SUGAR DEMAND-SUPPLY

S. KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Oct 11 - 17, 2010

Pakistan has 84 sugar mills and the fifth largest sugarcane growing area in the world. Sugarcane is grown on around a million hectares and provides the raw material in the country. The sugar industry is the country's second largest agro-industry after textiles. Apart from its edible use, sugar is also used to produce alcohol for medicinal purposes, ethanol for fuel, chipboard manufacturing, etc.

Recently, sugar millers have opposed a government decision to allow unlimited imports of raw sugar. The government has waived a 25 per cent regulatory duty and allowed millers and traders to import raw sugar at will after estimates that the 2010/11 crop would produce about three million tonnes of refined sugar against an annual demand of 4.2 million tonnes. Sugar millers estimate output at 3.6 million tonnes and say the government should set a limit in line with total demand.

Pakistan Sugar Mills Association (PSMA) advocates there should be a limit on the import of raw sugar. It should not be more than 500,000 tonnes. Moreover, the association is expecting 3.6 million tonnes of sugar output after flood damage and together with raw sugar import and purchases being made by the Trading Corporation of Pakistan (TCP) the availability will be according to consumption.

It has also said the government should specify a limit and it should be channeled through the ministry of industries to millers according to their production last year.

In Pakistan, internal disputes between sugar growers and processors also plague the sugar industry. Procurement practices used by sugar processors such as delaying the crushing season, buying cane at less than the support price, and withholding payments hurt the farmers' profitability. On the other hand, sugar processors complain that farmers grow unapproved varieties that produce low sucrose content resulting in lower sugar production and recovery rates. As a result of the fluctuations in quantity and quality of raw material, sugar mills are capable to operate at 50 per cent of installed capacity. The lower sugarcane supplies have also forced most of the mills in cane producing areas to close 1-2 months earlier than normal.

However, during FY 2009/10, (Oct/Sept) Pakistan's sugarcane production was estimated at 47.8 million tonnes, down 2.2 million tons from last year's estimate. The decrease in sugarcane area and lower production during the last couple of years were attributed to the non-transparent government sugar policies, significant increased in minimum support prices for competing crops (e.g. wheat and rice), dwindling water resources, and higher input costs.

Despite the industry's troubles, the tighter sugar supplies have led to higher sugar prices and benefitted sugar growers. This trend is projected to continue in FY 2010/11. In FY11, sugarcane production is forecast at 52.7 MMT, an increase of 10 per cent over the previous year due to an anticipated increase in planting area. Cane prices may range from Rs1,200 to Rs1,800 per tonne, which is significantly higher than last year. The higher prices are likely to persuade farmers to grow more sugarcane in 2010. Thus, FY11 cane acreage is expected to increase 14 per cent to 1,075 thousand hectares.

In FY11, refined sugar production is forecast at 3.75 million tonnes primarily due to anticipated increase in area under sugarcane crop. Pakistan's domestic consumption is expected to be 4.28 million tonnes. Domestic production will be supplemented through imports. For FY 2009/10, refined sugar production was estimated at 3.42 MT (raw value) based on 80 per cent crushing and 8.9 per cent recovery.

WORLD SUGAR BALANCE

.

2009-10
(MT, raw value)

2008-09
MT

Change

Production 159.042 154.225 4.817
Consumption 167.446 164.593 2.853
Surplus/deficit -8.404 -10.368 -
Import demand 51.930 50.962 0.968
Export availability 51.964 50.903 1.061
End stocks 53.234 61.672 -8.438
Stocks/consumption ratio (%) 31.79 37.47 -

The world consumption of sugar is forecasted to grow by 1.73 per cent to 167.446 million tonnes. World production is expected to increase by 4.8 million tonnes to 159 million tonnes still leaving a shortfall of 8.4 million tonnes versus shortfall of 3.6 million tonnes in November 2008. India, the second largest sugarcane producer globally with over 24 million tonnes of sugar production, has suffered double blow due to falling acreage in last two years and 20 per cent deficiency in rainfall. On the other hand, Brazil, the largest producer with excessive rainfall, is likely to delay sugar production and reduce sugar realisation. According to International Sugar Organisation (ISO) world sugar prices are expected to remain high on supply shortfall of nine million tonnes. After two consecutive seasons of surplus between world sugar production and consumption, world sugar economy is now facing a significant supply-demand imbalance. There will be fall in global sugar production. As a result of demand-supply imbalance, many countries are seen importing sugar. Pakistan, Asia's third-biggest sugar consumer, may buy 700,000 tons of white sugar by June as shortage pushes prices to near-record levels. Philippines may import 100,000 million tonnes of raw sugar.

CONCLUSION

In Pakistan, the future stability of retail prices of sugar will depend on timely imports and prevailing prices in the international market. The floods have adversely affected the production of sugar. However, the industry and the government must look into the critical issues and should work out a proper mechanism for establishing cordial relation between the mills and the growers.