SUGAR TURNING INTO A LUXURY
MANZOOR HUSSAIN MEMON
Oct 11 - 17, 2010
Sugar as per its classification is considered as a basic commodity, however, in recent phenomenon this has changed to luxury. Several times during the last one and half year, people in Pakistan jested around and treated the commodity as most precious i.e. crystalline white refined tiny diamonds, which they preferred to offer in lieu of sugar based confectionary and sweet products.
The price of sugar has been emphasised by the various policies affecting sugarcane procurement pricing, the supply of sugar to markets and import possibilities to overcome demand-supply gap if any. During the last one and half year, demand-supply gap of sugar in the domestic market has widened on account of meager carryover stocks vis-a-vis average growth in demand. However, the prices in international market are on continuous decline since the increase in supply was more than forecasted from the world's second largest producer and supplier of sugar in the first quarter of current calendar year.
AVERAGE SUGAR PRICES PER KG
MONTH/YEAR PAKISTAN WORLD EUROPEAN UNION Pak Rs US$ Pak Rs * US$ Pak Rs * FY07** 29.64 0.222 13.5 0.681 41.41 FY08** 30.8 0.282 20.05 0.697 49.55 FY09** 46.66 0.399 32.59 0.525 42.88 Jan'10 66.44 0.584 49.41 0.478 40.44 Feb'10 68.55 0.559 47.57 0.459 39.06 Mar'10 64.87 0.412 34.76 0.455 38.39 Apr'10 65.0 0.363 30.55 0.450 37.87 May'10 66.0 0.335 28.31 0.421 35.58 June'10 67.0 0.350 29.57 0.410 34.64 July'10 70.0 0.384 32.85 0.428 36.62 Aug'10 75.0 0.407 34.93 0.432 37.07 Sept'10 77.0 0.496 42.63 0.439 37.71 * as per prevailing average exchange rates excluding carriage & forwarding cost and import duties etc.
** January - December
At a point, it was expected that the commodity would again come to its original classification on account of increased supply in the world lowering the prices across the globe. During the last few months, the prices have again started increasing vis-‡-vis demand in international market. However, in relation to global developments, the price trends in domestic market remained in either direction. Despite sufficient stocks as per official announcements, the prices continued to increase over the period and prices in wholesale and retail market surged significantly owing to increased seasonal demand because of Ramazan. This trend continued because of rumors of considerable devastation on account of recent floods in the country. The extent of damages to the economy particularly agriculture sector are still unclear. However, as per subjective estimates, sugar production is unlikely to increase. The recent decision by the government encouraging imports of raw and refined sugar may reduce the pressure on sugar and sugarcane prices. Cognisant of these and the so-called mismanagement by government authorities, the prices are unlikely to come down in the short term. Thereafter, the prices will continue to link with demand-supply gap which may improve. However not significantly, sugar prices are expected to remain around current levels.
In the beginning of current calendar year, the government has decided to import about 1.03MMT sugar to overcome the supply-demand deficit. However, due to absence of proper planning and policy, the imports decisions are usually ill-timed and mishandled affecting the domestic economy. The Trade Corporation of Pakistan (TCP-entity mainly responsible for dealing with import and export of different commodities including sugar) has failed to import the commodity timely, and is still unable to manage the deficit. Resultantly, government was unable to deal with the crisis and removed the subsidy by increasing the prices to Rs55 per kg at Utility Stores Corporations (USCs).
Based on the current prevailing prices, the landing cost of the imported sugar would be between Rs50 to Rs60 per kg. This landing cost includes the C&F cost, regulatory duty and impact of rupee devaluation etc.
AVERAGE COST OF PRODUCING SUGAR ACROSS THE COUNTRY
(based on assumptions) Average cost of sugar cane per 40 Kg = Rs185 Average Recovery Rate (Sugar) = 9 per cent Average Recovery Rate (Molasses) = 5 per cent Average price of Molasses per Kg = Rs8.5 Sugar produced = 3.6 Kg Molasses produced (per 40 Kg sugarcane) =2 Kg Sale of molasses & bagasse = Rs17 + Rs2 = Rs19 Other cost (average) per Kg = Rs10 Cost of sugar produced per Kg =(Rs180 + Rs10 - Rs19) = Rs171/3.6 = Rs47.50 per Kg Total Estimated Sugar Production 3.42 Million Metric Tons (MMT) Carry Over Estimated Stock 0.55 MMT
Cost of Previous stock (about 550,000 tons) of about Rs30 based on similar assumptions would further reduce the total cost of available stock approximately by 5 per cent to 8 per cent. This means that the industry's average cost of the sugar available for sale during the current industry's financial year is about Rs44 to Rs45 per Kg. We can now easily compare the sale prices of the commodity, which remained over Rs60 per Kg in the last so many months showing the industry's direct average gross margins ranging between 15 per cent to 20 per cent. This may further improve over 20 per cent with the sale of sugar in the last two months at over Rs70 Per Kg depending on the proportion of volumetric sales with total sales of sugar during the FY2010.
Sugarcane is one of the most important cash crops and the industry is considered as the driving engine of the rural economy after agrarian economy in many countries. In several developing countries both the crop and industry is termed as a vehicle for rural uplift and development. The sugar industry is cyclical in nature. Historically, whenever there has been a shortfall in sugar production due to various seasonal factors, demand outstrips supply pushing prices up and forcing the government to intervene to stabilise the prices. This shortfall in the sugar production is a common and regular phenomenon. After every 2-3 years of consecutive good harvest, the sugarcane crop falls under the low production cycle that remains intact for a year or two depending on the return of the heavy rains. While being a basic commodity, sugar faces an inelastic demand throughout the business cycle. Currently the per capita consumption of sugar is about 25-26kg which is slightly higher than world average of 24.5kg. With growing population across the globe and ever-increasing sugar based products, the demand for sugar is continuously increasing. The strategic importance of the sugar industry entails a great degree of regulatory control. The government of Pakistan is heavily involved in the sugar industry by regulating industry, trade and prices, and influencing farmers' crop decisions in various ways. The rules and regulations imposed on the industry serve to protect the interests of all the stakeholders. However, this also gives rise to a bone of contention between the various parties involved since there is always a conflict of interest in the policies that are set. The presence of politicians in the industry complicates the situation and largely affects the policies.
In Pakistan, more than 80 sugar factories had been established till 2008 and the industry has crushing capacity of over 400,000 MT per day and as per sugar industry rules 1972 (160 days of operation) the total crushing capacity of industry stood around 65 million metric tonnes (MMT) per annum. The average recovery rate varies 8 per cent to 9 per cent across the country. The total production capacity of industry is almost six MMT of sugar per annum against the ever rising demand of about 4.3MMT, with the residual reflecting the export potential. However, on account of lower production of sugarcane in the country, the average capacity utilisation of the industry stood around 60 per cent. Sugarcane yield and recovery rates are direct determinants of supply of sugar. There has been virtually no significant improvement in yield and recoveries over the last two decades. Lower sugar recoveries are largely attributed to the poor quality of the cane produced rather than the inefficiency of the processing sector. Therefore, increasing number of mills rather than improving yield and cultivation area, in order to raise sugar production, is a plausible policy option if previous units are operating at full capacity level and sugarcane availability to existing mills and new mills is not constrained.
During FY09ís season, despite attractive procurement prices set by the government, the sugarcane crop declined significantly on account of reduced cultivation area and shifting of farmers to other crops offering relatively better prices than sugarcane. The government further increased the procurement price of sugarcane. However, this could not achieve the targeted increase in sugarcane cultivation for the outgoing season. Further, forced earlier crushing has also affected the sucrose recovery rates, which reduced across the board as compared to recovery rates achieved in FY09's season. On the other side, on account of demand-supply gap, the procurement prices were significantly higher than the minimum procurement price of Rs101/40kg set by the government. The prices of sugarcane touched the peak of Rs250/40kg in the latter part of the current year's season. Resultantly, average cost of sugarcane approximately stood between Rs180 to Rs200 per 40kg for almost all sugar industry players. The cost of sugarcane constitutes over 80 per cent of the total cost of production. The ever high procurement cost increased the cost of producing commodity by about over 50 per cent over preceding year. This also resulted in hoarding of sugar stocks for better prices and margins as observed during the current calendar year.
High procurement prices in previous season increased the prospects of relatively better sugarcane crop owing to increased cultivation area by about 15 per cent because of shifting of farmers to cash crop for the upcoming season. The provincial authorities have also maintained the procurement prices of sugarcane at prior season level. Consequently, sugarcane production is expected to increase in FY11. However, recent floods in the country have given several challenges to the country as the disaster has affected infrastructure (such as roads, bridges) and agriculture economy (crops and livestock). The floods in the country may likely offset the positive impact on sugarcane cultivation and as per revised estimates, the production is estimated to remain at prior year levels.
Considering all above facts, one could not hope that the commodity will regain its original classification and would not be easily accessible to masses particularly below poverty line in the short term. However, one could hope for the same in medium to long term. In the past, policy measures taken by the government are usually on adhoc basis unfair to the sector having such strategic importance. Recent initiative of removing the duty by the current government on imports is considered as a positive step for reducing the pressure on prices of sugarcane and sugar. However, this remains a temporary relief to consumers, associated economy, and the industry as well. Government should intervene actively and honestly to make effective long-term policy as the distinctive excess and shortage in domestic production not only affect the masses but also have significant direct and indirect impact on sugar and associated economies. While demand trends remain stable and one can predict the same for the foreseeable future, it is not somewhat impossible to make plans for such seasonal and cyclical changes to keep the supply and the prices stable.
The writer is a Certified Chartered Economist (ChE)currently working as Senior Manager (Lead Economist) at JCR-VIS Credit Rating Co Ltd., an Affiliate of Japan Credit Rating Agency, Ltd.