The bitter-sweet duel between sugar mills and government authorities, which started in May this year, is far from over.

Just when one thought that the millers finally had it their way, the ECC decision to postpone acceptance of the offers received in the TCP gallop tender of November 4th threw a spanner in the works.

Over a month has passed since the flotation of the tender by the Trading Corporation of Pakistan for the sugar procurement of 200,000 tons from PSMA-member mills.

As reported in this newspaper yesterday, the authorities aren going ahead as they are willing to procure sugar only at the prevailing market price.

It is not clear yet as to how much the government is willing to pay, but it appears to be less than Rs.60 per kg.

However, the sugar industry, which quotes an ex-mill price of Rs.64 per kg, is not willing to sell at this price.

They want the procurement price to be benchmarked at Rs.59 per kg.

The catch is that current sugar prices happen to be lower than what they were a month ago when the PSMA-member mills submitted their bids.

On account of bumper crop and a record anticipated crushing output this season, sugars retail prices have fallen in last four months between Rs.20 and Rs.25 per kg.

Its an altogether different story why the consumers did not benefit from this drop, as the makers of "sugar-intensive" products, like confectionaries and soft drinks, did not bring their prices down.

Carrying excess stocks all year long and paying financial charges, the millers may not sell to the government at the price the latter may like to buy at.

However, with a ban on the commodity exports, government is the only big buyer, and there is little that millers can do to negotiate a desired price with it.

Sikandar Khan, ex-Chairman PSMA, told BR Research that, "mills could have exported sugar at Rs.72 per kg last month, but the exports were not allowed.

Now, selling to the government below Rs.60 would mean a financial loss up to Rs.1.8 billion.

Though sugar prices have fallen in international markets, our sugar can still fetch Rs.70 per kg.

As bumper crop is also expected next year, government should immediately allow sugar exports of up to 5 lac tons." While the sugar mills may have to book losses this year, it turns out that growers stand to suffer the most.

During sugar cane crushing season, sugar cane purchase prices track the trend in sugars prevalent prices.

As mentioned earlier, the prices have declined in the retail market owing to bumper cane crop and record sugar production for next year.

This means that the growers may not get a fair price, having borne a phenomenal increase in cost of cultivation this year.

The official sugar cane purchase prices-Rs.154 per maund in Punjab and Rs.150 per maund in both Sindh and Khyber-Pakhtunkhwa-have been lamented by farmers organisations as "too little".

It must be noted that last year, average cane purchase price touched Rs.200 per maund on fears of shortages.

Clearly, the sugar industry is under fatigue, and this may hurt the well-being of growers, especially small-scale and landless growers.

Moving forward, industrys working capital management may suffer if they are not able to pay up to their bankers on time.

With exports banned and no serious big buyer, prices may remain under stress, industry may lose money, growers will suffer, and it may become a disincentive to grow sugar cane at all.

To avoid the crisis and for a better course of action, the authorities should seriously consider two practical measures, which will ensure legitimate interest of all the stakeholders: growers, millers and consumers.

First, the sugar cane price should be linked with the sucrose recovery level of the crop.

Determining the cane price on the basis of "weight" rather than intrinsic "value" is unfair to those growers who produce high-recovery sugar cane by trying new crop varieties and going the extra mile.

Secondly, the government needs to stop mindless interference in the commodity market.

It must procure sufficient sugar as buffer against future shocks, but it should not impact the market.

It is about time to liberalise the market, allow the exports and let market forces of supply and demand prevail.

Thirdly, selling sugar or attain through utility stores at subsidised rates is a policy which cannot be sustained due to our precarious fiscal situation (6.5 percent of GDP budgetary deficit).

This structural imbalance can be addressed by withdrawing TCP and other government agencies from commodity business and replacing commodity exchange and only providing targeted subsidy to the weakest segment of society.

Sale through utility stores is an across-the-board mechanism which must end.

P S: London sugar spot rates have dropped to Rs.56/57 per kg.

That needs to be the new benchmark.
SOURCE: BUSINESS RECORDER