions before the WTO turns the world into a free-trading area next year.