It’s Bitter Sugar For Pakistan
In response to huge carry-over stocks at the beginning of the current harvest, the Government of Pakistan has increased the volume of sugar eligible for an export subsidy from 500,000 metric tons to 2.0 million metric tons. It is a difficult time for Pakistan when India’s Sugar production is touching all-time high and China’s demand for sugar has come down. Especially when they have suffered a major blow to their rice exports for Kenya.
In the recent past, one of the Major importers of Pakistani rice, Kenya has arrested around a dozen major rice exporters of Pakistan. According to Kenyan government, they did not have authentic travel documents and the Kenyan government has doubts of their alleged links with funding to extremist outfits. In an expected move, Pakistan had blamed India to pressurise Kenyan government to kill a 200 MT rice export.
Things are not getting easy for Pakistan anyhow, this time it is their sugar production proving to be bitter for them. In late 2017, the Government of Pakistan increased its sugar export quota from 500,000 metric tons to 2.0 million metric tons in an effort to move accumulated sugar stocks off the domestic market as harvest swings into gear. A freight subsidy of up to 97 USD per metric ton applies to the entire quota amount, bringing potential total expenditures on sugar export subsidies to 194 million USD.
The Background of Pakistani Sugar
Sugarcane growing areas in Pakistan received relatively limited rainfall from the monsoon from July to September, but surface and ground water supplies enable farmers to produce this water-intensive crop despite nine months of limited rainfall. Farmers produce cane for 87 sugar mills that are required to pay a government-established indicative price for sugarcane, much like India does.
While discounts for quality and water content are often applied to the indicative prices, the certainty of a nominally guaranteed price creates an incentive for farmers to produce sugarcane in areas within delivery distance of a sugar mill. Indicative prices go up or remain unchanged from year to year, but rarely if ever go down. They leave sugar mills to pay prices for cane that are often disconnected from market forces. Millers are able to recoup some of their cane procurement costs by selling into Pakistan’s inflated domestic sugar market where prices are shielded from lower-priced imports by a 40 per cent tariff.
However, because indicative sugarcane prices are so attractive for farmers, cane production in recent years has tended to exceed the needs of the domestic market, resulting in a high-priced exportable surplus that, more often than not, requires a subsidy to be competitive on international markets.
Pakistan’s domestic market is currently trading at 487 USD per metric ton, nearly 100 USD above reported international prices. Preliminary export data suggests that foreign buyers are purchasing Pakistani sugar with exports of 260,000 metric tons from September to November (most of it in November). According to global agriculture information network of USDA, “Sri Lanka, Bangladesh, and certain African countries are the major buyers thus far”. Though it is strange to see that the Peoples Republic of China which claims to be closest partnering nation of Pakistan was world’s largest sugar importer till previous year (slipped down this year due to low sugar demand in the domestic market). Has secured no position among top importers of Pakistani sugar.
The Blow to Pakistani Economy
It is believed that until global sugar prices remain below domestic prices in Pakistan, export quotas and subsidies are expected to be a feature of Pakistani sugar policy. Officials have implemented subsidies during all but one (2016/17) marketing year since 2012/13, but the current quota of 2.0 million tons is by far the largest. Regional players in Pakistan blame Ishaq Dar, Finance Minister of Pakistan for all the policy loopholes. It is also true that as long as sugarcane remains an attractive option for farmers with a nominally guaranteed price, barring a significant increase in international prices, Pakistan is likely to continue this annual cycle of excess cane and sugar production followed by subsidized exports.
