Pakistan Sugar Mills Association (PSMA) presents the documented facts to apprise you of the ground reality on the following accusations:
That;
the current crisis is created by the sugar mills,
there is a sugar cartel operating in Pakistan,
the sugar prices per kg were Rs 28/kg to Rs 32/kg during March 2009,
the State Bank of Pakistan (SBP) gave undue extension for the repayment of working capital loans.
The current crisis is due to the refusal by the GOP to our proposals
During August 2008, it became a well-known fact that due to the high price, non-availability of fertiliser, severe frost attack, water shortage and delayed payments to farmers by some mills during 2007-2008, the sugarcane crop plantation area decreased by 20%. Based on this, we had estimated that the sugar production for the crushing season 2008-2009 would be around 3.2~3.6 million tons, this coupled with 2007-08 carry over stock would be insufficient to meet our domestic requirements. Accordingly, we requested the GOP vide letter dated August 22, 2008 to import 700,000 tons of raw sugar through TCP, get it refined during the crushing season and store it as buffer stock, to ensure reasonable price and restrict unreasonable margins to the market players.
On September 3, 2008, PSMA, Frontier Zone, officially documented with the Ministry of Food, Agriculture & Livestock (MINFAL), Ministry of Industries and Ministry of Finance that during crushing season 2008-2009, there would be a deficit of 700,000 tons of sugar, therefore, GOP should ban the export of raw sugar (gur) to enable the Peshawar valley mills to produce extra 80,000 tons of sugar, that would save the GOP spending on the import of this quantity.
The Economic Coordination Committee (ECC) rejected our above mentioned proposals. Instead of 700,000 tons of raw sugar, 200,000 tones of refined sugar was imported at extremely high prices and due to this, the buffer stock of 500,000 tons was not created with the Trading Corporation of Pakistan (TCP) and the Peshawar Valley sugar mills, instead of 80,000 tons, produced only 19,000 tons of sugar i.e. 61,000 tons of sugar valuing $38.4 million was lost. Implementation of our proposals to import raw sugar and ban on the export of raw sugar (gur) would have ensured stability of sugar prices.
There is no sugar cartel in Pakistan
All the Mills during crushing season 2008-2009, because of the cane shortage, competed for its purchase, increasing its prices manifold. Due to this, each sugar mill had a different price and recovery from sugarcane, as such, incurring different production cost. Thus, the crop shortage and faulty government decisions on our proposals are responsible for the high sugar prices not the industry.
There are 81 sugar mills in operation, whereas 6 mills have closed down. Majority of mills are public limited companies and have public ownership consisting of ten and thousands of shares holders. During 2008-2009, over Rs. 100 billion was paid to the farmers, for the procurement of sugarcane. Furthermore, sugar mills have different recoveries ranging from 8% to 11% that represents 37% of cost differential from mills to mills.
It is relevant to mention that; as instead of the quality being the criteria, all sugarcane varieties are priced on weight, therefore, despite ranking at number 6th position of the harvested area of sugarcane out of 16 major cane producing countries, we are placed at number 15th on the list, in terms of sucrose contents and yield.
Sugar price at the start of the season remain low, as sugar is produced in three months and sold in twelve months. The monthly increase in the sugar price reflects the interest cost of approximately Rs 0.50/month, the salaries and factory overhead along-with other inventory holding cost. The cartelisation is formed when businesses fixes an identical price, this is not the case for sugar industry, operating at different input and financial costs.
The mills have to sell sugar within a period of twelve months to adjust their working capital loans, to ensure its availability for the upcoming crushing season.
Due to the above mentioned facts, there is no possibility for the creation of cartel in the sugar industry. The fixation of ex-factory price is a forced cartel by the GOP.
The sugar prices during 2009
Sugar was being sold in March 2009 at Rs 43.83 per kg, not Rs 28-32 per kg as reported by media; sugar prices that are referred were prevailing during March 2008, when the sugarcane average price was Rs 60/40 kg.
The retail prices during 2009 published by the Federal Bureau of Statistics and MINFAL documents that during August 2009, there was an extra ordinary increase in the sugar retail prices to Rs 51.86/kg, this was only a short term price hike, the crisis only triggered, when GOP tried to bring it down by force, factories were sealed and because of harassment created at the wholesale and retail levels, demand and supply mechanism collapsed. However, if there would have been no GOP intervention, then the market demand and supply mechanism would have checked the price hike. Most of the time, sugar prices referred in the media relates to 2007-2008 crushing season, when the sugarcane prices were at Rs 60/40 kg and sugar was sold to the TCP at Rs 25 to 32 kg. Sugar was not sold to the TCP during 2009 period.
During the crushing season 2008-2009, due to the sugarcane shortfall, the mills competed to procure cane, as a result, Rs 80/40 kg price notified by GOP went as high as Rs 140/40 kg, the average cane cost doubled to Rs 120/40 kg compared with the crushing season 2007-2008. As sugarcane price constitute 80% of the cost, sugarcane cost alone comes to Rs 35.29/kg coupled with refining cost, the breakeven price of sugar excluding sales tax and excise duty is Rs 43.13/kg.
As the price of sugar in Afghanistan was 70% above the domestic retail prices, during the past 3 months, sugar under guise of gur left the country, we informed GOP vide letter dated July 18, 2009 to stop this trend and documented that the smuggling of sugar in the guise of gur would increase the price of sugar in the domestic market. GOP, however, refused to impose ban on the export of gur being the cover for sugar smuggling. We document that in the upcoming crushing season, there will be another year of sugar shortage and GOP should immediately ban the export of raw sugar to increase sugar production and availability of gur to domestic consumers at reasonable prices.
It is unfair to blame that the sugar mills are hoarding sugar, all our stocks are documented with the GOP and pledged with the banks, term hoarding represents, hidden stocks, not declared stocks. As there is no buffer stock with TCP to intervene and arrest price hike, therefore, the market sentiments drove the sugar prices upward in the retail level on the grounds that the landed cost of sugar at Karachi port is Rs. 65/kg, India’s retail prices are at Rs. 60/kg as of Pak Rupee and Afghanistan over Rs. 75/kg.
Extension of loan repayment
The State Bank of Pakistan’s (SBP) issued unprecedented deadline of July 31, 2009 in the month of February 2009, for the clearance of loans and advances taken against the crushing season 2008-2009. In the light of this, we document the following:
The sugar industry has a financial cycle that starts from the month of October and ends in September, whereas, the sugar production commences from the end of November, lasting up to March i.e. approximately 4 months. The sugar produced during this period is sold throughout the year, and the loans and advances utilised towards the sugarcane payments are cleared by October/November each year.
The above mentioned cycle has been there for the past 60 years. It was not possible to dispose off stock valuing Rs. 91.54 billion, held by the millers in the market by July 2009, because market can only absorb 300,000 tons sugar valuing Rs. 12 billion per month. Therefore, based on above the established fact, the State Bank of Pakistan allowed us to follow the established loan cycle with a condition to pay off 25% of loan each month, and clear all our loans by October 2009, as pursued for the past 60 years.
Loans for the sugar project financing and working capital are obtained by individual sugar mills from commercial banks, governed under separate contractual agreements; SBP had unilaterally revised the repayment date from October 2009 to July 2009 on the direction received from ECC. The revision of repayment date was in contradiction with the terms and conditions signed between the company and the bank. SBP’s mandate relates to the loan defaults, not normal banking transactions in trade.
The SBP revised the loan payment schedule on merit, and this has no relationship with the current crisis.
Sugar crisis is created due to the faulty decisions by the ECC and MINFAL, there is no sugar cartel, the sugar prices quoted by the media relates to year 2008, ECC forced SBP to change the repayment date of working capital from October 2009 to July 2009. However, SBP on our representation reinstated 60 years old practice. In the light of this, we suggest the following long term measures.
Long-term measures for sugar sector
Our beloved country has an agriculture based economy, during the past 60 years; the successive governments have not come up with any long term agriculture policy. As a result, agro based industrial sectors have not achieved excellence compared with the identical sectors operating worldwide, because various government departments give no importance to innovative suggestions. The sugar sector is one of the victims, that to date is governed under the obsolete and outdated 1950’s Sugar Factory Act. It is in our national interest to increase sugarcane/sugar production, bring prosperity to the sugarcane farmers, ensure reasonable sugar prices and increase our foreign exchange earnings. We, therefore, suggest the following:
a) linkage of sugarcane prices with the sucrose contents and timely payment to the farmers
The Federal Board of Revenue along-with the MINFAL and Ministry of Industries & Production notified measures vide notification No. C. No.1 (3) STM/2004 dated December 16, 2005. The said notification stated that the sugarcane price would be fixed on the basis of sucrose contents (recovery) instead of weight, middlemen would be eliminated and it will be mandatory to pay via bank for the cane procurement.
The above notification should be implemented in letter and spirit, all sugarcane varieties should be priced on sucrose contents (recovery) instead of weight. This would ensure prosperity to the sugarcane farmers and bring price of sugar to a reasonable level for the consumer. Beside this, GOP revenue from the sugar sector would increase manifold and we will be in a position to export excess sugar in the international market.
b) ban on the export of raw sugar (gur) to increase sugar production
The country is facing sugar deficit, accordingly, there is a ban on the export of refined sugar. Contrary to this, raw sugar is allowed to be exported at the cost of sugar deficit within the country. Because of the lucrative gur export, 90% of the sugarcane is diverted towards the tax free commercial gur production, as the Gur Control Order, 1948, that regulates the gur production, is held in abeyance. As a result, the four Peshawar Valley sugar mills in NWFP having capacity to produce 125,000 tons, only utilises 15% of their capacity, due to this, two have already closed down and if no measures are taken, remaining two would cease operations in the next crushing season. This would further decrease the sugar production. The application of law with the same yardstick for both commercial gur and sugar industry would increase our sugar production.
Implementation of the above mentioned measures are in our national interest, GOP’s refusal to revise 1950’s Sugar Factories Act and refused to implement the Gur Control Order, 1948 are responsible for the sugar crisis at regular intervals.