Sugar industry facing policy failure

Sugar Inquiry Report which was made public cannot be described as an in-depth analysis covering all bases of sugar industry, it is only one aspect — sugar price hike was the result of government’s decision to allow export of sugar unjustified as it caused a 30% increase in its price

According to a professional point of view in agriculture and water policies, If Imran Khan can rationalize sugarcane and wheat policies, it would be one of his greatest contributions to the development of the agriculture and agro-industrial sector of Pakistan.

Sugar crises-current scenario

The interest groups both sitting in parliaments (who are large farmers and mill owners), supported by Bureaucracy/relevant institutions and All Pakistan Sugar Mills Association (APSMA) having a huge stake in this commodity, under one pretext or the other have tilted past policies in their favor largely at taxpayers cost.

Expecting a right policy discourse is not possible as long as this powerful group is both the policymakers and their execution.

This sugar crisis is not happening for the first time as every year at the start of the crushing season a perpetual conflict between two main stakes holders’ farmers and millers plague the industry.

But there is a need to document views and roles of all actors in the supply chain in getting a better understanding of the industry and who are more often the winners and losers.

Farmers often claim that procurement practices used by sugar processors such as delaying the crushing season, buying cane at less than the support price, and withholding payments hurt their profitability.

Every year at the start of the crushing season millers deliberately delay crushing for one reason or the other, often forcing growers to sell their crop for less than the fixed price which has been set higher than the international price.

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 the raw material, sugar mills have been required to operate at 50 percent of their installed capacity. Both of these policy instruments carry a huge impact on retail prices.

On the other hand,  massive unregistered buying of sugar cane takes place in Punjab. Instead of growers selling their cane at the gate of the mills and receiving a receipt assuring payment at a later date, the representatives of mills bought sugarcane from the field. 

Is there a sugar mafia? The millers deny with an argument that in sugar production, 80 percent of the cost is the cane, and 10 percent is in the form of taxes. So, 90 percent of the cost of sugar is fixed by the government, what can they do anyway in 10 percent opportunity space?  (PSMA Chairman) 


 Government or Tax Payers

There is no specific Govt perspective – they simply roll out the policies designed a long time ago. Ministry of National Food Security and Research (MNFS&R) sends its recommendations for support price of sugarcane in following the request of provinces; however, the provinces take their time in announcing the prices.

It needs to be appreciated that Pakistan’s sugar sector has witnessed turmoil time and again. Interim measures used to address sugar production and prices include, inter alia, fixing the sugarcane support price by the Government, intervening in open market supply of sugar through the Trading Corporation of Pakistan (TCP), exporting sugar with subsidy and providing sugar on subsidized rates through government-owned Utility Stores Corporation of Pakistan.

While such measures are likely to be competition adverse, they may have some merit on grounds of consumer protection/welfare. But the question is doing consumer benefited or the interest of sugar baron was protected.

Further, the policies formulated at the Federal level are without giving much weight to the competitiveness of sugarcane in domestic and export markets.  Enhancing productivity is key to competitiveness, no efforts have been made by Research Institutions to produce varieties yielding higher recovery rate.

A great deal of bias exists both at provincial and federal levels as revealed by lack of credible policy studies on sugarcane and one gets the impression as “no go area” for in-depth policy analysis in comparison to rice, cotton, maize, etc.

The center of policy debate is getting the right price for farmers, millers, and consumers. As the jury is still out, we can learn much from expert views and international experience to propose a healthy policy debate. Our analysis clearly shows that farm price for sugarcane has implications for ex-mill and retail prices and a key to the industry reform process.

Given the high volatility of sugar prices in world markets and the political sensitivity of import-competing crops, a price band policy with price floors and ceilings might be an attractive option to evaluate.

Valdes (2013)   also advises using a type of variable tariff based on moving averages of world prices. When world prices rise in the short term, the tariffs would fall, cushioning the negative impacts on domestic buyers.

When world prices fall, the tariffs would increase, cushioning the negative impacts on domestic producers. Such a possibility would have to be exceptional and administered with a credible commitment to focus this deviation from tariff uniformity on these few import-competing products only, with pre-established and transparent rules.

Policy revision

Then there is a school of thought advocating that by replacing the current pricing mechanism with a new system that would connect sugarcane price with the wholesale price of sugar in an attempt to ensure a level playing field for all commodities.

Sugarcane comprises 80% of the wholesale price of sugar. The suggestion is that sugar millers should pay 75% of the sugarcane price in advance and 5% after a year keeping in view the average wholesale price of sugar.

when India has been debating sugarcane prices for some time,  the latest suggestion comes from the Commission for Agriculture Costs and Prices, 2016,  that recommends the Government on partially decontrolling the sugar sector (abolishing levy and freeing the monthly release system) and then cane price and sugar price realization linkage to create the Hybrid Formula for pricing of sugarcane, which is composed of revenue sharing principle dovetailed with some Minimum Fair Reference Price (MFRP).

The revenue sharing principle will be to distribute the total revenue generated in the cane-sugar value chain from sugar and its first stage by-products (molasses, bagasse and press mud) produced from a ton of sugarcane, between farmers and millers in the ratio of their relative costs (70:30) incurred in producing sugarcane and converting that sugarcane into sugar and by-products.

If the value of by-products is loaded on the value of sugar, then this ratio comes to 75:25. Given the uncertainty about future sugar prices, this revenue sharing principle needs to be combined with MFRP so that farmers are ensured of a minimum price. The adoption of this transparent and scientific Hybrid Formula as the basis of pricing of sugarcane will bring greater stability and rationality in the sugar sector.

As concluding remarks the excess supply or excess demand comes at a heavy cost to taxpayers. There is an over-production of sugar in the country, creating a situation like what is happening to wheat – which cannot be exported at a competitive price and entails large subsidies that we cannot afford. Inquiry report very well spells this out as large amounts have been provided in subsidies to sugar manufacturers for export.  

The committee also reported that the Punjab government allocated Rs3 billion at a time when the price of the commodity was increasing in the domestic market a case of institutional failure. On the other hand, policy failure is very clear – farmers are getting price higher than the international price in Government accounts but this might not be the case as the role of a middleman (mills agents) is well known. 

The consumer is a major looser as sugar price is insulated from world markets and paying high prices for poor-quality sugar. Then hidden environmental cost is not accounted for paid by the present and future generation for water scarcity and its poor quality. Rationalization of output and input prices along with adopting PEDAVER (PA/PQNK) supported good agriculture practices is the best pathway in developing a profitable, competitive, sustainable, and inclusive agriculture.

Decontrolling the sugar industry and incrementally moving towards full-cost water pricing can address issues related to Policy, Institutional, and Market Failure in Sugar Industry. Hope inquiry report leads to forward-looking policy discourse.

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