Sugar rush — Why are prices so high?

There is a rot in Pakistan’s sugar market. The current prices of sugar in the country have shot above the Rs 200 per kilogram threshold reaching heights that the vital commodity has not seen before. While some of this increasing price can be attributed to general inflationary trends in the country, the main reason is a vicious cycle that the country’s commodity market is stuck in.

In the case of sugar the problem lies in historical supply chain issues that have plagued the country for years. The country’s sugar daddies use an intricate network of political clout and lobbying to manipulate the market and maximise their profits. Using racketeering, hoarding, and satta bazi they control sugar supply and short the product from the domestic market. To understand the full story, we must go back to the beginning. 

Pakistan’s sugar industry 

Much like many other industries in the country, partition meant a new beginning. In August 1947, there were only two sugar factories in the newly minted state of Pakistan. Most of the sugar mills set up in the colonial era were on the Indian side of the border, and the two in Pakistan were not nearly enough to meet domestic supply. 

This was an opportunity. For the first few years of the country’s existence sugar had to be imported which was a major drain on a new state with very little trading power. At the same time, sugar was a high-demand commodity in the subcontinent and plenty of sugarcane was grown in the new state. The 1947-48 production numbers for sugarcane in Pakistan were over 54 lakh tonnes. Nearly 75% of this sugarcane was grown in the Punjab. Since at the time the country’s landed elite were also its political elite, it became clear that many of these landowners that were growing sugarcane would now set up sugar mills, process the sugar and make more money. 

Over time, politicians in particular adopted the sugar business and mills thrived. By the early 2000s those initial two sugar mills had become 91 sugar mills. The only problem was that Pakistani sugarcane was wildly uncompetitive. Production was low compared to the global average yields and so was sugar extract percentage. This meant imported sugar could actually compete with the local product. To counter this, government policies placed tariffs on imported sugar and even banned it while giving subsidies to local sugar mills. As a result, the number of mills grew and so did the number of farmers growing sugarcane.

To put this into context Pakistan ranks 5th among the world’s sugarcane producing countries by cultivating sugarcane on 1.1 million ha and producing sugarcane of about 65.5 million tonnes with an average yield of 58 tonnes.

Quite encouragingly, however, most of the increase in Pakistan sugarcane production came through improvement in per ha yield. Despite these developments in sugarcane production, Pakistan still obtains 17% lower yield than the world average and much lower than in the main sugarcane producing countries. The recovery rate of sugar from sugarcane is also lower than the world average resulting in higher sugar production costs in Pakistan, and the gap is even wider when the rate is compared with major sugar producing countries of the world. 

Ironically, the sugar industry pays lower sugarcane prices to its producers and charges higher prices of sugar from its domestic and international consumers. Under this situation, Pakistan export of sugar is mostly viable only under export rebate programs. Such rebates in India and Pakistan have in fact created a slump in the international sugar market and its price has become low at US$260 per tonne.

Misusing subsidies 

Now the only problem here is that the only way sugar producers in Pakistan can afford to be profitable is through subsidies. To this end the government gives generous support prices for sugarcane, they give exports to sugar mills in the form of low electricity prices to encourage them to export more. However, the concept is that the sugar mills be empowered enough to produce enough to first fulfil domestic demand and then export and earn foreign exchange for the country. 

The problem is that the country’s sugar barons live in a lawless land. Just last month Profit reported on how the country’s sugar mill owners finally called a truce on a seven year old war to form political alliances. With their deep political roots these families manage to control every aspect of the sugar supply chain. 

Think of it this way. Pakistan has this year imposed a ban on sugar export. That is because international prices of sugar are increasing. Since the government of Pakistan gives subsidies to sugar mills and encourages the harvest of sugarcane Pakistan produces cheap sugar. Traditionally, agriculture products such as sugar and wheat are highly subsidised in Pakistan. There are direct subsidies in the form of support prices, and then there are indirect subsidies in case of urea due to availability of cheap gas, and availability of subsidised water and electricity for all farm produce.

Now this sugar should mean Pakistanis gets cheap sugar. Instead what the sugar mills do is they hoard sugar, say they lost a lot in production and illegally send the rest out of the country through smuggling routes. 

According to a recent report, the reason behind this is smuggling. Interestingly, the sugar official exports over the past two years are a mere 1.5 percent of the last two years’ production yet shortage on the domestic market remains rampant.

The other problem is unhinged inflation expectations and loss of confidence in the PKR. Dealers and investors operating in a cash economy are better off by hoarding non-perishable products such as sugar in anticipation of price rise and as a hedge against the depreciating currency. 

The cotton conundrum 

So Pakistan’s sugar market is subject to the whims and profiteering wishes of its political elite. That is nothing new. What makes it worse is that this profiteering is taking place at the expense of otherwise economically productive crops. 

The battle between the delicate white lint of cotton and the sugary sweetness of sugarcane is an unexpected but harsh one. Over the past two decades, however, cotton has taken a backseat with farmers shifting in droves towards growing the more profitable but water-guzzling sugarcane. Cotton has fallen out of demand, become internationally uncompetitive, and output has fallen by a whopping 65% from 14 million bales being produced in 2005 to 4.9 million bales being produced in 2023. Cotton producers are losing interest and prefer crops like sugarcane and paddy while the government continues to be disinterested in reviving cotton. Sindh has seen growth in the sugar industry in cotton-growing areas, especially in Ghotki, where five sugar mills have been set up.

The price problem

As things stand the issue of rising sugar prices have become a point of political infighting. It began with the caretaker government claiming there was a problem of depleting sugar reserves. “Rising sugarcane prices and court orders were also seen as being behind the rising price of sugar,” read a government report. 

Meanwhile dealers began to claim that the price of the commodity increased after the supply of sugar got suspended as vehicles got stuck on the national highways after the suspension of permits. Senator Taj Haider claimed that “Honourable Rana Sanaullah allowed 1.4 million tons sugar to be smuggled” and lamented how ex-planning minister Ahsan Iqbal had held his former cabinet colleague Naveed Qamar responsible for the crisis. Haider claimed that Pakistan’s former Commerce Minister Naveed Qamar had officially allowed the export of around 250, 000 tonnes of sugar to help the finance ministry earn some foreign exchange, and took exception to the insinuation that his party colleague was somehow to blame for the shortage.

Ahsan Iqbal also pointed fingers at Naveed Qamar who pointed them right back at Ahsan Iqbal claiming the decision had been taken in a meeting of the Economic Coordination Committee. The fighting has led nowhere but sugar prices continue to rise. Prices will go down eventually but the cycle will not be broken. Unless serious introspection leads to even more serious decisions the next time sugar prices rise on the international market we will see the same hoarding and shortages leading to the same kind of price increases.