Archive for August 24th, 2009

Image Credit: Dawn Newspaper

Image Credit: Dawn Newspaper

In the past few weeks, the term “sugar crisis” has been increasingly used by media outlets and Pakistani authorities to describe the recent rise of sugar prices. But what are the factors behind this so-called crisis? Below, Bilquis, a consultant from Lahore [click to read her previous CHUP contribution], delves into the issue in an attempt to shed light on the term and understand who is to blame:

On the onset of Ramadan, demand for basic food commodities rise as people prepare for the month of fasting. For at least a decade or more, this is matched by a substantial price increase as supplies are not sufficient to meet demand. And subsequently, a crisis occurs when there is a massive shortfall in supply.

The recent sugar crisis in Pakistan materialized because of this shortage in supply. There are two kinds of supply shortages—Natural or Artificial. Natural shortage include i) unfavorable weather conditions that reduce supplies, ii) adverse market structure that leads to decrease in production over a period of time and iii) change in government policies that negatively impact production. Meanwhile, artificial shortfall means to deliberately withhold supplies to create a shortage for profit. And lastly, mismanagement of supplies by key players in the market can also create shortages.

So what happened in Pakistan’s sugar market/industry in 2008-09 that resulted in a shortfall? Is it natural or artificial?

The current year saw a natural decrease in sugar production. In general, farmers, like others, only produce crops that give them maximum profit. In 2008-09, the current government increased the wheat price to Rs 950 (minimum price) to encourage farmers to grow wheat. This was an attractive incentive and resulted in attracting non growers to grow wheat (as it is profitable).  As a result, sugarcane farmers switched to wheat production which resulted in a drop in sugarcane production.

Moreover, over the past decade, sugar cane production has declined because of the naturally difficult/negative constitution of the sugar market. Numerous specialists state that farmers have decreased the total area under production due to water shortage, behavior of the mill’s management, late payments, increased input cost, and diseases and rodent attack. They especially blame mill owners for late and/or no payments to farmers and limited irrigation water that make the farmers reluctant to grow the crop. Hence, these two factors have naturally reduced the supply of sugar by 15 to 20 percent compared to last year.

Moreover, in the International Market, Brazil and India are the biggest sugar producers in the world. In 2008-09, these two producers faced adverse weather conditions that resulted in a natural reduction in the global supply. Hence, the global price of sugar sky rocketed as well.

Prior to Ramadan, like any other year, wholesalers and mill owners have been accused of hoarding sugar. By limiting supplies, they artificially created a shortage. The main reason is profit. Mill owners buy sugar cane before December because crushing season lasts four months (December to March). Approx 38 to 40 lakh tons of sugar cane is crushed (this is the whole annual supply). The processed sugar is then kept in warehouse or sold to wholesalers. Hence, these mill owners and wholesales are key suppliers and have a monopoly over supply and thus control prices. As they are aware of higher demand before Ramadan, they deliberately withhold supply to manipulate higher prices and profits and hence artificially reduce the supply of sugar in Pakistan.

Who is to be blamed?

Government mismanagement and sugar industry profiteering are the real reason for the current crisis.

Ahsan Iqbal, member of the PML-N, correctly point outs that after the wheat incentive, good governance called for monitoring the possible supply shortages of other commodities. Although the government did watch crop production and was aware of the potential sugar shortage, it failed to act timely. Various reports in December indicate that the total production was 3.2 million tons while demand was between 3.4 to 4.0 million tons. The government solution was to import duty free raw sugar of 300,000 tons so that the mills could process it. However, at that time, the government feared that if they imported duty free raw sugar, then mill owners would not buy from the local market (According to Geo TV’s Capital Talk on 18th August 2009. Nevertheless, delaying the time of purchase did not bode well for Pakistan as international price of sugar shot up (scarcity in the global market) and now sugar is nearly twice as expensive to import.

Moving on, the government is aware that sugar consumption increases around Ramadan. It should be 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. Hence, the government should maintain a buffer stock to avert crisis.

Moreover, mill owners and wholesalers manipulate market prices to obtain profit, especially around Ramadan. This needs to be stopped. The natural shortages in sugar supply turn into crises because of hoarding. Although this year the government placed tremendous pressure on mill owners and wholesalers to release the artificially hoarded sugar, no real legal action was taken against them. Furthermore, Dawn newspaper states that these mill owners/wholesales usually have strong political ties with the government (especially the PML –N) or are in the government and are able to avoid any legal action. This needs to be addressed and the government must take severe action against such policies.

Natural reasons can create a supply shortage in any crop. However, for it not to turn into a crisis, it is the responsibility of the government and the industry to avoid mismanagement and illegal profiteering.

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