Pakistan

Is there room for movement on support price?

Is there room for movement on support price?

Support prices are a tricky business. Ostensibly set to improve farm economics, support price mechanism is often upwards-sticky, meaning that governments are reluctant to make downward revisions even once price/supply volatility subsides.

That is exactly what has happened with sugarcane over the last decade. Between 2009-15, indicative price of sugarcane as set by provinces increased by 2.25 times, led by volatility in white sugar prices in global commodity market. Since then, support price has remained stuck at Rs180 (Sindh: Rs182) per 40kg, possibly the longest stable run despite increasing cost of farming inputs such as fertilizer and land rent.

Expectations of renewed pressure from growers to increase indicative price levels in the upcoming harvest season have recently picked pace. On surface, two consecutive seasons of falling acreage under sugarcane, coupled with declining white sugar stocks (read: D-Day for sugar in December, published on September 16, 2019) indicate that farmers may be able to seek some respite. However, global commodity prices tell a different story.

If there was ever any doubt that white sugar prices in the domestic market bear no link to global commodity market, recent movements should leave no doubt. As per International Sugar Organization, sugar prices are hovering at $310 per ton (last 10-day average); against ex-factory price of $420-450 per ton in the domestic market (PKR equivalent Rs65-70thousand). If retail prices are any guide, the upward trajectory of domestic prices is showing no sign of abatement, despite the per ton differential of over hundred dollars with international prices.

And relent, they will not! After several periods of payment delays and low cane off take/poor utilization, farmers will demand some level of price incentive to invest in yield-improving inputs such as higher fertilizer and pesticide application. So far that incentive is missing.

Can the provincial governments afford to announce increase in indicative prices levels, without pushing millers to shut down operations? Consider that at even at current support price level of Rs180 per 40kg, millers would breakeven anywhere between $380-400 per ton, a differential of minimum $80 from international prices.

Lazy-eye disease often leads casual observers to fault inefficient milling operations for higher domestic production cost. What is often missed is that sugar production is a variable cost-driven business, with cost of sugarcane contributing as much as 80-85 percent of ex-factory price.

In order to bridge the gap between domestic and international prices, Pakistan needs to improve the sucrose output recovered from sugarcane. Even if indicative prices remain fixed at current level, sucrose content ratio will need to improve by at least a whole 1 percentage point – from existing 10 to 11 percent – for domestic and international prices to even out.

On the other hand, if the indicative price increases to Rs200 per 40 kg, sucrose recovery would need to increase by another point to 12 percent. Except, that would require growers to invest significantly in farm agronomics and inputs and in turn demand even higher selling price for their product. And so on. (Even ignoring the fact that Pakistan’s agro-climatic dynamics may not allow increase in sucrose ratio up to that level).

For so long as support price mechanism is in place, the conundrum will continue to exacerbate. On one hand, grower and miller interests will remain at loggerheads, where one party’s gain will be equal to other’s loss. Yet, political parties of all shades insist on retaining support price mechanism, some even proposing to expand it to other crops. Pray there may be a U-turn on this one!