A SENIOR government official in the ministry of commerce is reported by the press to have said that government has decided to teach sugar mills a lesson, if they do not release their stocks and reduce the price of sugar. The report was related to government’s decision to auction 300,000 tons sugar from TCP stocks.
Why has the government developed such a negative perception about sugar industry? The reason of this cannot be the price rise alone. It is mainly because of the misconception that sugar industry is involved in cartelization.
The Monopoly Control Authority has been directed to rough up mills on this pretext. Let us consider the price trend first.
What should be a going retail price of sugar in the present scenario? We consider the ground realities in Sindh. In the last concluded season of 2004-05, the position of the industry was as under:
Sugar cane
crushed: 7,915,416 tons;
Sugar produced: 754,458 tons (raw imported
sugar excluded); Sucrose recovery: 9.53 per cent;
Average cane cost/40 kg: Rs65
Punjab produced larger quantity of sugar (2,046,353 tons) with sucrose recovery of about nine per cent and average cane cost being much lower compared to Sindh.
On the basis of costing data of last five years, cane-cost alone constitutes about 75 per cent of the total production cost. Taking the data of average cane cost of Rs65 per 40 kg and sucrose recovery of 9.53 per cent, Sindh industry could produce 3.812 kg of sugar from 40 kg of sugar cane.
The total production cost of making 3.812 kg comes to Rs86.67 i.e. Rs.22.73 per kg. Therefore, ex-mill price was Rs22.73 per kg.
In order to arrive at retail price per kg, sales tax at 15 per cent (i.e. Rs3.45/kg) and marketing expenses of 15 per cent(Rs3.45/kg) will have to be added making it Rs28.41 /kg. The high price this year was primarily the result of abnormally high price of sugar cane.
Sugar cane was not only short in supply i.e. about 8.0 million tons as against 120 million tons annually but was also of poor in quality. Normal surcrose recovery is about 10 per cent but last year it was 9.53 per cebnt. Draught conditions and shortage of irrigation water in Sindh during previous season were also factors that led to shortage.
Sugar industry can produce cheaper sugar provided sugar cane is made available at reasonable prices. The Sindh Cane Commissioner had fixed official rate of cane at Rs41 per 40 kg during 2004-05 but growers pressurised the provincial government for an early start of crushing season and then delaying the harvesting.
Once boiler is fired, you cannot take a shut down; the mill has to operate with cane or without cane i.e. major operational expenses will have to be incurred even if there is “no cane”. Thus mills suffered huge losses as can be seen from their balance-sheets.
Viewing the price-trend of sugar from another angle is to compare it with price trends of complimentary goods during last 10 years. A small exercise shows that price of sugar has remained stable except for the year 2004-05. (see the table)
While government’s concern is fully appreciated in view of the rising prices of sugar, ground realities cannot be ignored. The government itself is importing sugar at $410 per ton, landed cost has shot up to Rs30 per kg and it is touching Rs32 per kg. By doing so, the government itself has provided a higher bench mark price.
As to cartelization, sugar mills are a bunch of disunited lot. Every sugar mill pursues its own policy according to its resources. Weaker mills often resort to “distress sales” while stronger ones sell their stocks on the basis of market conditions. This is also true of all the industries. This cannot be called cartelization.
If the government wants to lower the price, it can do away with sales tax which will result in reduction of price by Rs3.50 per kg. Sugar is the only food item in Pakistan which is subjected to sales tax.
There is no need to fix the sugar industry. It is back bone of our rural economy and generates its own electrical power. If encouraged, it can supply electricity to the national grid and play an important role in mitigating the energy crisis. Distilleries can provide ethanol for blending into motor fuel and help contain the rising prices of motor spirit.
(The writer is the Chief Executive of Pangrio Sugar Mills Ltd. The views expressed here are his own).
A SENIOR government official in the ministry of commerce is reported by the press to have said that government has decided to teach sugar mills a lesson, if they do not release their stocks and reduce the price of sugar. The report was related to government’s decision to auction 300,000 tons sugar from TCP stocks.
