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According to a FinMin press release on July 28th, the ECC has approved a proposal for import of 0.3 million tons of sugar by the Trading Corporation of Pakistan (TCP) to maintain buffer stocks in the country ahead of upcoming crushing season. Kudos to the government for trying to send a price signal to the market, at a time when international prices are once against resurgent after bottoming-out in Apr-20!

Rumours of sugar import have been floating since Feb-20 when the government banned export after retail sugar prices ran amok smack in the middle of the crushing season 2019-20. Yet, either the FBR never got around to issuing notification for removal of tariffs (as per a 2016 SRO, imported sugar is still valued at $725 per ton against prevailing rate of $350 per ton), or the private sector has failed to express any interest in import of sugar at current parity (landed cost of imported sugar is close to Rs 70 per kg at 20 percent mark up over ISA White Sugar Price Index).

Either way, the timing of import announcement is interesting. Historically, retail prices of sugar peak in summers, led by increase in seasonal demand – a fact highlighted in this space ad nauseum. Month on month price trend this year appear to be no different, except the blinders of “cost-plus pricing” worn by the babus insist that the prices “should” now stabilize since producers have benefited from decline in inventory holding cost due to monetary easing.

The industry’s view brings no surprises. After hinting at a year-end surplus during Mar-May, the millers speak of unprecedent buying between Jun and Jul, suggesting that the country may now witness a shortfall by calendar year end. Since the government shows no interest in making information regarding national stock position public, mills cannot be faulted for taking advantage of the information asymmetry. What is embarrassing, however, is that no one in the public or private sector appears to have any clue about domestic demand of sugar. Despite recurrent “crises” the industry has witnessed over the past decade, no academic research has been commissioned to understand trends of household and commercial sugar consumption, despite abundance of data on production and supply-side.

Those who label Rs 90 per kg price of sugar as profiteering must also pause and ask why domestic prices are resurgent at a time of depressed economic activity. In the past 20 months, retail prices of sugar have risen by exactly 50 percent, yet demand seems to show no price elasticity. If this is profiteering, what is stopping the regulators from collecting data on current stock position, and issuing clarification that supply is adequate based on historic trends? Surely Covid-19 could not lead to increase in demand for sweeteners!

It looks as if that the handling of sugar industry this year is set to become a comedy of errors. Because markets usually assume that governments have greater access to confidential information, the timing may lead players to believe that official crop surveys anticipate a shortfall in availability of raw material sugarcane come next crushing season beginning Dec-20, fuelling speculation about constrained supply.

Why? Because historically monthly sugar prices peak by August, after which they begin to decline as news of crop plantation and yield begins to flow in from farmlands. Between Jul-Sep, supply is also lean because sugar production is a seasonal business that runs from Dec-Mar, and mills begin to run out of stocks by third quarter of calendar year. Because commodity prices are forward-looking, importing sugar right when the peak is about to break (based on historic trends) may be misinterpreted as government’s attempt to forestall another shortfall.

Yet, it is worth noting that as per crude estimates of per capita national consumption by PSMA and MNFSR, the TCP import order of 0.3 million tons is good for no more than 20 days of domestic demand. Unless sugar’s status has also been upgraded to that of a “strategic commodity”, the price signal may very well backfire and lead to another “sugar rush”.