Sugar industry, including growers of sugar-cane, is in a spin. Palliatives given the respectable name of government policy thrown in here and there in response to some pressure and to mollify this lobby or that, do not take far.

The latest decision by the Trading Corporation of Pakistan (TCP) to relieve the sugar mills of their unsold sugar stocks belongs to that category. To please the grower a spate of fresh notifications trying to change the Sugar Factories Control Act has been issued. There is no gainsaying that all these decisions are based on band-aid philosophy and fail to address the underlying problems plaguing the industry or the farm.

First the decision of the TCP to buy sugar; 25,000 tons will be purchased entailing huge expenditure of Rs0.5b. This shortsighted policy robs the taxpayers by transferring to the mills an income that they have neither earned nor deserved. Why should the taxpayer bail out sick and inefficient industry by relieving it of its excess stock, which they failed to market? And why should the consumer pay artificially raised high prices? The taxpayer faces double jeopardy by having to pay through its taxes when the TCP buys the stocks at a higher price when he buys sugar as a consumer. The government is under no obligation to guarantee profits or undertake marketing on behalf of sugar industry, or for that matter any other industry. The industry should be subject to all the laws of economics including those of production and supply and demand to justify its existence.

That the industry is inefficient and produces at a much higher cost needs no reiteration. The government’s decision to double the quantity to be purchased by TCP is not based on sound economic principles. The usual bureaucratic inefficiency will ensure that the stocks will remain unsold/un-exported and the taxpayer will have to bear the additional carrying cost, the financial cost and storage cost including its deterioration. It so happens that the production this year appears to be less than the last year, perhaps on account of lower sugar-cane crop or delayed lifting of sugar-cane. According to the latest figures sugar mills have produced 2.37 million tons by February 28 compared to 3.24 million tons produced during the corresponding period last year.

It has been estimated that during the current year total availability of sugar will be more than 4 million tons, with 3.5 million tons production and some carry-over. This will give annual per capita availability of 21.4 kgs. One should not be surprised if there is shortage of sugar in the future requiring imports; and subsequent surplus is noticed later requiring export. It is important to remember that we have never been able to export without huge subsidy.

Now for the grower and his sugar-cane crop. For the current year, the federal committee on agriculture has estimated it at 51.7 million tons. In its recommendations to the Economic Committee of the Cabinet, the Agriculture Prices and Policy Commission (APPCOM) has recommended a support price of Rs.40/40 kgs for Punjab and NWFP and Rs.41/40 kgs for Sindh and Balochistan. It has philosophized its recommendation by saying:

‘Fixation of minimum/support price of sugar-cane is not meant to replace the market-based prices but to provide a floor to the market and correct the short comings of the imperfect market often characterized by collusion among the mills.’

The optimism of the bureaucrats must have overtaken their sense of realism when they assumed that they would be able to iron out the imperfections of our market! They must be having illusions of invincibility to harbour such silly notions.

There is no point in announcing minimum purchase or support price if the same cannot be enforced. Support price policy lacks teeth. In the absence of enforcement, the mills and the growers are left to the market and their own devices. Final price is predicated on demand and supply. Between 1992-93 and 2002-03 the area under crop has increased from 885,000 to 1 million hectares; (13 per cent), and production increased from 38 million tons to 52 million tons (37 per cent). Highest ever production was in 1998-99 at 55 million tons. Twice as much cane is needed to provide for the mills to work to its capacity. The mills determine how much to produce and how much cane to buy and when. Therefore the price and the treatment that the grower receives depend largely on that decision. There have been times when the sugar mills have paid much higher than the support price. At others, they have refused to buy the sugar-cane even at the support price.

The problems that the growers face from the sugar mills is refusal to buy their crop, delayed lifting, delayed payment or lower than the support price. The APPCOM blames the problem on the middleman without realizing the useful economic role he performs in the marketing chain. The APPCOM’s role is only disruptive of the market. According to APPCOM’s survey carried out in December 2002, sugar mills in Sindh were not purchasing cane at the support price. They deducted Rs. 3 to 8 per 40 kgs on account of cartage etc. In Punjab, the mills appear to have formed a cartel or an informal zone against the growers. The price received by the growers varied between Rs35 to 40. Therefore, the mills were exploiting the weak bargaining position of the grower everywhere.

Attention has now shifted to the Factories Control Act to overcome the helplessness of the government.. The proposed draft amendment prescribes a harsher new procedure whereby the sugar mill will issue a Cane Purchased Receipt (CPR) along with a cheque, postdated by 30 days for the amount payable. The mill shall be liable to pay interest at 12 per cent per annum for delay of each day beyond a period of 30 days from the date of purchase. The specified branches of the bank will encash the cheque on 61st day. No mill shall purchase cane without this arrangement and without signing an agreement with the banks.

What will happen in actual fact is that the mills will simply refuse to buy the cane, or in case they do they would offer to buy it at a lower than the support price and on deferred payment basis. The banks may simply not have the balance or the authority from the mills to pay to the grower as stipulated in the new legislation. Only the privileged and the powerful will benefit from the proposed solution through selected application of law. That they do in any case. The proposed amendments even if adopted will fail to give teeth to the policy, which would lapse into disuse and provide cynics a field day.

What is it that ails the industry? First is the sugar manufacturing capacity, which was created mostly by Zia-ul-Haq to bribe his potential cronies? The APPCOM has recommended that the problems faced by the industry like availability of cash credit, regulating imports of sugar should be addressed. That is not an efficient way of allocating resources.

The milling is almost twice the producers’ capacity to supply the cane. Sustaining them on artificial basis is proving to be a costly enterprise. The government has to have an understanding of the futility of its efforts and must try to withstand pressures from mills and farms. It should get out of the entire business beginning to end and allow the market forces to allocate resources in a more efficient manner. It should stop fixing support price, which becomes a joke because no mill buys the sugar-cane except at that price. Most of the times they do not buy sugar-cane at all forcing the grower to sell the crop at throwaway price. If the government did not support sugar-cane prices, some of the growers will be forced to shift to some other crops. And this will be to the good because the crop is heavy on scarce water. Water is going to be scarcer in the future, when every drop will have to be conserved.

A policy decision to keep its hands off marketing will bring about a reduction in production of sugar-cane and will force the sugar mills to review their production strategy. Half the inefficient mills will go out of business. Half the sugar mills will then be able to cope with the reduced cane production and will be able to pay good price to the grower Comparative economics of sugar-cane and the competing crops at prices realized by the growers do not favour sugar-cane production at all. For each rupee of inputs, cotton plus sunflower yields Rs. 3.04 as against Rs. 2.97 for sugar-cane. For each day of crop duration the comparative figures for the two crops are Rs63.23 against 43.03. For each acre - inch of irrigation water cotton plus wheat yields an income of Rs596.36 against Rs353.23 for sugar-cane. These are the figures for Punjab. Sindh figures are just about the same. Why then do the growers not shift? One reason is almost free water for which they do not pay an economic cost.