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In the 5 weeks since the announcement of Sugar Inquiry Commission’s report, national average retail price of the commodity has declined by less than one percent to Rs 80.6 per kg. In its desperation for a smallest win, the federal government may wish to declare this 75 paisa decrease a huge victory. But it is anything but.

A court room drama has ensued since the industry association sued the Federation for its slanderous and unsubstantiated findings. Initially, the Islamabad High Court granted an interim stay against the petition, ordering the sugar mills to sell sugar at Rs 70 per kg. When that fancy did not pan out, the court allowed the federation to proceed against the mill as per Commission’s recommendations, allowing the mills enough time to seek another stay from Sindh High Court.

It does not take a psychic to predict that the matter will now be dragged through mud, while the parties hash out jurisdiction – now that the GoP has challenged SHC’s stay in the apex court. The PSMA, however, took a clever commercial bet by not retailing the commodity at Rs 70 per kg, which would have been an implicit admission that the association has the power to dictate market prices, or reduce selling price by a substantial margin (one-eighth!) without incurring a loss.

But let’s recap how it all started. Back in February, the federal government imposed a ban on sugar export after retail price of sugar witnessed a sharp rise of 35 percent over preceding 12 months. Ever since, domestic retail price of the commodity has been remarkably stable. Can the federal government then declare success in bringing price stability by banning exports, albeit belatedly?

Not really, because international prices across all major commodities have come under pressure after the outbreak of Covid-19 pandemic. Domestic demand for sugar is also expected to suffer, estimating to decline by as much as 10 percent, down from monthly consumption of 440thousand tons. And by banning exports, the government has once again de-linked international and domestic prices, as the premium between the two is once again on a sharp rise (see illustration).

Recall that between Jun-Dec 2019, domestic millers exported sugar without freight support, after the Punjab government withdrew subsidy prematurely. The success of millers in securing export order without regulatory intervention indicated their competitiveness in global trade at the prevailing prices at the time.

While commodity prices based on ISO’s White Sugar Price Index and domestic retail prices are not directly comparable, they can serve as a good proxy for ex-factory price of domestic sugar. Excluding incidental costs of freight and transport, the ex-factory price should theoretically be set by the highest bidder. A decision to sell to foreign instead of local buyers at a time when domestic price is on a sharp rise, is indicative that the price offered by the foreign buyer is higher, or that the producer is at the very least averaging out his selling price at what is still a profitable rate.

The Inquiry Commission through both SBP and Customs has access to unit prices of international trade contracts. If the price recorded by sugar mills for domestic sales is materially different than that of export contracts made during the same period, an investigation into commercial decisions taken by mills may be warranted.

On the flipside, since the export ban was imposed, sugar is retailing at a near-constant price of Rs80 per kg domestically (on average). Yet, ever since the ban imposition, the premium between ISO’s White Sugar Price index and domestic retail price has increased from 1.25 times to 1.50 times, aided by rupee depreciation – although mitigated by dulled demand in the international market.

It should be pointed out that the premium between ISO’s White Price Index and domestic retail rate must always be positive (as the latter accounts for profit share of intermediaries such as wholesalers and retailers over ex-factory price). However, in absence of publicly available data for either ex-factory or wholesale prices, that is as direct as a relationship may be elicited.

Lest it be forgotten that in Jan-20, at 1.25times the premium was still higher than 14 months ago (Nov-18: 1.06times). Back then, the differential was at its nine-year low, yet mills were still demanding export subsidy by blaming oversupply caused by mandatory cane crushing requirement. However, now that both exports are banned and imports are discouraged under a prohibitive tariff regime, domestic consumers can no longer demand parity with the international market. Enough with good intentions!

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Hamid Khan Jun 30, 2020 09:42am
The writer do indicate his ability to understand the mechanism of international and local pricing. But he has completetly failed to understand that sugarcane price is fixed by GOP. With mills purhasing sugarcane at Rs. 250/- per 40KG. The cost of sugarcane comes to Rs. 56/- per KG in sugar and taxes are Rs. 10.70 at a minimum so the total is Rs. 66.70 for sugarcane and sales tax. I hope that business are not setup a charity rather to earn. The commission report has highlighted the above facts while has denied any other costs related to this. So if that is the case same should be applied to all the industries operating in Pakistan either automobile, cement, steel etc. To the respected writer out annual consumption is 5.5 million tons so to import the sugar for country demand you need to have $ 2.5 billion. Do you think that we have that much money and also destroying the livelyhood for millions of farmers and rural persons? I guess not as we are not in a position to do so.
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