Sugar Sharks: How does the most powerful lobby in Pakistan get its way?

Scores of sugarcane-laden lorries are parked on the main road in front of an abandoned car-making plant in Sujawal district, about 130 kilometres from Karachi. The signboard on the deserted factory says Dewan Farooque Motors in big, pale letters. Badin-Sujawal Road separates the one-time maker of Santro cars from Dewan Sugar Mills (DSM), one of the three functional cane-crushing units in the area.

A group of drivers and their helpers is sitting underneath a parked lorry that is carrying as much as 1,600 maunds of sugarcane. How long have they been waiting here to offload sugarcane, I ask them. 

“One week,” says Abdul Razzaq, a driver, in Sindhi. He says he has hauled his trailer from Gambat, Khairpur district.

And how long does he think he’ll stay here? “God knows better,” he shrugs his shoulders in resignation.

The fact that a grower based in Gambat has to send 64 tonnes of his crop to a sugar mill that’s almost 400 kilometres away, and then wait around indefinitely for the buyer to accept his highly time-sensitive produce, speaks volumes about the crisis that sugarcane growers of Sindh currently find themselves in.

The government notifies around October every year the minimum price that sugar mills must pay to growers. Initially, the notified price for this season was Rs182 per maund (40 kilograms). Sugar mills stopped crushing, saying the price was too high. The matter went to court, which decided that the minimum price should be Rs160 per maund.

Now it seems everything is back to normal: growers are selling, mills are crushing, retail price is steady and exports have been allowed (along with the promise of a heavy subsidy to mill owners).

But examining the situation closely reveals blatant rent-seeking by arguably the most influential lobby in Pakistan: the sugar industry.

“I’m still getting Rs130 per maund despite the court’s order that set the minimum price at Rs160. I had to accept even Rs105 per maund on certain varieties (of sugarcane),” says Kamran Memon, 35, who has cultivated sugarcane on 135 acres this season in Darro, Sujawal district.

His crop is ready to be harvested. With a per-acre average production of 600 maunds, he expects to produce around 81,000 maunds this season. But even in the beginning of February when the produce should’ve already been shipped off to sugar mills for crushing, Memon had harvested only 8,000 maunds.

In other words, about 90% of his crop is still standing while the crushing season is nearing its end.

Memon is in two minds. His understanding of the business tells him he should immediately harvest and ship the crop off for crushing. But mills started crushing late and are now giving farmers far less than the notified price.

Harvesting the entire 71,000 maunds at once poses the risk of a loss in sugarcane weight. A delay of one week before the sugar mill opens its gate for the lorry to enter the premises means the produce will ultimately weigh about 20-25% less. Sugarcane dries and its weight reduces with the passage of time. This puts a dent in the farmer’s income as he gets paid according to the weight of his sugarcane.

In addition, a late start by mills means an acute shortage of vehicles to transport sugarcane for crushing.

Usually, mills set up sector offices in sugarcane-growing areas and help farmers get access to trucks and trailers. But a black market of sorts has emerged for transport vehicles in Sindh. Mill officials receive bribes through transporters at the rate of Rs10 per maund for arranging transport.

“It’s a buyer’s market. I can’t resist the mills for paying me less than the notified rate. My sugarcane will be reduced to fodder if I don’t sell it immediately,” he says.

Who owns sugar mills?
The business card of Anwar Majid lists Larr Sugar Mills (LSM) as part of the Omni Group of Companies, his holding company that owns businesses mainly in sugar and energy sectors. Yet the general public in any of Sindh’s agro-towns – even in PPP strongholds like Sujawal and Badin – refers to LSM as former president Asif Ali Zardari’s enterprise.

The same goes for Ansari Sugar Mills, Bawany Sugar Mills, Khoski Sugar Mills, Chamber Sugar Mills, Naudero Sugar Mills, New Dadu Sugar Mills, Tando Allahyar Sugar Mills and New Thatta Sugar Mills – all formally listed as part of the Omni conglomerate. Zardari denies ownership.

Sugar is the fuel that national politics runs on. Each of the three largest political parties is funded primarily by the sugar lobby. But this is not merely a case of crony capitalism, which symbolises only a nexus between business and political classes.

Here the political class is the business class. Business and politics have not just teamed up in the sugar lobby; they have become one. Newspaper reports suggest as many as 50% of sugar mills are owned by politicians. Industry insiders assert that politicians’ holdings in the sugar industry are even larger than that.

As Memon contends, it’s a buyer’s market. Even though growers have to send their crops to sugar mills located hundreds of kilometres away, queue up for weeks to deliver them at the mill’s gate and accept lower-than-notified rates, setting up new sugar mills remains next to impossible in Sindh.

The good, old licence raj still holds sway, and new entrants are hard to find.

Even established players face stiff resistance from within the sugar lobby should they try to play smart. Case in point: attempted ‘relocation’ of five sugar mills, allegedly owned by the family of former premier Nawaz Sharif, to South Punjab.

When the sponsors of Abdullah Sugar Mills, Abdullah Yousaf Sugar Mills, Chaudhry Sugar Mills, Haseeb Waqas Sugar Mills and Ittefaq Sugar Mills tried to move their plants to South Punjab from other parts of the province, PTI leader and sugar mill owner Jahangir Tareen and others from the area went to court to prevent the ‘relocation’ citing a ban on the establishment of sugar mills under the Punjab Industries (Control on Establishment and Enlargement) Ordinance 1963.

Tareen’s motive was, according to his lawyer Aitzaz Ahsan, to protect the cotton crop in South Punjab. Setting up ‘new’ sugar mills in the area would discourage farmers from growing cotton, the petitioner said. Subsequently, the apex court ruled against the relocation and even barred Sharifs’ mills from crushing sugarcane in this season.

Critics question, however, why a sugar mill owner would feel so strongly about the possible damage to the cotton crop as a result of the establishment of ‘new’ mills in the area. They argue that it reflects Tareen’s willingness to spend a lot of political capital by insisting on de-industrialising his constituency and forcing voters to stay on in a low-paying, less productive vocation.

Supply-demand dynamics
No mill is currently buying sugarcane in Sindh at Rs160 per maund in line with the court’s order. A few of them are buying it at Rs130 per maund. Some are offering as low as Rs105 per maund.

Sugar mills are able to buy cheaply partly because of the arrival of sugarcane from Punjab. Long trailers often seen outside mills in different districts of Sindh around the crushing season bring sugarcane from South Punjab.

Increased supply gives further room to crushing units in Sindh to dictate the rate to growers. Sindh-based growers claim that four million tonnes out of 36 million tonnes of sugarcane produced in Punjab is being crushed here.

Data released by the Pakistan Sugar Mills Association (PSMA) shows Punjab-based mills crushed between 28 and 30 million tonnes of sugarcane in the last two seasons.

One reason why sugarcane from the neighbouring province is arriving in Sindh is that growers in Punjab face the same problems in selling their produce to local mills. But unlike their counterparts in Sindh, most Punjab-based mills are ‘clean’ in the sense that they technically don’t buy sugar at less than the notified price, which is Rs180 per maund this year.

That is to say, if they buy sugarcane directly from growers at all.

According to growers from Punjab, mills buy sugarcane at the notified price from ‘farms’. ‘Farms’, in other words, are the so-called middlemen in the supply chain. They buy sugarcane from small growers at a lower-than-the-notified price and then sell it onwards to the mills at the notified rate. Growers claim that these so-called farms that are registered entities are fronts for the mills themselves. The farm makes a margin on the buying and selling of sugarcane. The mill buys the sugarcane from the farm at the notified rate, which satisfies the government in terms of the legalities of the process. Average it out and the mill’s cost for buying sugarcane decreases. The only loser in this trade is the grower.

Of course, growers are free to take their produce directly to the mill’s gate and receive the notified price. But the gate usually opens for only those vehicles that are brought in by the ‘farms’ not the growers.  

Mohammad Aslam Chughtai, a farmer based in Khanpur Tehsil of Rahim Yar Khan, cultivated sugarcane on 75 acres this year. Even 70 days after the beginning of the crushing season, Chughtai says his 75% crop is still standing.

“They apply katoti (cut) of up to 40% on one pretext or another. So the effective rate I’ve got so far is only Rs120-130 per maund,” he says.

Middlemen pay up to Rs80 per maund to small farmers who have no choice but to sell their crop at low rates, he added. “There are lines of vehicles as long as eight kilometres. Not everyone can afford to wait around for eight to 10 days on roads,” he says.

He confirmed that growers from his hometown are selling their crop to the local agents of Sindh-based sugar mills. “The agriculture department should make a schedule and implement it to ensure that sugarcane reaches mills without any weight loss and wastage,” he added.

Checking the arithmetic
With the average sugarcane yield of 600 maunds per acre in Sindh, a farmer’s revenue amounts to Rs78,000 at the going rate of Rs130 per maund.

But growing sugarcane on an acre of land in Sindh costs somewhere between Rs80,000 and Rs105,000, depending on whether the farmer has opted for ratoon cropping, which grows from the stubble of the preceding season’s crop.

For example, per-acre land preparation costs on average Rs15,000, seed Rs25,000, fertilisers Rs15,000, ploughing Rs5,000, sowing labour Rs5,000 and water Rs10,000.

After adding harvesting and transportation costs of Rs40 a maund and accounting for bribes, the per-acre cost amounts to more than Rs100,000 – substantially higher than Rs78,000 an acre that farmers are currently getting at the going rate of Rs130 per maund.

And what do sugar mills get out of the whole production cycle? Background conversations with senior members of the production team at DSM reveal it’s rolling out as many as 18,500 bags of 50kg each on a daily basis.

This equals 925 tonnes of refined sugar a day. If the mill operates for 100 days this season, it will have produced 92,500 tonnes of sugar.

Even if it sells sugar to distributors at a conservative rate of Rs40 per kg, it will generate annual revenues of Rs3.7 billion. (The average monthly retail sugar price in Karachi was Rs55 per kg in January.)

https://www.youtube.com/watch?v=QiEg9fv6Zao&feature=youtu.be

Speaking to Profit, DSM CFO Muhammad Ilyas Abdul Sattar said his company is paying growers exactly Rs160 per maund. He put the daily output of sugar at 800 tonnes, about 14% or 125 tonnes a day less than the figure quoted by sources within the company.

Making profit, posting loss
The costs of human resources and electricity, otherwise major expenses for any industrial unit, are extremely low across the sugar industry.

They burn bagasse, which is the residue left after the extraction of juice from sugarcane, to produce steam. That steam runs turbines and generates electricity, which is sufficient enough to power not only the mill but also light up the adjacent residential units for staff.

As for labour, a majority of them are hired through a thekedari system for about three to four months a year. This is the reason that the bulk of workers in most Sindh-based mills are Pakhtun. “They are easy to hire. They are not from around so they stay away from union-baazi and cause little trouble,” said one sugar mill official.

Yet most listed sugar mills record only a marginal increase in earnings in their annual financial accounts.

According to Insight Securities Research Director Zeeshan Afzal, the profitability of major sugar mills listed on the Pakistan Stock Exchange remained stagnant between 2012 and 2016. “The increase in earnings of sugar mills does not reflect the substantial rise that the benchmark index recorded during the same years,” he said.

In spite of growers falling over each other to get their sugarcane to DSM while the mill churns out bags after bags of refined sugar, the company has posted net losses in five of the last six years.

According to its 2016 report, DSM recorded a net loss of Rs696 million. Its net losses in the preceding two years were Rs454 million and Rs110 million.

Commenting on tax laws, AF Ferguson and Company Chairman Syed Shabbar Zaidi said the sugar industry is a haven for undocumented cash. Growers and distributors who trade with the sugar industry on either side of the supply chain are undocumented. “It’s fairly easy to keep money off the books,” he says.

Hypothetically speaking, saving sales tax of 8% on 125 tonnes of ‘undocumented’ sugar rolled out in a day can result in a windfall of Rs400,000 or Rs40 million for 100 days.

Plus, there’s an elaborate scheme of sugar-for-money where mills tell growers to either accept refined sugar in lieu of cash or wait for months on end to receive payment against sugarcane. Selling sugar on the black market through growers not only improves their cash flows but also saves them taxes worth millions of rupees every year.

“I sold refined sugar worth Rs2.5 million in Jodia Bazaar last year. That’s because sugar mills seldom pay farmers in the last month of crushing,” said one grower while requesting anonymity.

Pakistan Sugar Mills Association (PSMA) Chairman Javed A. Kayani did not respond to requests for comment. PSMA Secretary General Inayatullah Khan and the two secretaries for Punjab and Sindh zones also refrained from returning calls for comment.

From sugarcane to tilapia
Afzal of Insight Securities believes sugar production will remain on the higher side this year. A news story by Reuters on Feb 6 quoted a sugar exporter as saying that farmers’ appetite for the crop has diminished because of low domestic prices.

“There is a high chance that farmers will reduce the sugarcane area for the 2018-19 crushing season. Local sugar prices have been depressed because of oversupply,” sugar producer Almoiz Industries Nauman Ahmed Khan told a Dubai sugar conference earlier this month.

Memon, the Darro-based farmer, has already planned what he’s going to grow instead of sugarcane next season: tilapia. It is freshwater fish inhabiting shallow streams and ponds. He has already built a fish farm by erecting dykes around a large piece of land. The fish is exportable. “Its market is not as strong as that of sugar. But at least there’s certainty that I’ll make a decent profit next year and won’t run from pillar to post to sell my product,” he says.