Feb 18 - 24, 2008

The irony of sugar industry is that it continues to face problem whether there is shortfall in sugarcane production or there is a bumper crop. In the recent past the industry has suffered due to acute shortage of sugarcane but this year millers find them incapable of buying the entire crop. There is ample sugarcane but they do not have funds to pay the growers.

All the stake holders in general and the government in particular are responsible for the prevailing situation. While the blame game continues, consumers have to pay for their collective inefficiency and myopic vision. The situation in Punjab may not be alarming but the mills in Sindh are at the verge of closure.

Sugar industry in Sindh faces colossal losses and is on the verge of collapse. Pakistan Sugar Mills Association (Sindh Zone) has conveyed the grim situation to the provincial and federal authorities with a request to save it from sinking.

It may sound a paradox because the industry was expected to produce about four million tons of sugar due to bumper sugarcane crop, estimated at 60 million tons for the current crushing season. The industry faces colossal loss of Rs 32 billion unless sugarcane-sugar price parity is improved.

The industry has been trapped in deep financial crisis due to plunge of sugar wholesale price to Rs 22 per kilo, the lowest during the last three years causing Rs 8 per kilo to the producers.

In fact the financial crisis triggered during 2005-06 season, when the government increased the support prices by Rs 17 pushing the price to Rs 60 per 40 kilogram of sugarcane from Rs 43 for 2004-05. The increase allowed by the Sindh government was follow up by the Punjab and NWFP governments.

The 40% increase in sugarcane price disturbed semblance of proportion in form of a loose economic equilibrium existing between sugar production cost and its price.

The situation was aggravated by additional increase of Rs 7 in 2006-07 lead taken. In two seasons, a 56% price increase was unprecedented and unbelievable at no time and nowhere in any commodity subject to support price mechanism.

On top of a sizeable increase in sugarcane price, Government of Pakistan liberally imported sugar despite the warnings given by the Association. During 2005-06 season 1.581 million tons sugar was imported by Trading Corporation of Pakistan and private sector. This cost US$ 763.60 million in foreign exchange.

How illogical was this pursuit is evident from Rs 7.5 billion subsidy paid during 2006-07 to the Trading Corporation of Pakistan due to slashing of sales price in the domestic market due to glut of sugar. Import of another 586,543 tons sugar cost US$ 296 million.

Liberal import and carryover of sugar stocks pushed the inventory to as high as about 1.273 million tons at end of 2005-06 and about a million tons at end of 2006-07 season. Sugar oversupply and forecast for 4 million production in 2007-08 set the recessionary trend in the domestic market.

The situation does not allow the sugar industry to continue its operations. The industry is not in a position to pay the farmers for sugarcane being supplied. Sugarcane constitutes 78% of the cost of sugar production and 15% Sales tax hardly leaves any thing for millers. The sugar industry is pushed in situation of perils and will come to grinding halt any day.

As the saying goes the biggest stakeholder in any country is the government. It has to come up with appropriate policies to facilitate the investors, the consumers and the public at large. In case of sugar industry in Pakistan the government has not been playing its due role. To begin with the policy planners and the strategic decision makers do not understand the dynamics of this industry. Therefore, most of their decisions backfire.

It is beyond doubt sugarcane is the biggest cash crop of the country and sugar refining industry is the driving engine of the rural economy. Despite enjoying such an important status in Pakistan's economy the industry continues to face problems. The industry at an average produces around 2.5 million tons of sugar and also pays 15% sales tax on the basis of ex-factory sale price but policy planners give no heed to the problems being faced by the industry.

The government is always sensitive towards retail price of sugar and in an attempt to ensure smooth supply of sugar and contain its price allows import and pays subsidy. However, it has been failing in understanding the industry perspective before fixing support price of sugarcane or deciding timing for import of sugar. The fallback is that despite paying billions of rupees subsidy on imported sugar its price often touch new highs.

The prevailing scenario this year is very interesting. After having touched record high levels prices have plunged to alarming low, far beyond the cost of production achieved last year. The situation does not support any of the stakeholders. Mills cannot sell sugar below cost and also do not have fund to pay the sugarcane growers for the new purchases. The cash starved mills are finding it difficult to keep the crushing going.

It seems that policy planners are least bothered about the smooth operations of this industry. They claim to be the friends of growers but do not understand that if the mills do not operate or have funds to pay the growers how can they survive.

However, it is necessary to reiterate one again that unless the government comes up with a comprehensive sugar policy the industry would continue to face problem year after year. The policy should address the key issues i.e. export of sugar, deregulating sugarcane and sugar prices reducing sales tax applicable on sugar.

The government must realize that due to bumper crop the crushing season could extend beyond March or even further if the blame game continues and mills unable to work at full capacity. Extension in crushing would stale the standing crop and more importantly would not allow the farmers to achieve the wheat sowing target.