economics notes for bs iii by suhail mahesani

7/28/2019 Economics Notes for BS III By Suhail Mahesani

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SHARE OF SUGAR INDUSTRIES IN PAKISTAN FOREIGN TRADESugarcane shortage was foreseen last year in this meeting which was estimated to about 9.0million tonne lower than 2003-04 crop, a fall of almost 20%. Beside the shortage of the crop thesugar industry faced the pressure for the early start of crushing. The Mills in Sindh zone were

being forced to start as early as the 1st week of Oct04, while the sugarcane supply was no wherein sight. Twice negotiated, the crushing date was finally set for the 1st of November04.Ironically only few mills in Sindh zone could hardly continue beyond end February even withthe intermittent stoppages, crushing almost 5.0 million tonne less sugarcane than the year 2003-04 i.e. 40% lower.

The anticipated shortfall in the sugarcane supply encouraged the sugarcane growers to demandhigher price for their product. This trend immediately started to reflect in the price of sugar in themarket.

The retail price of sugar had hardly moved out of its lowest ebb of three years in a row ofdepressed prices, when Government expressed its concern and in an effort to arrest the upward

move announced import of Raw as well as the Refined Sugar. Simultaneous to this theInternational Sugar Prices started escalating due to a major crop failure in India for the

second year in a row. This encouraged the millers to procure sugarcane at almost double thesugarcane price to break the cartel formed by the sugarcane growers.

With the situation still slipping out of hand, Government allowed duty free import of refined andraw sugar. At the first announcement the import of raw sugar, which was blocked by fewimporters, was now released to the millers. This was done too late resulting in the most sugarmills who wanted to refine raw sugar decided not to import raw sugar as the crushing season wascoming to an end.

To bring the sugar prices to a desirable level the ECC in its subsequent meetings took furthersteps including steady release of sugar from TCP stocks through Utility Stores and doing awaywith the withholding tax on the import of sugar. Further to the imports by traders TCP wasdirected to call for international tender and procure additional 200,000 tonne sugar to supplementthe sugar already floated in the market by the importers. In an effort to attempt importing cheapersugar the sugar import ban imposed on the Indian sugar was also relaxed despite PSMAs adviseregarding its high sulphur content which could be hazardous for health.

Till the preparation of this report import of 622,040 tonne of refined sugar and (partly utilized)282,200 tonne of raw sugar has taken place. Sugar retail price upward surge has subsided asshown in the following table.

Month Av. Retail PriceJan'2005 24.35Feb'2005 27.00Mar'2005 26.33April'2005 26.27May'2005 26.15June'2005 26.60July'2005 28.54


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Aug'2005 27.85Sept.'2005 26.65

Due to the seasonal effects and the shortage of the crop, the shortfall in the sugar production is acommon and regular phenomenon. After every 2-3 years consecutive good harvests our cropsfalls under the low production cycle that remains effective for an year or two depending on the

return of the heavy rains.Unmoved by the rising sugarcane prices and sensitive to the rising sugar prices, the attitude ofthe Government representatives was aggressive and scornful towards the sugar industry. Ignoringthe ground realities it was rather easy to blame the sugar industry for the price hike and the shortproduction.

Ignoring the past data, the crop condition, the lack of research and development work and theseasonal effects on the crop, the Government officials stuck to their assumed high yields and thedesired results. Even after the early end of the crushing the sugarcane production, estimates wereinflated by the Agriculture Ministry and during meetings with PSMA the industry was blamed bydesign for the following deeds.

1. Sugar mills utilized a low percentage of sugarcane.2. Sugar mills must have crushed more sugarcane, which is not on record.

3. Sugar prices were increased through cartel.

On the basis of the above assumptions the image of the sugar industry was regularly tarnishedthrough media campaign, uncalled for threats were given through the media and cases wereinitiated against sugar mills. While reviewing 2004-05 we shall also discuss the facts on theabove-mentioned accusations.

The year under review 2004-05:

As forecasted last year, the sugarcane & sugar production ended well below the projecteddomestic consumption and the milling capacity. As per data provided by the MINFAL sugarcaneplantation Area was reduced to 966.6 Ha in 2004-05 against1074.0 Ha. for 2003-04 crop.

Low Crop Yield & Causes

Beside a noticeable reduction of 10% in the crop area, weather conditions i.e. winter andmonsoon rains, irrigation water supply, both have been below normal due to which a lower yieldwas expected. Though reports from the MINFAL claim the sugarcane yield for 2004-05 crop ashigh as 49.0 tonne / Ha, PSMA crop estimate does not indicate yield exceeding 45.0 tonne perha. The exaggerated sugarcane production adjusted upwards after the crushing campaign causeda lot of controversies and misleading basis for the sugar production2004-05.

Seasonal changes always had dynamic effects particularly on the sugarcane crop that has beenobserved in the past. On the contrary insufficient rains and low water supply had severe adverseeffects on the crop. 1995-96, 1996-97, 1999-00, 2000-01 & 2004-05 fell under the low cycle ofunfavourable weather conditions, which can be matched with the meteorological reports.

Sugarcane requires a huge quantity of water for its survival. It is cultivated on irrigated land andrequires 60-80 acre-inches of water from plantation to maturity. Water shortage severely affectsthe quality of sugarcane crop. According to statistics provided by IRSA (Indus River Authority)


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the canal head withdrawals were decreased by 10.3% for Kharif and 26.7% for Rabi 2004-05.The short supply in the irrigation system shows acute shortage in Punjab and Sindh provinces.(Economic Survey of Pakistan 2004-05)

Pakistan has a well-known irrigation system that provides security to the cropping intensity anddiversity. The system is dependent on rainfall, snow and reservoirs etc. Our monsoon and winter

rains supplement the irrigation system and it contributes directly and indirectly by about 15 MAFannually. The sugarcane crop in Pakistan alone draws almost 10 million-acre foot of water,which is about 10% of the total water requirement for different crops in the country.

Sugarcane crop 2004-05 faced shortage of the irrigation water as well as the low rainfall. Basedon the last 25 years data, the rainfall in winter and monsoon is established as Normal when therainfall measures 70 mm in winter and 137 mm in monsoon as a benchmark.

Keeping this in mind let me inform you that the rains feeding 2004-05 sugarcane crop were aslow as 42mm in the winter and 86mm in the monsoon season, this makes the total rainfall 38.5%lower than normal.

With the above information along the low canal withdrawal report, no further reason is required

to believe the fact for the low yield of sugarcane 2004-05 which is estimated by PSMA to as lowas 45.0 tonne/ha. Low Percentage of Utilization

The sugarcane production, yield & percentage of utilization by the mills during the abovementioned years are tabulated hereunder for a quick glance.

Low Sugar Production Years You will observe that the plantation area during the above-mentioned years was not much different and the utilization of sugarcane by the mills during theselow yield years ranged 62% to 68%. So assuming 80% utilization during 2004-05 is merely awishful thinking.

You will also observe that during the low sugarcane production years the percentage (%) of otherutilizations of sugarcane i.e. (seed, fodder, gur etc) remained high. The diversion towards Gur

production has always been more attractive during the short supply of sugarcane. High prices ofGur with no sale tax have encouraged the production of Gur. Surprisingly the market Gur priceremained 30% higher than the refined sugar.

Sugar Production:( 2004-05)

Sugarcane plantation area decrease together with the low yield caused 25% reduction in sugarproduction in comparison to 2003-04, which was a record production of 4.0 million tonne.

Pakistan ranks 5th in the sugarcane plantation acreage and has 15th position in the sugarproduction because of the low yield and recovery percentage. The statistic reveal that after highproduction years a low production year is always bound to follow with a severe blow in theabsence of a significant improvement activities in the irrigation system and research and

development work. During this year 32.10 million tonne of sugarcane was utilized by the mills toproduce 2.92 million tonne of cane sugar at the recovery rate of 9.10 % Beet sugar productionwas also down by 50% with a production of only 11,400 tonne.A limited quantity of raw sugar was utilized by the mills to supplement the sugar production by182,300 tonne. Thus the total production stood at 3.12 million tonne, the availability of sugarraised to 4.55 million tonne with the inclusion of carryover stock and import of 622,000 tonnesof refined sugar resulting in a carryover stock of 577,650 Tonne.


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The sugarcane supply to the mills in Punjab was down by about 6.0 million tonne resulting in21.28 % less sugar than 2003-04. Sugar Mills in Sindh faced the severe impact of the sugarcaneshortage inspite of record utilization of crop to 84.6%. the sugarcane utilization was down by 5.0million tonne in comparison to 2003-04 and thus sugar production from cane was 38.2% lowerthan the previous year.

NWFP mills faced the traditional diversion to gur making. Though the cultivation area and thesugarcane production indicated minor improvement, the utilization by mills remained under30%. The production of sugar was down by 31.33%. The overallzone-wise scenario is presented hereunder for a quick assessment.

Domestic Consumption

Domestic consumption as well as the per capita consumption has been on the rise during the pastthree years. Consumption that was once 10.70 KG per capita in 1987-88 has alarminglyincreased to over 25kg per capita. Past two years consumption shows that at least 200,000 tonneof extra market supply was made over and above the projected estimates, part of it wasaccredited to the Afghan Refugees returning home. Based on the available supply / sale data, the

domestic consumption for the year 2005-06 would not be any less than 4.0 million tonne.The unexpected sudden increase in the consumption that made an obvious impact on the supplyis one of the causes contributing the bullish trend in the sugar market.

Other Events of the Year

Ministry of Industries and Production on the directive of the President and the Prime Minister ofPakistan initiated to formulate policies to add value to the sugarcane by-products such as bagasseand molasses. PSMA was actively represented and presented the initial project summaries in thetwo separate committees constituted to prepare a project study for: -

i. Formulation of National Policy on Indigenous Fuel Ethanol / Gasohol production & use

programme in Pakistan.ii. National Policy for Power co-generation by the sugar industry.

Rigorous PSMA inputs and discussions were made during the separate meetings called for theabove projects by the Ministry of Industries & Production during the past seven months.

Sugar industry was always blamed in the past for the lack of initiative on the use of the by-products as been practiced in the rest of the World. The industry having initiated nearly tenethanol-manufacturing projects with huge investment was glad to see Government support on theuse of ethanol. During several meetings on the formulation of blending ethanol with petrol andthe required legislation for this affect, the sugar industry observed a very tough resistance fromthe oil companies whose vested interests were involved.

They took a strong plea on the basis of already surplus petrol available in the country. To derailthe formulation of policy they went to the extent of a special presentation to the Prime Ministerin the absence of the representatives of Ethanol Manufacturers. Efforts are now being made bythe PSMA to put the project back on track.

In the mean-time due to high production and export of Ethanol from Pakistan, the EuropeanUnion has levied high import duties and is considering Anti-Dumping Measures as well, againstwhich the Government of Pakistan has been approached for prompt action.


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Similarly a number of meetings took place at the Ministry of Industries for the formulation ofNational Policy for power co-generation by the sugar Industry. In this case representatives ofWAPDA, NEPRA, Sui Northern and Sui Southern participated. For a regular supply ofElectricity the basic requisite of Power Co-generation by sugar mills was the supply of gasduring the period when the mills are non-operative. The representatives of the gas companies

came-up with their own problems of shortage of gas. After detailed deliberations during themeetings chaired by the Minister for Industries certain condition and criterion were laid out forthe initial start of the setup for power co-generation by the mills. The basic criteria forconsideration included the crushing capacity, self-sufficiency in bagasse, the financialperformance of the mill and the most important, the location of the mills in relation to the accessdistance from the main gas supply line.

The recommendations were to be forwarded to the Inter-ministerial Committee for evaluationpurposes.

During March2005 PSMA delegation held meetings with the Chairman CBR and discussed thevarious issues of sales tax, further sales tax, audit procedures and other problems indocumentation. CBR also explained the general complains they had regarding the low sales tax

collection in 2003-04 which was due to the low sugar prices and elimination of additional salestax. The chairman CBR was informed that low collection of sales tax was not due to tax evasionas been stated in the print media referring to the CBR reports.

Production 2005-06

Initial reports indicate a further decrease in the plantation area for the sugarcane. Against967,000 Ha last year the plantation is reduced by 7% to 900,000 Ha. PSMA estimates slightlyhigher cultivation as the farmers are being encouraged by the high price of the sugarcane. Watersupply has been in abundance and is likely to continue during the maturity season of sugarcane.High winter rains snow and moderate monsoon has assured an above normal irrigation supply forthe rest of the year which may result a higher yield of 50-51 tonne per Hectare.

Sugar production 2005-06 is not foreseen any better than the last year though diversion forfodder consumption may be at its lowest. Sugar production is foreseen at 3.0 million tonne,against the estimated consumption of 4.0 million tonne. Carry forward stocks at mills includingTCPs reserved stock stands at 577,650 tonne while the import is still in progress for utilizationin the month of October and November.

With the balance stock of 577,650 tonne on 30th Sept05, the estimated production 2005-06, theavailability of sugar would be around 3.6 million tonne, which needs to be supplemented withthe in-time import and refining of raw sugar to a considerable quantity.

Research and Development

The soaring sugar prices in the domestic and global market with expanding demand is a wakeupcall for the industry and the Government. There is fresh warning and demand for research,development and innovation today more than ever, unless the country is let to future consumermarket. It is high time to develop and extend the applied research services to the growers and themills for the enhancement of sustainable production of sugarcane and its products.

Comprehensive and extensively involved sugarcane varietal research with specific targets areurgently required with special emphasis on the sugarcane varieties of less water dependency.

To increase the per acre yield there is also need to adopt new means and methods for water


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conservancy and controlled irrigation system like drip and sprinkle irrigation. The proposal forimplementation and extensive use of drip irrigation system was put up in the meetings with theMinistry of Food in the presence of scientists & irrigation experts called in on the occasion.

As indicated earlier the per hectare sugar production in Pakistan is 4.5 tonne, where as in ourneighbourhood India has achieved 50% higher production i.e. 6.5 tonne, Thailand at 6 tonne,

Egypt at 12.5, Brazil at 10 and above all Australia at 14 tonne are the examples in front of us thatwe need to follow to achieve at-least self sufficiency based on the economic growth of thefarmers and the millers both.

Continued depressed prices of sugarcane and sugar will never lead to any growth vital for anagro-based industry. Economic survival of the growers and the millers should never be forced todepend on the short supply of the commodities. Whenever interest of the growers and the milleris sacrificed to offer favour to the consumer the option is short lived and the commodityultimately suffers.

International Scenario

Sugar production 2005-06 is indicated as deficit for over 2.0 million tonne. The world

consumption is projected to 151.3 million tonne against the production estimated of 149.1million tonne. Though various agencies have minor difference for the shortfall forecast hasalerted the international market with visible activity.

The annual growth in consumption is catching up with the production and nearly half the deficitis due to low production forecast in Pakistan.

Brazils sugarcane and sugar continues playing a leading roll in the world. It is expecting ajump of 35% in the sugarcane production in the next five years from420 million tonne to 565 million tonne. The ethanol production is also expected to move alongfrom 16.7 billion litters to 26.5 billion litters for which 50 new ethanol and sugar refineries areunder construction. Brazil will continue dominating the sugar exports in the world as the sugar

production in 2005-06 is indicated 6% higher than 2004-05.Brazil has another credit of reaching 63% of the light vehicles market share using flexi fuel andpure ethanol cars besides exporting ethanol to many countries. India alone buys around 1.0billion liters of ethanol from Brazil.

China is expecting increase in the demand as per capita sugar consumption is moving to 8.0 kgfrom 7.0 kg few years back. With its sugar production expected to 9.6 million tonne China willbe looking for import of over 1.0 million tonne.

Sugar reforms proposed to the European Union, which were formally presented by the EuropeanCommission in July, demands 39% cut over guaranteed sugar prices in two years. This couldbring significant reduction in the domestic production and export availability of sugar.

CONCLUSIONS

After three consecutive high sugarcane production years 2004-05 was a low production

year with a shortfall of at-least 10.0 million tonne in comparison to 2003-04.

Sugar production was low by 1.0 million tonne in comparison to 4.0 million tonne

produced in 2003-04

The shortfall was well with in the PSMA estimate discussed in this meeting last year.


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Reduction in sugarcane plantation and low yield due to the below normal rains & watersupply resulted in high sugarcane prices, high sugar production cost and consequently abullish trend in the sugar market beyond expectation further encouraged by the climbinginternational prices.

Mishandling of the sugarcane crises by the Government triggered further rise in the sugar

prices. By over stating the magnitude of the crises market players were taking advantage.

As suggested by PSMA an import of 500,000 tonne of raw sugar should have been

allowed to supplement the shortfall and at the same time keep the sugarcane prices downto an affordable limit.

It is observed that misleading data, subsequent ECC decisions for unlimited imports and

zero rated duty did not bring the desirable results as the reports on the increase in thesugarcane prices was totally neglected which was the major factors for the start of thesugar crises.

The decisions at higher level are always made adversely to the data & advice conveyed

by PSMA during the sugar crises, both, in the case of surplus and in shortfall. Instead of

taking corrective measures the industry faces a punitive tune and threatening decisions.

Due to shrinkage in the plantation area the 2005-06 crop is expected around 45.0 million

tonne and the sugar production may also remain under 3.0 million tonne.

The consumption of sugar has dramatically increased with in the last two years and thus

the consumption in 2005-06 could be more or less 4.0 million tonne.

To fill the gap, import of at-least 700,000 tonne raw sugar is unavoidable which should

be made at the early stages to supplement the sugar demand and keep the sugarcaneprices at a level to promote the sugarcane crop meet the future demand.

In addition to the delay in the legislation for blending of ethanol in petrol the distilleries

are faced with the loss of their preferential access to the European Union alcohol market.Import duty plus Anti-Dumping Measures by the European Union is seen as a seriousthreat to the ethanol manufacturers in Pakistan. The High P.O.L. prices can only becountered by introducing Alternate / Renewable source of energy.

The Government of Pakistan should immediately announce its policy on co-generation

using bagasse as fuel.

Dedicated zones must be announced to give incentives to the sugar mills to develop good

varieties of cane increasing the growers yield and the mills sugar recovery.

The price of sugarcane must be linked with the quality of sugarcane by giving incentives

to the growers to grow high yielding and high recovery cane. Similarly growers growing

the low yielding and recovery cane must be penalized by the cane pricing system. Government should take up extensive research and development work with participation

of PSMA to achieve higher yield, recovery and development of less water dependentvarieties. All out efforts be made to make this valuable crop viable.

2005-06 The Year Under Review

Production


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Unaware of the severe effects of the frost in the coming months, PSMA was optimistic inforecasting sugar production of just over 3.0 million tonnes against the domestic consumptionestimated of 3.9 million tonnes.

Continuation of the last years short production, the frost attack further deteriorated the situation.As usual, the sugarcane price immediately sparked the situation, with the result that sugar market

started reflecting the production cost, which had always been a sensitive issue for theGovernment.

Right in this meeting last year, a million tonne shortage of sugar was forecasted based on theofficial information for production of sugarcane crop. The need for the import of raw sugar wasalso ascertained to supplement the production. The severe frost attack on sugarcane crop inNorthern Punjab and NWFP further disturbed the supply of quality sugarcane. Beside the aboveloss the lucrative business of Gur making flourished as the demand was high at home andAfghanistan seriously hurting the milling sector.

Overall situation remained below average as 30.00 million tonnes of sugarcane was utilized bythe mills to produce 2.58 million tonne of sugar, supplemented by 372,500 tonnes refined from

raw sugar and a marginal addition of only 8,700 tonnes from beet. Thus the total production wasregistered at 2.964 million tonnes, apparently below 50% of the production capacity of the mills,thus Pakistan experienced second crop disaster in a row.

Sugar Price Structure & Crises

The Government of Pakistan supports the cane production by setting a market support priceannounced before or after planting. The local demand is always above the minimum price fixedas a result mills renegotiate the procurement price. Provincial Governments in 2005/2006increased the official cane purchase price for 40 kilograms to Rs 45/- for Punjab & NWFP andRs. 48/- for Sindh. Sindh Government later revised this price to Rs. 60/-. However, during theentire season the price fixation remained a volatile issue between the growers and the millers.The growers refused to sell the cane at the official price and millers in some areas of Punjab andSindh were forced to delay the start of crushing season.

The milling sector ended up bearing the bulk of the risk when the circumstances changed. Whilethe support price varies significantly when there is shortfall during a particular harvest, there isno similar level of adjustment when the harvest is good and cane is in abundant supply.

With intermittent stoppages the seasons cane price averaged to Rs. 80/- in Punjab and up to Rs.95/- in Sindh province resulting in a significant rise in the production cost to above Rs. 32/- to34/- per kg without addition of 15% sale tax which was immediately reflected in the marketsentiments and retail sugar market shot up to Rs. 38/- to Rs. 40/-.

The unprecedented increase in the minimum support price in the province of Sindh triggered thesituation in the whole country. Increase of sugarcane price twice in the same crushing season byabout 50% encouraged the growers to further dictate cane prices and cartel supplies.

As a result of the situation the sugar market immediately started reflecting the trend in sugarprices, the sugar production was also termed as deficit by about a million tonne.

The disturbance in the sugar market was immediately noticed by the Government concernedauthorities who labeled the millers as profiteers involved in cartel under declaring the sugarcaneprocurement and production of sugar.


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The Government was candidly informed of the situation and the deficit of sugar for the season toarrange import of the required quantity of the sugar, who beside allowing duty free import of rawand refined sugar approved import of about 850,000 tonnes of sugar by TCP for sale anddistribution through Government managed outlets, with an obvious objective of subsidizing thesale to bring the market prices down.

The unlimited import of refined sugar to the tune of 1.5 million tonne along 0.5 million tonnes ofraw sugar already refined has now converted the 1.0 million tonnes deficit year into a milliontonne surplus year.

The situation thus developed hampered the economy of all concerned and the over sensitivenesshas resulted the year ending with large stocks held by TCP, Mills and by the traders whoimported sugar at high price.

Ironically the international prices started subsiding as soon as Pakistan had enough of self-dumped sugar.

The sugar crises during the year caused the industry face the blame game with all Government

agencies actively involved. In this connection few actions are being mentioned without going into details.

Monopoly Control Authority charged the sugar mills for cartel of sugar and registered

cases against mills for their sale being below the desired assumed percentage by theMCA.

National Accountability Bureau was asked to investigate corrupt practices leading to the

sugar crises in the country. The investigation was later withdrawn.

CBR appointed custom-armed staff at the mills gates to supervise and monitor

procurement of sugarcane and the sale of sugar looking for tax evasion and sale tounregistered buyers. The monitoring was withdrawn with the end of crushing.

State bank of Pakistan imposed 50% margin restrictions for financing against the security

of sugar stock and instructed for immediate adjustment of all advances against thesecurity of sugar stock. The final date for adjustment was later extended from 31st July to31st Oct2006.

After the hectic meetings at PSMA and with the concerned Government officials some of therestrictions have eased down. Government intervention through bringing down the import duties,subsidizing the supplies through its outlets and blaming the industry hardly matters withouttaking necessary measures to support production of a better crop in a competitive environment.Past experience and record shows that the sugar price has been moving up and down inverselyproportional to the quantum of the sugarcane and same was the affect on the price of Gur where

no factories are involved, contains impurities and remains tax free. The graph hereunder clearlyindicates that the factor controlling the sugar price is the quantum of sugarcane, the main rawmaterial. Sugar production totally dependent on the sugarcane production has always reflectedthe weak link in the overall value chain.

Pakistan Sugar Mills AssociationSugarcane Production & Av. Sugar Retail Price

Years Sugarcane Av. Retail Sugar Av. Gur Retail Price


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Production Price

1992-93 38,058,900 12.62 10.031993-94 44,427,000 12.80 10.49

1994-95 47,168,400 14.36 11.07

1995-96 45,229,700 17.86 14.54

1996-97 41,998,400 21.44 18.671997-98 53,104,200 18.75 18.91

1998-99 55,191,100 19.63 17.19

1999-00 42,000,000 22.85 19.81

2000-01 43,620,000 26.73 26.31

2001-02 48,041,000 21.97 23.31

2002-03 52,049,000 20.12 20.45

2003-04 53,800,000 19.26 19.79

2004-05 43,533,000 25.34 23.98

2005-06 44,312,000 35.00 30.26

OUTLOOK 2006-2007

Per data provided by the MINFAL there is 14% increase in the plantation area of sugarcane.Cane production had dropped significantly in the past two years in a row limited to 44 milliontonnes. The increase in the plantation area along promising weather conditions i.e. supply ofirrigation water & rains sugarcane production is expected to over 50 million tonne which ensuresincrease in the sugar production to about 3.5 million tonnes.Though cane production in 2006-07 shows better prospects yet the utilization of sugar mills willremain around 50% capacity provided 40.0 million tonnes supply is made to the mills.

Government of Punjab has already announced indicative minimum price of sugarcane asRs.60/40 kg, which means that delivered price at the mill-gate with the inclusion oftransportation, cess and price competition would be around Rs.70/40kg on average. SindhGovernment has also recently announced Rs. 67/40kg and NWFP Rs. 65/40kg.

With such enhanced sugarcane price the production cost of sugar cannot be less than Rs.34/kg exmill i.e. retail price expected to a minimum Rs.38/kg. Confusion prevails over the price structuredue to the following reasons, which have been brought to the attention of Government ofPakistan at a higher level

I. 2005-06 a deficit year of sugar production by one million tonne ended with a surplus ofover one million tonnes.

II. Crushing season 2006-07 starts with a carryover stock of 1.3 million tonnes.

III. 2006-07 producing 3.5 million tonnes will have availability of 4.8 million tonnes againsta consumption of 3.9 million tonnes.

IV. Major stock held at the end 2005-06 belongs to TCP which Government intends to offload at a highly subsidize rate to the market threatening the domestic sugar price.

V. International sugar market prices are down where as Government of Pakistan has yet toclampdown any import duties to stop further inflow.


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Whereas the industry bears a strong feeling to pay better sugarcane prices to ensure a bettersugarcane crop in future there is confusion as how to maintain a balance in the minimumindicative price and a matching production cost. Government has been approached at severaloccasions explaining these issues of utmost importance.

Despite these hurdles government of Sindh has already issued directions for an early start of

crushing on 1st Oct2006. As a regular phenomena every year millers are pressurized for an earlystart of the crushing with the plea to vacate some portion of the land from sugarcane for thesowing of wheat, whereas the millers resists to accept the plea for the reason that the sugarcanequality at the early season is of very low recovery, the fact is very well known to the allconcerned Ministries and the growers as well who irrespective of the facts force for the earlystart as the payment system of sugarcane has still continued based on the weight and not thequality.

Per our estimates early start of the sugar mills with the low recovery is causing a loss ofminimum 150,000 tonnes of sugar costing mills billion of rupees, which is a phenomenal loss tothe industry and the country.

Overlooking the technical and the positive aspects in favour of the late start, the main cause canbe spelled out as the row between the Growers and the Millers over the price hike and the non-availability of the crop. Shortage and the immaturity of the crop in the beginning normallyresults the early closure of the season at the higher recovery period. An adverse step forachieving the optimum production.

International Scenario: - The leading analysts had been changing stance on the world sugarproduction and consumption and as the year went by the deficit gap was closing. On averageremained within 148-150 million tonnes against the consumption of 149-151 million tonnes. Thecontinued deficit and imbalance in demand and supply kept the prices significantly strongerduring the year (See table below) While the high white sugar prices deterred its import more andmore attention was diverted towards the raw sugar, which prompted a higher premium and soon

the import of raw sugar for processing was no more profitable. Instead the exporters who couldexport both the refined as well as raw started giving preference to exporting refined sugar. Braziland Thailand both switched to more attracted option by increasing the export of more whitesugar.

Later the Sugar prices in the International market started sliding down due to big global supplyand soft demand. The prices sunk by almost 25% since July06 after touching US$ 490/- a tonnedown to US$ 370/- in Sept06. The prices started ascending in Nov05 right at the beginning ofthe season 2005-06 from US $ 288/-, apparently over Speculations and sudden large demand.

London white sugar featured peak in July when it hit record US$ 498/- a tonne. Raw sugar hadits 25 years peak price of 20.46 US cents/lb at New York market in February with the news of

drought in many sugar producing countries. The prices rose and tumbled sharply during the year.2006-07

Global production estimates for the year 2006-07 shows a surplus of about 3.0 million tonnesagainst a similar amount of deficit last year (2005-06).

The global stock/consumption ratio which has always played a pivotal role over the global sugarprices will remain low and could cause price rise in the future year for the 10% estimatedproduction fall in Australia due to smut and the ongoing drought in the Central and South Brazil,


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which might reduce the seasons output as well as cane supply for sugar production.

India is expecting its record sugar production of over 23.0 million tonne in the year and is aboutto lift ban on export of at-least 2.0 million tonne out of its surplus, unhappy over the fall ofinternational prices now matching its production cost.

EU sugar output is expected to fall from 22.0 million tonne down to 16.5 million tonne in 2006-07 due to E.U sugar regime reforms suggesting price slashing.

Presently the world production is expected around 2.5 million tonne higher than the consumptionfor the first time since 2002-03. Consumption and stock ratio is expected to grow nominally toabout 38.5% having significant affect on the prices.

Conclusions

Sugarcane plantation area (906,988 Ha) for the year 2005-06 was the lowest in the past

decade after 1992-93 when the plantation area was 885,000 Ha

Low plantation area coupled with the frost attack resulted in low yield, the sugarcaneproduction was limited to only 43.5 million tonnes

Sugar production for the year remained below average producing 2.58 million tonne ofcane sugar supplemented by refining of raw sugar and a small quantity of beet sugar. Thetotal output remained within 2.964 million tonnes i.e. 50% of the production capacity

For millers & growers both, the year was the second crop disaster in a row. Low

sugarcane production increased the demand and the high cane price caused the sugarproduction cost to a record high.

Duty free import of unlimited raw and refined sugar was allowed to fill the gap and bring

the domestic prices under control.

By the end of the year 1,581,000 tonnes of refined sugar and 454,000 tonnes of raw sugar

has been imported. Such a large quantity import had significant effect on the international

prices while the year was considered as global deficit.

At the same time the year ended with a glut like condition. End September stock at mills

were at around 445,400 tonne, at TCP godowns 660,000 and other importers holdingabout 200,000 tonnes, with further supply of 128,000 expected shortly by TCP.

Domestic sugar falling price, release of stock by TCP at subsidize rate, duty free sugar

import condition along SBP new financial restrictions jeopardized the start of newcrushing season.

After challenging meetings at the concerned ministries and SBP the Prime Minister of

Pakistan was approached through a letter apprising him with the total scenario.

Details were further discussed at the Federal secretaries meetings seeking stabilization ofdomestic sugarcane and sugar prices and fixing appropriate crushing dates practicallypossible.

Following the discussion between the secretaries committee of Government of Pakistancomprising Secretary MINFAL, Secretary Industries, Secretary Finance, and SecretaryCommerce held on 3rd and 4th Oct.2006, the main points resolved were as under:-

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006 while


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Punjab & NWFP will start the crushing campaign after mid of Nov.2006

The minimum indicative price of sugarcane were approved as following

? Sindh Rs. 67/40kg? Punjab Rs. 60/40kg? NWFP Rs. 65/40kg

Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that

the banks provide financing to the sugar mills without undue and additional securitymargin conditions

While it was agreed that TCP will continue to play its interventionist role to guard against

escalation of sugar prices in the domestic market, the Government of Pakistan will takenecessary steps to clamp measures to control & guard against disruptive dumping ofimported sugar in the domestic market.

Quality Premium applicable in Sindh was suspended for the season 2006-07. Further

decision for its removal through the system of sugarcane payment on quality basis will beworked out for adoption throughout Pakistan.

Last but not the least, it was decided that all issues pertaining to the sugar industry will be

resolved by the Government in consultation with PSMA, and the Industry to ensure thatthe retail price in domestic market remains stable.

With the start of the new sugar year 2006-07 we hope that Government of Pakistan and theProvincial Governments will take extensive research and development work for the sugarcanecrop with the participation of PSMA to develop better yield & recovery and improve theeconomics of sugarcane growers by increase in per acre yield while the industry will be morecompetitive in producing more sugar due to the increase in sugar recoveries to meet the nationaldemand.

2006-07 The Year Under Review

Production: -

Blessed with the favourable weather conditions, availability of irrigation water and 14 percentincrease in the plantation area of sugarcane, the sugarcane production showed considerablepositive affects. Out of 54.9 million tonnes of sugarcane, supply to the mills was limited to 40.47million tonnes, i.e. 73.75%.

The production of cane sugar as forecasted, ended at 3.52 million tonnes, nearly 1.0 milliontonnes in excess to the production 2005-06 the deficit year. The carryover stock of 1.3 milliontonnes, stored mainly at the TCP reserve stock and mill godowns made the total availability to4.93 million tonnes with the inclusion of about 100,000 tonnes of imported sugar as against 1.6million tonnes of sugar imported last year. Production estimates and availability against the

domestic consumption remained exactly within the forecasted figures of PSMA discussed at thismeeting last year.

Though sugarcane crop promised better prospects, the recovery was marginally higher than thelast years as 8.70 % against 8.60%. It could not achieve the sort of recovery of 9.15% and 9.10% as in 2003-04 and 2004-05 that could make a significant affect on production.

Unfortunately the sugar recovery, the most important factor has been ignored by the Governmentconcerned Ministries particularly at the time of forcing the early start of crushing campaign each


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year. Length of the crushing season is misquoted from an obsolete document the Sugar FactoryControl Act ignoring the maturity of the crop. Due to the pressure from the Government and thegrowers, recovery losses in the month of October November could be as much as 2% followedby the height of a miserable joke, that at the period of achievement of high recovery thesugarcane crop is exhausted due to early start and thus a minimum of 250,000 tonnes of sugar is

lost.Based on the fortnightly production reports of PSMA for the last five years, the recoverypercentage in Punjab though accumulated, shows a vast variation that confirms the magnitude ofthe loss in production.

Periodic Recovery of Sugar Mills in Punjab (Accumulated)

YearsStart

Crushing

Nov

15th

Dec

15th

Jan

15th

Feb

15th

Marc

h

15th

April

15th

End

Crushi

ng

2002-03 15-25 Nov - 6.97 7.71 8.06 8.29 8.47 15-25Apr.

2003-0415-30Nov.

- 7.50 8.37 8.72 8.94 9.0905-25Apr.

2004-05 1st. Nov. 6.88 7.87 8.41 8.67 8.91 8.9615-30March

2005-06 15-20 Nov - 6.85 7.45 7.71 7.83 8.0515-30March.

2006-07 25-30 Nov - 7.32 7.84 8.08 8.24 8.5010-15Apr.

Although the domestic market was fully supplied with the commodity, small quantity import,

leakages of sugar import through Afghan Transit Trade and its reported unauthorized sale withinthe territory of Pakistan, kept destabilizing the domestic market prices already under pressure.

Sugar & Sugarcane Price Situation (2006-07)

Before the start of the sugar year 2006-07 Prime Minister was apprised with the sugar crises andthe reasons for the fluctuating price situation, who constituted Secretaries Committee to look intothe affairs of the industry with an effort to bring an amicable and workable policy. Thecommittee in its meeting held on 3rd & 4th Oct2006 agreed on the following few points for thecrop year 2006-07.

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006, while

Punjab & NWFP will start the crushing campaign after mid Nov.2006

The minimum indicative price of sugarcane were approved as following

Sindh Rs. 67/40kg Punjab Rs. 60/40kg NWFP Rs. 65/40kg

Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that

the banks provide financing to the sugar mills without undue and additional securitymargin conditions


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While it was agreed that TCP will continue to play its interventionist role to guard against

escalation of sugar prices in the domestic market, the Government of Pakistan will takenecessary steps to clamp measures to control & guard against disruptive dumping ofimported sugar in the domestic market.

Quality Premium applicable in Sindh was suspended for the season 2006-07. Further

decision for its removal through the system of sugarcane payment on quality basis will beworked out for adoption throughout Pakistan.

Last but not the least, it was decided that all issues pertaining to the sugar industry will be

resolved by the Government in consultation with PSMA, and the Industry to ensure thatthe retail price in domestic market remains stable.

Since the agreement the whole year was spent negotiating and requesting the

implementation of the decisions. Several breaches were notified to the concernedMinistries such as: -

TCP was to intervene against the escalating prices, but it continued intervention during

falling prices causing further decline in the domestic market.

Government of Pakistan did not take necessary measures to stop the import of sugar to

the extent that Indian surplus sugar started pouring in Pakistan without consideration ofquality control standards.

No Provincial Notification was issued for the suspension of the quality premium in Sindh

Province. Sugarcane payment system based on quality is yet to come to replace thesystem.

Sugar Retail Market Average Price (2006-07)

Month Rs. / Kg

October 32.87

November 33.15December 30.86January 31.55February 30.74March 30.63April 30.25May 29.85June 28.38July 29.20

August 30.03September 29.77

Average 30.61Domestic sugar prices remained continuously under pressure due to over supply whereas

Government of Pakistan did not make any effort to stabilize the situation, even through the abovenoted pre-agreed steps. The millers had to pay the notified sugarcane prices in-spite the fact thatmarket sugar prices did not match the announced sugarcane prices. The retail price structure isgiven hereunder for record and reference. With the gradual fall in the domestic market, thesugar price ended with a minimum loss of Rs. 4/- per kg against the price of Rs. 34/- per kgassumed as a base at the time of fixation of the sugarcane prices for the season, causing a


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minimum loss ofRs. 12.0 billion to the mills and Rs. 4.0 billion to the ex-chequer through loss in Sale Tax.

Sugar & Sugarcane Price Situation (2007-08)

After continued negotiations, meetings were held at the Ministry of Industry & MINFAL andfinally with the Secretaries Committee on 18th Sept2007 with fresh decision and promises. Thecommittee was informed by PSMA representatives candidly about the non compliance inimplementation of the decisions made last year and the losses faced by the Industry as a result.

On presentation of a resume by the Secretary MINFAL the following was agreed upon asminuted by the Finance Division.

PSMA would ensure production of sugar by 1st week of November in Sindh and Punjab

to raise the total availability of sugar to 0.7 to 0.8 million tonnes in the month ofNovember 2007.

The provinces will be requested not to change minimum price of sugarcane from the last

year level i.e. Rs. 65/- per 40 kg in NWFP, Rs. 60/- per 40 kg in Punjab and Rs. 67/- per40 kg in Sindh. MINFAL will take action in this regard.

The Ministry of Commerce and MINFAL in consultation with PSQA and PSST will take

steps that the quality and standard of sugar is checked.

TCP will continue to offload the old imported stock of sugar, and will purchase fresh

sugar from PSMA to replace the old one.

TCP will maintain strategic buffer stock of 400,000 tonnes. It will purchase 300,000

tonnes sugar from PSMA on open tender basis with a quantity of 25,000 tonnes eachtender on weekly basis during the months of November, December 2007 and January2008 by adding to the leftover strategic stock with TCP to make it total of 400,000tonnes. The stock shall remain within the premises of sugar mills and will be replaced

with fresh stock. These reserves will be increased to 500,000/ 550,000 tonnes, if needed,for which approval of the ECC will be sought.

Sindh Government will be requested to defer implementation of Quality Premium in

Sindh till a consensus on uniform formula is developed. MINFAL will take action.

TCP will not import sugar if the price per Kg remains within Rs. 31/- per Kg in the

market.

Class B sugar from the positive list is to be deleted.

PSMA in response reminded for an amendment in the minutes to add a point already agreed forrecommendation i.e.

The recommendations must include exemption of sugar from the Special Excise duty of

1% levied vide Finance Act 2007, missing from the memorandum.

TCP was to maintain & improve its buffer stock at 550,000 tonnes regularly by purchase

from sugar mills.

Contrary to the decisions Sindh Government has already issued the levy of quality

premium like last year. Concerned authorities are informed of the action.

International Scenario: -


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World production and consumption 2006-07 crop year was the year of recovery from longconsecutive deficit to a surplus year, estimated up to 3.0 million tonne that ended with anaverage of 10.0 million tonne. The world market remained under bearish pressure due to thesizeable surplus. High production expectations for 2007-08 has further put the internationalmarket prices under pressure and is likely to continue for the year.

The sugar glut in India is the main cause of the depressed sugar prices in the world. Theproduction 2007-08 in India is likely to overtake Brazil as world top sugar producer.International Sugar Organization forecast Indias production as 33.0 million tonnes raw valueagainst Brazils 29.20 million tonnes, both struggling hard to get rid of the surplus to theinternational market.

The world sugar is facing heavy surplus for the second consecutive year in 2007-08. The latestforecast of the world sugar suggests production at 163-173 million tonnes consumption at 157-160 million tonnes with the surplus forecast for over 10 million tonnes.

Thus the distinctive excess in the global production over consumption and the high exportavailability is expected to have direct impact on the sugar economy. Consumption and stock ratio

is to grow considerably. Its affect on the domestic process would be significant and particularlyin the case of the good harvest expected.

Outlook 2007-08 (Domestic)

For the second consecutive year the prospects for the sugarcane crop have been highlyfavourable as the weather conditions and availability of irrigation water remained optimum forthe sugarcane crop. The plantation area of sugarcane crop has shown increase of 11 % to 1.147million hectare. Province of Punjab and Sindh both, have shown equally the area increase.

With such an increase and the expected yield of 50.6 tonnes per hectare the production ofsugarcane is expected in excess of58.0 million tonnes, which itself would be a record production of the sugarcane in Pakistan.

Per statistics the sugarcane utilization by the mills remains on higher side to around 80% whenthe production is on higher side as the requirement for seed and fodder is low. In case thesupplies to the sugar mills exceed 47.5 million tonne the sugar production is expected to reacharound 4.2 million tonne with a recovery of 8.75 % i.e.

With a carryover stock of 1.0 million tonne the availability of sugar for the year 2007-08 wouldbe around 5.2 million tonne or even higher. The consumption projected to 4.20 million tonne theend stock on 30th Sept2008 could be repeatedly 1.0 million tonne or more enough for thedesired buffer stock for the period prior to the start of the new crushing season 2008-09.

In short there would be no room for import of sugar throughout the season and the prices are toremain stable with a bearish trend due to global surplus, low prices and high availability in the

neighboring India and internationally.

Diversification of by-Products remained untapped

1: Use of Ethanol Blended Petrol

Encouraged by the Government and the formulation of the policy on the use of ethanol beingactively persuaded, the sugar industry promptly responded by establishing more ethanolrefineries. At present the annual production capacity of ethanol at 21 refineries in Pakistan has


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reached 400,000 tonnes. With the advent of high crude oil prices in the global market, ethanol isincreasingly seen as an alternative, renewable and environment friendly fuel of the future.

However, in the absence of a prompt legislation for the use of locally produced ethanol blendedwith petrol in Pakistan, ethanol producers had to face anti dumping measures by the European

Union.Pakistan State Oil and Hydro Carbon Institute of Pakistan on instruction from Government ofPakistan last year launched a pilot project to introduce and encourage the use of 10% ethanolblended petrol. PSO started the introduction in three of its petrol pumps, one each at Karachi,Lahore & Islamabad.

Instead of straightforward legislation for the use of 10% blended petrol, as is being doneworldwide the initiative was handed to the oil lobby who succeeded in proving the experimentunsuccessful. As long as the policy for fuel ethanol is controlled by the oil sector the substitutionprocess will remain slow.

Pakistan imported petroleum products worth US$ 3.10 billion in 2006-07 that constitutes major

chunk of its deficits, likely to increase in the current situation, shift to use of ethanol blended fuelcould save considerably keeping its environmental aspect of importance.

Despite the potential advantages, progress in promotingbio-ethanol lacks policy impetus. The oil refining companies in collusion with the ministry ofPetroleum have managed to keep a lid on private sector involvement. Rather than enjoyingincentives, the private sector is burdened with domestic taxes on industrial alcohol sales. Suchdomestic policy biases have been compounded by import restrictions abroad, which havecompromised the countrys export potential.

2. Re-consideration of Power co-generation by the Sugar Mills

Under the policy 2002 for independent Power Plants incentive were available for the power Co-generation units including the sugar mills and it was decided that the power generated by thesugar mills will be purchased by NTDC or DISCO concerned at agreed rates approved byNEPRA. The proposed project was delayed since the acquired gas was not available. Being amajor shift the alternate fuel use was studied.

In recent meeting consideration was given to the Power Co-generation of sugar mills establishingindependent power projects based on duel-fired system of bagasse and coal. PSMA urges theGovernment to decide an upfront tariff.

Hence the main potential in the diversification of the Pakistans sugar industry still remainsuntapped and needs to be promptly addressed to take advantage of the developments in the field

where sugarcane is increasingly seen as an energy crop. Though the sugar industry in Pakistanhas come of age, it faces formidable exciting challenges in the foreseeable future.

PSMA has always expressed hope that Government of Pakistan will start extensive research anddevelopment work on sugarcane crop and its optimum utilization.

Sugar year 2007-08 heralded happy tidings by setting a record production volume of sugarcaneat 63.920 million tonnes, sugarcane crushing at 52.757 million tonnes, sugar production at 4.737million tonnes, similarly extending proportionate increase in production of its four main by-products, namely, bagasse, molasses, filter mud and crop wastes. From each of these four by-


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products, as many as 40 plus derivatives can be made. No other crop or commodity offers scopefor such a sizeable number of derivatives.

From bagasse can be made 20 derivatives, including generation of renewable energy, paper andboard, packing materials etc. Molasses processing can give 15 derivatives, inclusive of ethanol asenergy source, cattle feed, viscose yarn, bakers yeast etc. Filter mud is useful as fertilizer. Crop

waste useful to make five derivatives, including power generation. Exploiting these resourcesinto value-added products is awaiting attention.

A record production has indeed been a gratifying feature of 2007-08 season. This deservesanalysis both on national and zonal levels, for comprehension so as to evolve more material inputfor solving problems. We look at 10 years record of sugarcane production in Pakistan, in terms ofarea under the crop, yield and recovery which represent sugar production trend.

Crop area, yield and in effect sugarcane production portray fluctuating fortunes. Area fared inrange from 907 thousand hectare (2005-06) to 1241 thousand hectare (in 2007-08) variance at36.82% has indeed been quite wide.

Yield fell in range from 47.33 tonnes/hectare (in 2003-04) to 53.12 tonnes/hectare (in 2006-07),

having 12.23% variance which makes it noticeable. Sugarcane production was in range form44,099 thousand tonnes (in 2000-01) to 63,920 thousand tonnes (in 2007-08) giving variance of44.94%, indeed significant.

A record at 63.920 million tonnes sugarcane crop, having no use other than of its processing bythe national sugar industry, its supplies to sugar mills soared to 52.757 (40.484) million tonnes,forming 82.53 (73.72)% of total output level. Sugar recovery improved to 8.98 (8.70) %contributed further in making the highest ever at 4.741 (3.516) million tonnes of sugarproduction.

Sugar crushing fared in range from 28.983 million tonnes (of 1999-2000) to 52.75 milliontonnes (of 2007-08), denoting a big variation of 82.2%. Sugar recovery rate was in range form

8.21% (of 1998-99) to 9.15% (in 2003-04), making significant at 0.94%. Sugar production inrange from 2.415 million tonnes (of 1999-2000) to 4.741 million tonnes (in 2007-08), made asizeable variance of 96.14%. Likewise, sugarcane supplies to industry for processing createdrange band form 62.07% (of 1999-2000) to 82.53% (of 2007-08). It made a marked variance of32.96%.

These figures underline significant, fluctuations in the relevant production parameters. Thisreflects inconsistency, derailing a steady, sustainable growth flow inevitable for managingeconomic gains. This precisely points out absence of a precise policy format fairly conceived anddesigned, to be in place. Unless it is made available, sugar segment will stay locked in deceptivedilemma, which tends to deny due benefits.

During 2007-08 season 79(77) sugar mills were operational. Sugarcane crushing on an averageby mills was 66,773 (52,555). Production of sugar on average per mills at 59,963 (45,662) tonneswas higher by 31.31%. Higher production level was not as much rewarding, which by normalfeature of economies of scale should have been more rewarding. National sugar industry, bycrushing at 52.751 million tonnes during 2007-08 season achieved 2.661 (1.911) million tonnesof molasses by-product, at 5.04(4.71)% recovery rate.

A profound policy framework, taking care of sugar and derivatives of its key by-products isneeded. Now is the time, to make move in this direction.


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COST- PRICE DISEQUIBRIUM A record sugar production of 2007-08 did not cast a desiredwholesome influence on bottom line of the sugar industry, contrary to a general impression ofmore the production more the profit. This tendency does not make a match with sugar segmentdue to markedly different traits governing sugar manufacturing and marketing. Sugar productiontakes place in about 110 days. Sugar sales stretch out to 365 plus days in event of larger

production rollout, a record of it taken place during 2007-08, making sales further extended. Thispeculiar situation is attributable to inelastic demand characteristic of sugar. Sugar consumptionremains steady, with normal increase by population and income growth. Sugar purchase bypublic tends to be in small quantity of packet sizes, not in bulk. Inflationary trend in the economydented disposable income part, which in turn suppressed to an extend demand element ofpopulation increase as well. Besides, carry forward to review year sugar stock at 445,399 tonnesmade aggregate sugar supply volume hefty at 5.182 million tonnes.

Another element in price imbalance, rather distortion, carrying adverse influence on sugarindustrys bottom line has been huge at about 72% being cost component of sugarcane in sugarproduction. Besides provincial governments fix sugarcane minimum price, usually endorsed bythe Federal Government authorities.

Provincial authorities carry tilt in favour of farmers, while federal functionaries keep concern forconsumers about sugar price. This leaves sugar industry alone, grinded by such contrastingpolicy pursuit as a permanent feature being followed. There has been no rationale in price tag ofsugarcane and sugar, exposing the sugar industry to heavy hazards. As a result fixed costcomponent of sugar manufacturing stays above 90%, leaving fraction to chase for economies ofscale by increased production volume.

PSMA has been agitating the problem of price imbalance on lacking linkage between sugarcaneand sugar cost/price equation, and reiterating to take up this case with care jointly by theprovincial and federal authorities. This time, it received a hearing, followed by a hesitant effortto reconcile the issue. Cost of sugar production was critically assessed for striking some

equilibrium. A Committee of Federal Government Secretaries from three Ministries of Finance,Industry and Commerce was formed for the purpose. It worked out ex-mills sugar price atRs.29,000/tonnes to safeguard sugar industrial segment. However, over supply of sugar,compounded by a short time prescribed for payment to sugarcane farmers, 15 days from thesupplies, compelled as always happened, to sugar industry desperate sales during the crushingcampaign, to care for cash flows for farmers payments. This has been a distinct feature of sugarindustry, so it was always being brought to authorities attention but has been of no avail. Sugarprices fared through out the season markedly subdued, trailing far below the safe price levelearmarked. Month-wise wholesales sugar price, containing 16% sales tax, besides transport cost,trade margin etc. has been as given hereunder. This information provides a clear picture of thecrisis consistently over-riding the national sugar industry.

This proved distress-laden situation which prevailed. The Government of Pakistan, however,agreed to procure 400,000 tonnes sugar. Its purchase was made through Trading Corporation ofPakistan. However, the rescue design was inadequate and so incompatible. Procurement byTCP was through tender system for competitive price. This did not serve the purpose it wasdesigned. Had it been at assessed price of Rs.29,000/tonnes, the sugar industry could have safesales to the extent of sugar procured. The quantity picked fell short of 10% of the output. PSMAhad some solace that its proposal of carrying strategic/buffer stock by the Government wasacknowledged and acted upon. We are hopeful that the system brought on track will be


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maintained, improved and strengthen to deliver. Developing countries, like Pakistan, are oftenexposed to uncertainty of the crop size. It needs to hold strategic stocks of food stuff to servesociety as a safety valve.

INTENSIVE CROPPING INEVITABLE

Sugarcane production figures of the past decade, in it output level above 50 million tonnes ofsugarcane for five years, seems attractive. This achievement has largely been by more hectaresbrought under the crop. Yield has been above 50 tonnes/hectare but for three years.

Pakistan, with on an average one million hectares under sugarcane crop holds potentials todouble sugarcane and sugar production by improvement in quality of sugarcane and itsmarketing, particularly of supply schedule ensuring instant crushing of sugarcane on itsharvesting.

Potentials exist of producing more than twice the record sugar production at 4.737 million tonnesreached in 2007-08 season. It demands intensive crop pattern, to be inducted by improvement inthe existing system. Greater dynamics can be infused in this regard by setting up of a sugarcane

research institute. It is as imperative as important, more so as challenges on economic front inglobal circuit are increasing day by day.

Each country cultivating sugarcane has to create a research and development institute of its own,to evolve new varieties, suitable to their soil and climate, in brief echology. Seeds can not bebrought from abroad. Institutional structure is imperative for evolving seed/fuzz, itsmultiplication and distribution. Besides the institute shall become a centre of excellence fortraining of manpower in farms and factories engaged in sugarcane cultivation and processingrespectively. Creation of such a superb and inevitable institutional set up shall not cause strain ongovernment revenues. Huge funds running into billions of rupees contributed by mandatoryrequirement in form of sugarcane cess for decades by the sugar industry and sugarcane farmers,remain unutilized with Governments of the Punjab, Sindh and NWFP Provinces. Symbolicstructures do exit in the public sector in all the three provinces but have been good for beingentities. Their rise and sustainable future squarely lies with the stakeholders, being beneficiariesand having raised funds. Sugarcane cess fund carries two specific usage, creating pucca roadnetwork connecting sugarcane farms with sugar mills and undertake useful research anddevelopment work about sugarcane varieties and allied areas.

PSMA has identified ideal location for sugarcane research and development institute, beingGharo in Sindh, by its being close to Arabian Sea. PSMA prepared a study about cost andbenefits of the institution. PSMA has approached all the concerned authorities, at Federal andProvincial levels, for release of funds so that the institutional structure is earnestly brought intoexistence and pressed into functioning.

Once the institutional structure comes into being, Pakistan shall have a steady, sustainablegrowth dynamics in sugarcane and sugar production, on lively intensive pattern of cropcultivation. On the present average one million hectare, sugarcane crop size can be more thandoubled the latest record level achieved of 63.920 million tonnes. No extra land will be required.

Similarly sugar production of a record at 4.737 million tonnes achieved at 8.89% recovery for2007-08 season will be more than doubled in a short time. Sugar industry presently holdssugarcane crushing capacity considerably more than its record crushing of 52.757 million tonnesduring 2007-08 season. No dose of fresh capital outlay is required. Sugar industry is now


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running on average of 110 days which makes it short for economic uplift. Standard period of itsworking has been spelt out at 150 days. It can be extended to 210 days by varietals developmentof sugarcane of early, mid term and late maturities to keep sugar industry operational for longer,so as to provide it economic viability, serving the national interests more effectively.

ZONAL VIEW, REVIEW

Information and analysis of sugar industry on national level, on modest macro-scale, inaggregate is reflection of performance of three zonal segments. By and large, no materialdifference is discernable on end-result between national and zonal levels. This, nevertheless,implies to have at a glance on important features of zonal performances, with relevantobservations of priority points.

PUNJAB ZONE:

Sugarcane was cultivated on 827 (712) thousand hectare, higher by 16.15%, setting a record.Season 2000-01 with 581 thousand hectares fared the lowest of the latest decade. Variance inrange at 246 thousand hectare i.e. 42.34% has obviously been significant.

Sugarcane production at 18.793 (12.592) million tonnes, up 49.24% was also a record, so highestof the past decade. The lowest sugarcane production was at 26.700 million tonnes of 2000-01,coinciding with area under the crop being at the lowest. Yield at 49 (52.74) tonnes/hectaredropped by 7.10% has emerged a case of concern, the lowest at 40.64 hectare/tonnes was struckin 1999-2000.

Sugarcane crushing at 33.045 (26.584) million tonnes, up 24.30% was note worthy. It was thebest of the past decade. The lowest at 18.068 million tonnes harvest was in 1999-2000 season.Sugarcane crushing fared fine at 81.98 (70.81)% of the crop, not on top in the decade. It was83.53 in 2002-03 and the lowest run was 60.88% in 1999-2000. Sugarcane production at 2.949(2.268) million tonnes, up admirable 31.12% was the best ever achieved. Sugar production faredin range of 1.316 million tonnes being the lowest in 1999-2000 season. Variance of 124% was

indeed huge. It gives good reading by rise registered. The momentum needs to be maintained formultiple benefits of it.

Sugar recovery rate at 8.92 (8.53)%, modestly up was the second best set during the pastdecade, the highest being 9.09% of 2003-04 and the lowest marked at 7.80% of 1998-99.

During 2007 season 42 (41) mills were functional. On average a mills sugarcane crushingincreased to 786,757 (684,381) tonnes, up 21.34%. Sugar production was up 26.91% to 70,202(55,315) tonnes. On average capacity utilization per mills fared better but not at an optimumlevel, leaving much scope for further improvement. Molasses output was higher by 31.50% at1.607 (1.222) million tonnes on 4.86 (4.60)% recovery. Higher molasses recovery meansproportionately lower sugar output. This reflects upon quality of sugarcane, besides supplysystem and a large crop impact.

SINDH ZONE:

Sugarcane cultivation spread over 308(214) thousand hectare, up 43.92%, was a record. Lowesthit at 183 thousand hectare was in 2005-06. Sugarcane harvest at 18.793 (12.592) million tonnes,up 49.24%, was also a record, while the lowest fared at 9.357 million tonnes in 2004-05. Thishad happened due to yield then touched the lowest at 43.52 tonnes/hectare. The highest of thedecade at 62.96 tonnes/hectare was fetched in 1998-99. This feature reflects marked fluctuation


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in sugarcane quality, besides disruptions in supply system.

Sugarcane crushing at 16.737 (11.627) million tonnes was at its best by giving an inspiringincrease of 43.94%. The lowest of the past decade was at 7.915 million tonnes hit in 2004-05.Sugar rollout at 1.561 (1.062) million tonnes, higher by 46.98% and highest of the decade, wasexciting, more so, it was attained by the modest sugar recovery rate of 9.33%, falling behind

9.83% of 2005-06 and 9.53% of 2004-05. Sugar recovery at 8.96% was the lowest in 1998-99.Barring this, recovery rate has been above nine percent. Scope of improving upon it to overdouble digit existed, calling for attention to its exploits, certainly to be in interest of thestakeholders and the national economy.

Sugarcane crushing formed 89.05 (92.80)% of the crop size, ranking the third best of the decade.Highest of it was in the preceding season and the second best at 89.98% in 2002-03. The numberof sugar mills functional remain unchanged at 29 units. On average sugarcane crushing per millsnotched up by 34.94% to 577, 138 (400,930) tonnes. Sugar production per unit movedimpressively up by 46.96% to 53,841(36,635) tonnes. However, capacity utilized was not at thedesirable optimum level. Working was contained to net 125 days with a record sugarcanecrushing so far, obviously providing a good scope to improve on the time scale, similarly on

supply schedule.

Molasses production of 889,566 (578,833) tonnes, up 53.68%, was achieved by recovery ratehigher at 5.31 (4.98)%. It proportionately reduced sugar production. Reason for it tend to behigher volume of sugarcane besides hitches associated in supply schedules.

NORTH WEST FRONTIER ZONE:

NWFP zonal working bore a little variance during the 2007-08 season over the previous.Sugarcane cultivation was on 105,000 (106,400) hectare, rolling out production of 4.800 (4.792)million tonnes, with yield being constant at 45.11 tonnes/hectare. Sugarcane area and crop sizefared in narrow range during the past decade. Highest crop harvest at 5.049 million tonnes was in2002-03 and the lowest at 4.100 million tonnes in 2005-06.

A notable feature was sugarcane supplies to the organized sugar industry segment improving to62.11 (47.03)% of the crop size, increasing sugarcane processing to 2.976(2.579) million tonnes,up 15.38%. Sugar production went up by 17.62% to 226,750 (192,777) tonnes. Sugar recoveryrate dropped to 7.62 (8.54)%. It fared the second lowest of the decade. Highest at 8.59% was in2004-05 and the lowest at 7.22% in 2000-01

During the review season 8(7) sugar mills were functional. On average per mills, sugarcanecrushing increased insignificant by 0.96% to 372,045 (368,485) tonnes. Sugar production was28,344 (27,540) tonnes, up meager 2.91%. This zone holds promising potentials for growth. Thisis checked and prevented by predominance of unorganized gur making segment. PSMA and its

NWFP zone have been pointing out the problem of tax free status of gur. This problem impactingadversely investments made in the industry and so also the federal and provincial revenues.Hopefully this problem shall be addressed soon.

One sugar mill sliced 64,095 (83,580) tonnes of sugar beet, produced 5,532 (7,143) tonnes ofsugar, at recovery unchanged 9.04%. Molasses production was 2,576 (2,973) tonnes.

MOLASSES:

Molasses has conventionally been considered a key by-product of Pakistan sugar industry.


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Substantial part of its production was normally geared for export. Domestic consumption, incontext of production, used to be just peanuts. However, molasses has been progressivelyreplaced by ethanol from 2002 and a steady increase. A record sugarcane harvest and crushingduring 2007-08 season gave molasses production at 2.661 million tonnes, being the highest. Thiscreated a space for molasses exports jump to 911,065 (339,595) tonnes becoming the best of the

past three years. Replacement of molasses exports by ethanol has been a right pursuit, of havingvalue-added forex revenues. Domestic market for molasses had been small all along. Similarsituation unfortunately has been found for ethanol. Hopefully, it shall be short lived. Risingexports of ethanol provide clear credentials of the products, being useful in domestic market aswell, by its acceptability abroad. This fact shall do away apprehensions, if any, about its utility asa gasoline supplement.

Molasses market in the country has been very limited for want of its diversification into value-added products. Its use in the past, and now for ethanol, was 1989 and actively from 1994confined to animal feed and processing of it by four old distillery units.

As ethanol holds positive prospects of domestic use and growth in global market, it needsconcerted efforts to keep dynamics. Simultaneously it is desirable to keep molasses market

abroad lively alive and online. This can be achieved by augmenting sugarcane production, asemphasized earlier, by intensive sugarcane cultivation method. Scope in both spheres is sizeableand need to be exploited in earnest.

ETHANOL:

Ethanol is a renewable source of fuel. Prices of gasoline registered a steep increase on a fastertrack, during the past five years, beginning form 2004. The phenomenon of consistently risingprice made ethanol more popular as gasoline mix in several counties, leaving Pakistan still inlurch. The Government of Pakistan have in principle agreed and decided to promote ethanol asgasoline mix to begin with at five percent and increase it to 10% on faster track. Resistance to it

is being consistently made on flimsy grounds. Initial 5% inter mix of ethanol with gasoline shallnot be made an issue, but pave the way for its steady gear up intermix to 10%. PSMA has beenpersistently pursuing, urging and advocating this matter for prompt implementation.

During 2007-08 season, 18 of the 22 functional distillery units were attached with sugar units.Three more are online to join the foray. Some more are to follow the suit. Prospects of ethanoltend to be tempting, being bright.

Ethanol production and its almost entire export reflect a rising trend in store. Its growthpotentials are promising.

Ethanol production, spearheaded by its export, registered an impressive growth. It was34,888 tonnes in 2002 and rose to more than 300,000 tonnes in 2008. It has been an impressive

increase, translating into average growth of 125% a year. Eighteen distilleries with sugar industrysegment hold capacity to produce 2.300 million litres of ethanol a day. Effective capacity,however, remains variable by quantity and quality of sugarcane available to sugar industry asthese carry direct influence on by-products, including molasses.

CO-GENERATION:

Economy of Pakistan for the past several year has been suffering power shortage, assessed to the


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tune of 5,000 MW. It has been due to consistent increase in energy requirement outpacinggeneration, sharply contrasted by no capacity creation taken place for power generation. In viewhydel power generation less expensive though, no new project has been set up. Efficiency of theexisting dams eroded by silting and reduced water supplies. This phenomenon pushed toincreasing reliance on thermal power generation, being considerably expensive, due to steep

increase in fuel prices. It compelled to look eagerly for renewable-cum-sustainable source ofpower generation. Sugar industry merits in category of renewal source of power. Pakistan SugarMills Association has been pursing this matter with the Federal Government since 1994 andactively since. Sugar industry being functional during November to March period has capabilityto generate power in excess of its own requirement to operate the mills. Its working to be duringwinter months, while hydle power supply tends to be at the lowest level, acute power shortage isbeing felt in this period. Sugar industry can generate now up to 2240 MW of electricity by usingsugarcane by-product bagasse, besides distillery spent wash. Each sugar mills can generate extraelectricity by using bagasse. Sugarcane has been acknowledged as renewable, besidessustainable source of energy in several countries, by use of ethanol and bio-fuel of bagasse. Thebottleneck in its energizing to combat energy shortage, specially in typical acute scarcity time of

winter season has been not yet won acceptance of authorities for a competitive tariff asIndependent Powers Projects (IPPs) By economics parameters and logical dispense, energy beingenergy, of similar use, shall get an uniform tariff. PSMA has given presentation on it, dealingwith scope and feasibility study, with economic benefits of acquiring electricity from sugarindustry. In principle the project details provided have been acknowledged, leaving tariff factorunder consideration. This restraint on sugar industry hopefully will soon settle down, enablingthe national sugar industry with its 79 performing units, located in three provinces. All the millsin rural areas, strategically placed, play its role resuming to provide electricity making the oasisalready created by it to become sparkling and contributing more to GDP.

PROBLEMS, PROGNOSIS, SOLUTION

Basic problem of sugar industry identified by consultations among the stakeholders has been

lack of linkage between sugarcane and sugar prices. Sugarcane minimum price is being set byprovincial governments. Sugar price stays afloat, left to market forces set it! Sugarcaneprocessing spell is seasonal, production takes place on average in about 110 days. Sugar salesspread over a year, may be above it, by inelastic demand. Besides, sugar industry is directed tomake payment to farmers in a week of supplies of sugarcane. How to manage finances ofinventory piling up each month at least by 17% of production rollout and accumulating to 68%by the end of spell and simultaneously payout within one week of supplies of sugarcane, whichforms above 72% of sugar production cost. This situation compels for desperate sugar sales bythe industry, often in advance and more so during

sugarcane crushing period to have cash flow! This issue has always been brought to theauthorities attention, but solution has not yet come off.

During the review 2007-08, season certain move ahead took place. The Federal Governmentprevailed to hold minimum price of 2006-07 season unchanged for 2007-08 season.

MINIMUM SUGARCANE PRICE PER 40KG

Season 2007-08 2006-07


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Punjab Rs. 60/= 60/=Sindh Rs. 67/= 67/63*/=NWFP Rs. 65/= 65/= (*Revised)

Besides, the Federal Government worked out sugar price to be Rs.29000/tonneex-factory, based on given minimum sugarcane price and related other costs of production.However, mechanism was not structured that be in place to ensure sugar price as determined.This left sugar industry in usual distress. PSMA persevered to have some system in place thatsugar price, as worked out, was assured. At best, the Federal Government procured 527,949tonnes of sugar through the Trading Corporation of Pakistan, but this was neither made duringthe sugarcane crushing spell as envisaged nor at the break-even price of Rs.29000/tonnes workedout. TCP purchases were by tender pushing sugar industry in same shape as in open market.Hence, no desired support could be had of it to save national sugar industry form pinchingimpact of the policy defects! In desperate sale for liquidity, mills exported about 277,339 tonnes.

PSMA hopes that a positive view of it will lead to progress, so as to put in place proper

modalities to protect sugar industry from perils but place it in sound shape so that it contributesto the national economy to the full extent of its huge potentials.

USES OF ETHANOL AS GASOLINE MIX:

PSMA has been pursuing this case for years. In principle, five percent use of ethanol as gasolinemix has been accepted. However, modalities are being worked out for its implementation. Oncethe preset impasse created by other interests is overcome, ethanol use is bound to gather a steadyrise.

POWER CO-GENERATION:

PSMA proactively took up this matter to address the problem of acute huge at about 5000MWpower shortfall being faced by the country, much adversely affecting the national economy.Sugar industry holds potentials to provide 2400MW of power. Each sugar mills is capable togenerate surplus power by using bagasse. Power to be available during criticalwinter months, the time of sugar industrys working, while hydle power goes to the lowest ebb,shall prove exceptionally convenient.

PSMA is perusing with the authorities to give a standard tariff to the sugar mills so that co-generation could be started immediately.

FINANCING FACILITATION:

Due to seasonal short term functioning, sugar industrys financial position stays vulnerable, assugar industry has to procure the raw material in 140 days and hold the finished product for 360days. Thus creating huge mismatch of financial resources.

SUSTAINABLE FUTURE:

Sugar is an energy food item. Its sustainable availability is essential. Besides, there must be afirm foothold in exports, rather succumb, time and again, to imports. Four by-products rollout ofsugar production and their 40 derivatives offer huge potentials to exploit. For this, increase in


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sugar production is prerequisite and essentially to be by intensive crop pattern, pursuit andpractices. This can be achieved on having a seed evolving and breeding research institute.Proposal of PSMA for setting up such an institute at Gharo in Sindh and release of cess fundsneed Government attention and prompt approval, so that this vital project is taken in hand at theearliest.

PERSPECTIVE 2008-09 NATIONAL:

As expected, since sugarcane production trend is of cyclic tendency and it has not been broken asyet, it is essential that steady sustainable growth in sugarcane and sugar production is attained.Sugarcane crop is poised to be lower during the ensuring 2008-09 season. The first estimate ofthe crop size drawn officially portrays the position to bring distinctly lower sugarcane andsimilarly sugar output.

Sugarcane production is estimated at 53.498 million tonnes, down by 16.31% from 63.920million tonnes of 2008-09. Yield is likely to remain in narrow range of 51.5 (50) tonnes/hectare.At an average of 75% sugarcane, flow to sugar mills for crushing, to be 40.124 million tonnes

and average recovery of 8.6%, sugar production may be 3.451 million tonnes, provided the firstestimate stays put, chances of which seem not firm. However, with stocks of about one milliontonnes of sugar in hand at the start of 2008-09 season, sugar availability in aggregate at 4.450million tonnes shall not complicate situation to a serious shortfall. However to keep sugar pricesfair in a reasonable range, import of raw sugar is a desirable option. PSMA has presented aproposal in this regard for consideration of the authorities.

The provincial governments have increased minimum sugarcane price for 2008-09 season. Inview of this increase and short crop size, economies of scale will operate but unfavorably. Thisodd situation added by inflationary tendencies in the national economy will have a significantimpact on cost of sugar production, bound to increase.

PERSPECTIVE 2008-09

International sugar market, inherent part of the wider commodity markets, during the year 2007-08 witnessed volatile price trend. It was in backdrop of financial tsunami gripping the UnitedStates of America and its spillover the global circuit. Currency values fluctuation carried a directimpact on commodity markets. Fear of recession rocked the boats of once considered durablestrong economies, dictating terms on global business spectrum. The last quarter of OctoberDecember 2008 is likely to give some insight to the future trend in sugar prices.

End stock estimate despite lower production and higher consumption during the last quarter of2007-08 is indicated to be larger than the corresponding period of the preceding two years.

Current price trend indicates sugar production to slip lower,

economics notes for bs iii by suhail mahesani

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