- Allowing the export of sugar and fixing of sugarcane prices by market forces
The sugar industry in Pakistan is the second largest agro-based industry. It has the installed capacity capable of producing an exportable surplus. There is a need to support the demand of the Pakistan Sugar Mills Association (PSMA) to allow the export of surplus sugar.
Since the well-being or otherwise of industry impact the rural economy, the government has fixed the price of sugarcane, which ultimately plays the most crucial role in fixing the retail price of refined sugar. The latest demand of the industry is that the government should let the market forces determine the pricing of sugarcane.
One of the prerequisites, both for sugarcane price and export of sugar is that the government should maintain strategic reserve stocks and intervene in the market at appropriate times to keep the prices at a reasonable level.
The Ministry of Food Security has recently released the statistics of total sugar production in the country, according to which, 7.9 million tons of sugar was produced during the 2021-22 crushing season.
The Ministry’s data showed that at least 51,706 tons of sugar stock were available from the previous season while 70,000-ton sugar, produced from beetroot was available till the start of the last season. This shows that the total sugar available from the previous season and at the end of last season was over 8 million tons.
According to the data, at least 5.3 million tons of sugar had been taken from the stocks or consumed till September 30, 2022. According to certain estimates, the daily sugar consumption in the country is approximately 15,980 tons. The ministry’s data proved that at least 1.7 million tons of surplus sugar would be available at the start of the next crushing season in November this year.
Though, the sugar industry had for the last seven months been demanding the export of surplus sugar, citing that sugar price in the international market had dropped from US$560/ton to US$528.7/ton till lately and it could further decrease to US$427/ton in February-March which would cause colossal loss to the national exchequer in terms of exports revenue if an early decision was not taken regarding the export of surplus sugar.
Since the export of sugar is highly dependent on the competitiveness of Pakistanis mills, one of the price questions to be answered is who should fix sugarcane prices in the country?
An important notable point is that there was the consensus of the experts gathered at the consultative roundtable on the draft report, “Government Regulations and Trade Potential: The Case of Sugar Market in Pakistan” held by the PRIME Institute, lately.
According to the presentation of Tuaha Adil, Research Economist at PRIME, the licensing regime for the establishment/expansion of mills should be reconsidered.
The Competition Commission of Pakistan (CCP) should be strengthened to promote competition and fair practices in the sector.
He suggested that the efficacy of Minimum Support Price (MSP) needed re-evaluation. The determination of the MSP needs to take into account the cost to farmers.
The export of sugar should be open throughout the year without approval from the government. The import of raw sugar could be allowed without tariffs to provide necessary raw materials to mills to operate at maximum capacity.
The criteria for the pricing of sugarcane should be linked to sucrose recovery to prompt farmers to cultivate better crops by using higher-quality seeds. Administrative controls should not be used to enforce prices rather market forces should be allowed to stabilize prices.
Shaista Gillani, a former member of the CCP said that presently, there was no independent mechanism to fix the support price. From a policy angle, the cost and benefit analysis of the sugar industry is necessary covering areas of administrative and enforcement costs.
During the last few years, the profits of the sugar sector are going down and this needs to be analyzed.
The CCP always advocated for a free market mechanism for the sugar sector, she added.
Asim Ghani Usman, Chairman Pakistan Sugar Mills Association stated that many factors had impacted the price of sugar including an increase in sales tax from 10 to 17 percent during the last few years. “If the government allows the export of sugar, the industry would ensure to maintain domestic reserves and the farmers can timely get their price. The Sugar Advisory Board is also not timely providing data and information to the industry. The sugar mills were not working as a charity, but they were doing business to earn profits, Usman added.
Sharing a report, experts from the PRIME said the unique feature of the sugar industry was that every aspect of the operation, licensing, capacity expansion, trade decisions, price of sugarcane, the beginning of crushing season, fixing of ex-factory and retail price- all require some form of government intervention or approval.
The successive governments dealt with the issue by relying on temporary fixes like increasing administrative controls and interventions to regulate the market and protect consumer welfare. The interventions have been increased to such an extent that every decision in the entire supply chain is controlled by the government.
The interventionist policies have proved to be futile, and prices continue to be unstable. The existential inefficiencies have contributed to modest growth in the production of sugarcane, low returns for farmers, an insignificant increase in yield per hectare, inefficiency of sugar mills, and most importantly, the prevalence of occasional market failures like hoarding and shortages.
The powerful sugar mill owners with strong political backgrounds have influenced the governments and prevented them from bringing reforms. The trade restrictions, though intended to protect the domestic industry, have actually deprived the entire sector of efficiency and improvement.
Therefore, it is the need of the hour to carry out reforms by opening up the sector and removing excessive government footprint. Globally, price is a decisive factor in market operations and countries have gradually reduced regulations in their markets for sustainability.