Study of the Sugar Industry in Pakistan Finance Essay

The sugar industry plays an important role in the economy of the country. It is the second largest industry after textiles. The sugar sector constitutes 4.2 per cent of manufacturing. In size, the sugar sector almost matches the cement sector [1] , however, it's many backward (sugarcane growers) and forward linkages (food processors) in the economy indicate that its indirect socio-economic impact in overall terms is significantly larger than its direct contribution to GDP. At the time of independence in 1947, there were only two sugar factories in Pakistan. The output of these factories was not sufficient for meeting the domestic requirements. The country started to import sugar from other countries and huge foreign exchange was spent on this item. Need was felt to increase the production of sugar. Keeping in view the importance of sugar industry, the Government setup a commission in 1957 to frame a scheme for the development of sugar industry. In this way the first sugar mill was established at Tango Muhammad Khan in Sind province in the year 1961. [2] No. of Mills Crushing Capacity 6.1 Million tones Contribution to Economy Share in GDP Employment Total Investment 3.0 - 4.0 Million Tones 1.9% 1.5 million (directly & indirectly) PKR 100 Billion (Approx) Average Yield Per Hector 46.8 Tones Total Cane Production 45.0 - 55.0 Million Tones Cane Available 30-43 Million Tones Average recovery of sugar 9.1 (vs. world avg. 10.6%) Per Capita Consumption 25.8 kegs. Contribution to exchequer Rs. 12.16 Billion Table : Key Facts of Sugar industry of Pakistan, BOI Govt. of Pakistan Currently Pakistan is the 5th largest country in the world in terms of area under sugar cane cultivation, 11th by production and 60th in; yield. Sugarcane is the primary raw material for the production of sugar. The sugar industry in Pakistan is the 2nd largest agro based industry comprising 81 sugar mills with annual crushing capacity of over 6.1 million tones. [3] According to Ministry of Industries and Production; total crushing capacity of the Sugar mills is about 505,000 tons per day. The average capacity utilization of the sugar mills during the last five years remained 70% to 74%. The Sugar industry employs over 75000 people, including management experts, technologists, engineers, and financial experts, skilled, semiskilled and unskilled workers. It contributes around 4 billion rupees only under the head of excise duty and other levies to the Government are also paramount significance.

Sugar Production in Pakistan

The Pakistan is an agriculture country, and agriculture is backbone of economy. Pakistan is also main producer of sugar in worldwide. Sugarcane is an important cash crop of Pakistan. It is an important source of income and employment for the farming community throughout the year. It forms the basis for many important industries like Gur, molasses, alcohol, sugar beverages, chipboard, paper, confectionery and provides raw materials to mainly other industries such as chemicals, plastics, paints, synthetics, fiber, insecticides, detergents etc. According to Food and Agriculture Organization of The United Nations and FAOSTAT, Pakistan is ranked fifth in world cane acreage and 15th in sugar production. Sugarcane is grown on over a million hectares and provides the raw material for Pakistan's sugar mills. Its share in value added of agriculture and GDP are 3.4 percent and 0.7 percent, respectively. Although, Pakistan happens to be the world's fifth largest grower of sugarcane it has perhaps the lowest yield in the world. The average sugarcane yields in Pakistan have remained between 40-45 tons per hectare which is considerably less than those obtained in many other countries. Average yield of sugarcane in the world is around: 65 metric tons per hectare and Asia 65.4 while China 77.1, India 70.6, Pakistan 46.0, Philippines 92.6, Thailand 92.6, Australia 75.5 and Egypt 105 tons per hectare. The sugar recovery is 8.5 % against the obtainable recovery of 10.5%. [4] Sugarcane production is cyclical as the interests of farmers and industry is often at odds. Industry procurement practices such as delaying the crushing season, buying cane at less than the support price, short weight, false deductions and delayed payments reduce returns to farmers. Sugar millers complain that farmers grow unapproved varieties with low sucrose content, thus resulting in lower sugar production and recovery rates. [5] For 2008-09, sugarcane has been sown in the area of 1029 thousand hectares, 17.1 percent lower than last year. Sugarcane production for the year 2008-09 is estimated at 50.0 million tons, against 63.9 million tons last year. This indicates significant decline of 21.7 percent over the production of last year. The main reasons of lower production are shortage of irrigation water, shifting of area to rice crop less use of DAP and non-payments of dues to farmers by the sugar mills on time for the last year's crop. [6] The following table shows the area cultivated production and yield for sugarcane production. In this also we see the comparison of last five years; Table : Area, Production and Yield of Sugarcane, Economic Survey of Pakistan 2008-09 According to Annual report 2009 of PSMA the reason is milling policies of the current crushing season have provided strong disincentives to sugarcane growers. Sugar mills reduced the price offered per 40 kilos by Rs 5.0 - about US$ 0.08 - and continued the practice of taking large deductions to meet their cane quality standards, causing cane growers to shift to more profitable crops. For the year 2009/10 sugarcane production is forecast at 53.6 MMT, an increase of 4 percent over the previous year due to an expected increase in area and yield. A shortage of cane supply during the current crushing season led to an increase in cane prices. This situation benefitted growers who received prices higher than the indicative prices announced by the Government. This development is expected to contribute to an increase in sugarcane area and productivity in the ensuing year. Moreover, last year's higher production of rice and sunflower led to lower prices received by farmers, thereby encouraging the switch back to sugarcane. [7] Sugarcane production for year 2009/10 was estimated at 53.6 MMT, which shows an increase of 4 percent compared to that of previous year. This increase was due to an increase in area and yield. A shortage of cane supply during that crushing season led to an increase in its prices. This situation benefitted growers who received prices higher than the indicative prices announced by the Government. This development contributed to an increase in sugarcane area and productivity in the ensuing year. Moreover, a higher production of rice and sunflower 2008 led to lower prices received by farmers, thereby encouraging the switch back to sugarcane.A

CONSUMPTION

In 2009/10 sugar consumption is forecast at 4.35 MMT. Total per capita refined sugar consumption was estimated at 25 kilograms, based on improved domestic supply and strong demand. Retail sugar prices were expected to increase 46 percent above the last year's average prices. Much of this increase of price was currency devaluation followed by a rise in international prices. Moreover, the stability of retail prices depended upon timely imports and prevailing prices in the international market.

REASONS OF CRISIS

Year 2009 saw a natural decrease in the production of sugar. One of the main reasons being that farmers only grow the products giving them maximum benefit. In year 2008 the government increased the price of wheat to Rs. 950 in order to give farmers an incentive to grow wheat. This caused the non growers to grow wheat. Similarly, sugarcane farmers also switched to wheat production. Other than this the production of sugarcane also declined due to difficulty faced in its production. These difficulties included water shortage, behavior of the mill's management, late payments, and increase in the input costs, diseases and rodent attack. Mill owners especially got blamed for late or no payments to farmers and limited irrigation water. These two major factors caused the supply of sugar to decrease by 15 to 20 percent as compared to its previous year. Furthermore, the biggest sugar producers, India and Brazil faced unfavorable weather conditions for sugarcane growth. This reduction in global supply caused the price of sugar to credibly increase. Another problem occurred when the wholesalers and mill owners artificially created a shortage of sugar to increase its prices right before Ramadan. These mill owners buy sugarcane 3 to 5 months before hand. Further they limited the supply so that prices of sugar would go up. The main incentive of course was profit. These mill owners have a monopoly in the market and so they are able to control the prices. So all in all in order to manipulate prices, the supply of sugar was artificially reduced in Pakistan. Considering the above stated reason, government mismanagement and sugar industry profiteering are the main reason for sugar crisis in Pakistan in the period 2008 - 2009. Although the government did watch crop production and was aware of the potential sugar shortage,A it failed to act timely. Various reports in December indicated that the total production wasA 3.2 million tons while demand was betweenA 3.4 to 4.0 million tons. The government solution was to import duty free raw sugar ofA 300,000A tons so that the mills could process it. However, at that time, the government feared that if they imported duty free raw sugar, thenA mill owners would not buy from the local market. Nevertheless, delaying the time of purchase did not seem to be a good idea especially as international price of sugar shot up and sugar was nearly twice as expensive to import. Moving on, the government was aware that sugar consumption always increases around Ramadan. It should have been responsible for managing the shortage in an effective manner. Unlike wheat and other crops, sugar can be easily stored for a long period of time. ButA the government did not maintain a stock to prevent crisis. Other than this, if mill owners and wholesalers are manipulating to maximize profit then a strict action should have been taken on the part of government to stop them and make certain policies that secures the right of public to a commodity of daily use like sugar at a nominal price at least when it is available. But the government did not respond to this and remained indifferent.

Role of political figures in sugar industry Pakistan:

The sugar crisis remained there in the economy of Pakistan for a long time. At one point in time the Finance Minister claimed that our government was unable to deal with the powerful sugar manufacturers. The regulatory body had long warned about the anti-competitive and restrictive practices of the sugar industry but no one paid attention to these warnings. Sugar mill owners have always been able to control the price of sugar, once again, due to bad policies of some minions of the state. Due to growth in population of Pakistan and increased industrial activity, the forecast of sugar requirement which was made for the 2009-10 was 4.2 million tons against a total expected production of 3.5 million tons by the country's 73 plus sugar mills. It is in the knowledge of Pakistan Sugar Mills Association (PSMA), that a powerful lobby representing the millers interest, has often made common cause against sugarcane growers who have to generally wait a lot to sell their crop. In spite of importing sugar, the millers have been lobbying for permission to meet the deficit by importing raw sugar and later on by processing, they could process it into refined sugar for sale in the local market. To counterbalance this scenario, the sugarcane growers should also be permitted to convert their crop into 'gur' or raw sugar for sale either to the sugar mills or in the local market. When the idea of importing raw sugar was floated last year, the sugarcane crushing season was about to start in November. At that time, some circles felt that if the permission to import raw sugar was allowed immediately, the sugar mill-owners may not remain very enthusiastic about the procurement of sugarcane from the producers. In the meantime, the news about the likely shortage of sugar in Pakistan reached the global community. Consequently, the price of sugar, including brown sugar, started rising in the international markets. Currently, raw sugar price in the international market is hovering around Rs. 52-54 per kilogram and when processed into refined sugar the cost may go up to Rs. 60-62 per kilogram. Anyhow, the government has now allowed the millers to import 300,000 tons of raw sugar to mitigate the impact of the current sugar crisis, which poses a serious political challenge to the government due to the fact that some political figures, mostly in the opposition, have big stakes in sugar mills. In Pakistan, the sugar sector constitutes 4.2 per cent of manufacturing. Likewise, the mills manufacture sugar for five months but have to release their stock uniformly over the year. Stock piling thus becomes an issue. A study on the sugar sector by the Competition Commission of Pakistan (CCP) reveals that "restrictive practices" in this sector are widespread. Although CCP does not have sound proof of a sugar cartel in Pakistan, but there is sufficient evidence to suggest about the existence of "parallel pricing" in this sector. Currently there are 79 sugar mills operating currently in the country, amongst them 33 are owned by the renowned political figures. Following paragraph provides the list.

NAME

Designation

(owner of ) : SUGAR MILL NAME

Ch Zaka Ashraf President ZTB Ltd Ashraf Sugar mills Haseeb group Cousions of Main Nawaz shareef Brother Sugar Mills Abdullah sugar mills Haseeb sugar mills Salman Shehbaz Son of Mian Shehbaz sharif , CM Punjab Ramzan Sugar mills Nawaz shareef Ex prime minister Chaudry Sugar mills Abdullah Yousaf Sugar Mills Itefaq sugar mills Humayun Akhtar Khan Former Commerce minister , leader of PML-Q Faisalabad Tandlianwala Sugar Mills Muzaffargarh Tandlianwala Sugar Mills Dera Ismail Khan Tandlianwala Sugar Mills Jehangir Tarin cousin of Humayun Akhtar khan (Two)JDW Sugar Mills United Sugar Mills Amer Sultan Cheema son-in-law of Ch Shujaat, President of PML-Q National Sugar Mills Sargodha Nasrullah Dareshk Former federal minister Indus Sugar Mills Abbas Sarfraz Former federal minister Premier Group(contains 4 mills) Saleem Altaf former federal minister Baba Farid Sugar Mills Shakarganj Mills. Fehmida mirza Speaker national assembly Mirza sugar mills The original owner of the Ansari and Sakrand Sugar Mills in Sindh is the top man of the country, but they said mills are being run by others. The network of political authorities compelled the Federal Minister for Industries who is Mian Manzoor Ahmed watoo, to fix the ex-mill price of sugar at Rs 48 per kg in the province Sindh and Rs 49.75 in Khaibar Pakhtoonkhuah(NWFP) and Punjab .Immediately after the Punjab government made a deal with sugar mills, and according to that deal the ex-mill price was set at Rs 45 instead of the aforementioned prices, the chief executive of the country came into action and accorded approval to Rs 45 as ex-mill price across the country. After much chaos in the country, the Ministry of Industries and Production and All-Pakistan Sugar Mills Association, finally reached an agreement to sell sugar at ex-mill rate of Rs. 48 per kilogram in Sindh as mentioned earlier and Rs. 49.75 per kilogram in Punjab. As a follow-up to this agreement, Federal Minister for Industries and Production Mian Manzoor Ahmed Wattoo revealed in the recent year of 2010 that the government has withdrawn cases which were registered against sugar mill owners in order to improve sugar supply chain and to stabilize its prices. Research has however shown that the input cost of the sugar stands at Rs 33.48 per kg which means that after cartelization and mutual agreements they have setup a high margin and has been dishonest with the masses by selling sugar at Rs 50 to Rs 55 per kg still has the maximum margin to pocket the profit of Rs 12 per kg when the ex-mill price was fixed at Rs 45 per kg. Khalid Mirza, who is the Chairman, Competition Commission, Pakistan. Made fine to the cement industry Rs 6.23 billion after it was evident the there is a cartel among cement manufactures just like in case of Sugar. He resolved to act accordingly, in the case of sugar industry, and not get under pressure by the political players. There is dominant political lobby of the self-interested sugarcane growers and the sugar industry, which has always made it possible to set the prices according to their vested interests and therefore deceive masses. In November 2008 the Ministry of sugar Industries sent a summary report to the Economic Coordination Committee (ECC), seeking permission of the import of raw sugar because of the shortage of sugarcane crop by 14 million tones. At that time Pakistan produced 50 million tons less by 14 tones in comparison with the sugarcane production of 64 million tons in 2007. Pakistan produced sugar of 3.2 million out of 50 million tones sugarcane crop however the requirement was 4.2 million tones sugar. The TCP documents suggests that Pakistani government , few months later, in February 2009, made an import of 25,000 tons of sugar at $451 per ton which is equivalent to PKR 51 per kg at Karachi sea port. few months later in April they imported 50,000 tons at $474 per tones (Rs 53 per kg) at Karachi port again and in the same month it again imported 50,000 tons of sugar at prices of $494 per ton (Rs 55 per kg) and in the month of August 75,000 tones at $638 per ton, meaning the total cost of the sugar is at Rs 74 kg.

SCENARIO OF SUGAR INDUSTRY IN 2010:

The sugar industry in Pakistan continued to deal with uncertainty in 2009 due to decreasing sugar production and a lack of coordinated government policy. This uncertainty has been seen in the current fiscal year 2010.The sugar industry has been showing varying trends in the current year. At July end, just a fortnight before the advent of Ramadan, there was Rs.10 per kg increase in the price of sugar sold at the utility stores. The objective of the move was to counteract against hoarding by profiteers during the holy month. The six-member ministerial committee once again relied on the Trading Corporation of Pakistan (TCP) to import 375,000 metric tons of sugar to replenish supplies, which it had earlier held responsible for the failure to import 1.2 million metric tons of the commodity by June 30.Previously Economic Coordination Committee made efforts to improve the sugar supply in the market, and it even authorized the committee to import sugar by either negotiating deals directly with the private sector or by tendering, whichever way the sweetener reached the country quickest. The six member committee was constituted after the TCP failed to import 1.2 million metric tons of sugar on the government directive to meet the shortfall between production and consumption. The government had estimated the shortfall of over one million metric tons. At the last ECC meeting, it was told that official sugar stock was sufficient only for 13 days. At the meeting, the sugar price was fixed at Rs55 per kg, up by Rs10 from the currently-pegged official rate of Rs45 per kg. The government took this decision to avert pressure from the utility stores after the commodity prices started witnessing an upward trend in the run-up to Ramazan. The new rates will take effect from the first day of the holy month. After Ramazan, according to the committee decision, the difference between the open market and utility stores would not be of more than Rs10 per kg. This stood as a broad hint that the commodity prices would further register a Rs5 per kg increase after Ramazan as the market rate is hovering above Rs70 per kg. c.gif The committee also recommended allowing duty-free import of 500,000 metric ton of raw sugar till November 30, 2010 on a first come, first served basis. The committee also decided that with the completion of the current sugar import process the market forces will be allowed to prevail and the private sector would be encouraged to import sugar.

The crisis in the sugar industry prevailed in mid 2010 because of failure on part of the cabinet to implement its decision of export of raw sugars and because the government failed to implement the recommendations of the regulator under the influence of vested interests.

The latest October/November story of sugar industry includes hoarding scenario and recovery of 35000 bags of sugar which has impaired the credibility of Pakistan Sugar Mills Association. Business recorder summarizes this story as: "The raid at the mills as reported in the press has tarnished the image of Pakistan Sugar Mills Association. Chairman Pakistan Sugar Mills Association in a press conference held on November 8 2010 had stated that sugar industry had already exhausted its stocks based on data received from member mills, including Hussein Sugar Mills Limited which reported 1.5 ton as remaining balance as on October 31, 2010. The recovery of 35,000 bags by Administration has raised questions and grossly impaired the credibility of PSMA." The Punjab government on November 30th informed the Lahore High Court that delayed import of sugar by the federal government had caused shortage of sugar in the province and its sale on high price. The latest October/November story of sugar industry includes hoarding scenario and recovery of 35000 bags of sugar which has impaired the credibility of Pakistan Sugar Mills Association. Business recorder summarizes this story as: "The raid at the mills as reported in the press has tarnished the image of Pakistan Sugar Mills Association. Chairman Pakistan Sugar Mills Association in a press conference held on November 8 2010 had stated that sugar industry had already exhausted its stocks based on data received from member mills, including Hussein Sugar Mills Limited which reported 1.5 ton as remaining balance as on October 31, 2010. The recovery of 35,000 bags by Administration has raised questions and grossly impaired the credibility of PSMA." The Punjab government on November 30th informed the Lahore High Court that delayed import of sugar by the federal government had caused shortage of sugar in the province and its sale on high price. The average retail sugar price in Karachi on November 30th was Rs 88 per kg, Rs 85 and Rs 88 in Peshawar and Quetta, respectively. However, the retailers in Lahore and Islamabad were selling sugar at Rs 72 per kg, the price officially announced by the government. Industries and Production Secretary Abdul Ghaffar Soomro said the sugar prices were directly linked with the price of sugarcane and the federal government had no control over that matter. He said the indicative rate announced by the Punjab government was Rs 125 per 40 kg, but the farmers were selling it at Rs 150 per 40 kg and in Sindh the mills were buying sugarcane at Rs 160 per 40 kg against the indicative price of Rs 217 per 40 kg. The sugar crisis is expected to resurface next year due to lack of coordination among various organs of the government and in the absence of any regulatory body to control sugar prices. Inadequate reserves with the provincial departments led to a free hand to market manipulators, who gradually increased the prices to more than Rs 100 per kg a few days ago. The quantity sanctioned to the provinces and the Islamabad territory in Ramazan had not been lifted by them till now. There was no sugar shortage in the country rather there will be surplus sugar in the coming days because the sugar mills had started their production and imports were also in progress.

CONCLUSION:

The major reasons for the sugar crisis brewing in 2009 and 2010 had been inability in framing effective measures by the provincial governments to control hoarding, failure to import sugar to meet shortfall of sugar production in the country, and an overall lack of government policy. The operation of cartels as explained had played an inevitable role in worsening the sugar crisis in the country.

RECOMMENDATIONS:

Tight regulatory policies should be chalked out to prevent sugar hoarding and appropriate surveillance measures should be implemented on a timely basis to check for illegal activities like hoarding carried in the sugar industry. Effective measures should be adopted to import sugar without any delay to overcome the sugar deficit in the country, and to avoid sugar price hike. A ban should be placed on the formation of cartels to avoid sugar deficit and sugar price hike. Sugar industries should be granted subsidies frequently to encourage them to forecast the sugar demand accurately and to prevent hoarding. REFRENCES: https://pkonweb.com/2010/11/sugar-cartel-politicians-behind-sugar-crisis-views-on-news-10-nov-2010/ https://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Politics/26-Sep-2009/Sugar-cartel-may-blackmail-growers https://ibrahimsajidmalick.com/tag/sugar-crisis/ https://haroonhaider.com/category/sugar-shortage-in-pakistan/ https://www.scribd.com/doc/20276168/Sugar-Crisis-in-Pakistan-research-paper https://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/06-Jan-2010/Sugar-crisis-may-deepen-further-in-coming-months https://www.chowrangi.com/sugar-crisis-in-pakistan-is-there-any-other-name-for-a-thief.html

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