Annual Review 1999
S. M. Tahir
Distinguished members of Pakistan Sugar Mills Association,
I feel great pleasure to welcome you on behalf of the Central Executive Committee and myself here at 34th Annual General Meeting today.

Our Annual General Meeting is a regular phenomenon held each year, and in here, beside carrying out regular business required by the Article of Association, current problems on production, marketing, taxation and export etc are also discussed. This occasion besides providing a get-together of all zones provides an opportunity of reaching a joint strategy and decisions to bring positive effects on the sugar industry, growers & others. It is therefore always desirable that maximum participation is made and decisions made at PSMA level are fully implemented and honoured by all members. To ensure joint decisions and benefits it is also requested that all non-members be persuaded to become regular members of PSMA. It is noted that the Center and Zonal Offices are regularly providing service to non-members for quite some time, which can not be continued longer. At the end of this meeting's agenda I would like to have your views regarding non-responsive members and non-members too.

Production 1998-99

For two successive years, the industry has achieved sugar production of over 3.5 million tonnes. Increase in availability of sugarcane in these two years after a short fall in successive past two years, a remarkable effect on production side is noted. This was mainly due to increase in the sugarcane plantation area,

unfortunately at the cost of further decline in the yield and sugar content of the crop.
Because of 47% increase in the sugarcane price since 1997-98 the production cost of sugar also jumped proportionately. With the short fall of 250,000 tonnes, a huge quantity of sugar was imported in 1996-97 and a portion of it in 1997-98 totaling import of 790,420 tonnes. Domestic markets were flooded with sugar and even during shortfall year, the industry faced a sugar glut. This was followed by 1997-98 production of over 0.5 million tonnes of surplus, with repeated performance in 1998-99.

So practically, a surplus of over 1.30 million tonnes was handled during these 2 years with the result that the industry again reached at the verge of collapse. Unfortunately it was during this period that the international prices declined from US$ 420/- to US$ 200/- per tonnes due to global surplus. Main buyers were forced to reduce consumption due to economic reasons and general recession.

During 32nd AGM in Oct 97 at Lahore on the floor of this house situation was well appreciated and foreseen by the members. They were informed that Government was in no mood of providing any subsidies for export, which was considered as vital for survival of the industry.

With dull export prospects members were generally in favour of creating an export fund supporting the exporting mills to compensate losses. A long pre-lunch and post lunch sittings did not bring any positive solution and it was decided that zonal level meetings be held to decide modalities of contribution towards export funds, which again did not bring any fruit and finally Government help was sought.

Sugar Export:-

You will all recollect that PSMA approached Government for export permission and sought financial help, to be able to match the falling international prices. In the beginning permission for export of 100,000 tonnes, and later enhanced to 300,000 tonnes was made before the start of crushing season 1997-98 with no financial support. With our continuous efforts and as a result of no export activity Government realizing the setback caused to the industry, initially agreed payment of rebate of RS.1/50 per kilo of export, but export activity remained low.

With further efforts and meetings, the Government finally agreed for a rebate of RS 4/50 per kilo of export of sugar through MOU signed on 29th May 1998 for an export of 400,000 tonnes. Prior to signing this MOU 167,958 tonnes of sugar was already exported under the previous arrangement.

The rebate paid on sugar export was hardly enough to meet the production cost of sugar for the exported quantity only, with the domestic prices still depressed.

With heavy stocks in hand prior to the crushing season 1998-99, the year under review, hectic efforts resulted in approval for continuation of further export of 500,000 tonnes, with the same rebate facility.

Government having instructed PSMA for an equitable export quota on
pro-rata basis, noted with concern the lack of interest shown by certain mills.

Since the export of sugar was no more viable, and even the rebate was not fully compensating the price, it was directed by the Government that export of 25% of
the production be made mandatory by all mills. Failing this condition, mills were to pay, an additional amount of C.E.D. to the tune of RS 4.40 per kilo against the
un exported quantity.

These directions through an SRO worked very well, and exporting mills fearing further drop in the international price, completed the export of approved quantity of 500,000 tonnes within a record time of five months and we later had to seek approval for excess quantity of about 5000 tonnes.

Having completed the export operation, some mills were faced with penalties and actions by C.B.R. for having failed the mandatory export of 25% in total or in portion. PSMA delegations in successive meetings convinced the Government and finally got the mandatory export amended down to 5% and C.E.D. charge against defaulted quantity reduced to Rs. 1/85 per Kilo. About 22 mills are faced with the penalty clause against quantities ranging 65 tonnes to 3,250 tonnes.

With all this exercise you will agree with me that the industry, with the continuous effort credited to our members finally got rid of the glut by exporting 1,073,566 tonnes. At present we are left with stocks, just enough to carry us to the start of 1999-2000 crushing season.

During last three years due to depressed sugar prices, sugarcane cost and, high mark ups by the Banks and DFI's sugar mills were forced with desperate sale resulting in defaults to financial institutions and the growers.

Distribution and monitoring of sugar export quota was entrusted to PSMA Zones and Center offices. Our PSMA offices were to issue rebate certificates and forward the exports documents to CBR, and follow up the certificates till sent to concerned collectors for the payment of rebate to the mills. PSMA offices in fact shared the workload of CBR and performed remarkably well.

Similarly, export of molasses for check on quality of export was controlled by PSMA office. Again it proved a successful operation; price of molasses was stabilized.

Linkage of Sugarcane Price with the Quality

Inspite of being 10th biggest sugar producers in the world the industry has not proven its viability and at the same time, there is dissatisfaction among sugarcane farmers. With production capacity we hold today, and the sugarcane plantation area in use, the country should have been able to produce a minimum of 4.5 million tonnes of sugar at the same cost, and should have caused a viability favourable to the industry and the farmers both. On ground truth is in reverse, because we are producing the most expensive sugarcane of the world. The yield per acre and the recovery (sugar content) of sugarcane is perhaps the lowest in the world. The average recovery in Pakistan is reduced to 8.19 % in the year 1998-99. Sugarcane price is fixed by the Government and forms approximately 70% of the sale price of sugar. This together with other regulated expenses, forms 87 to 90 % of the sale price of sugar leaving hardly 10 to 13 % revenues in the industry’s control.

Since de-zoning, the incentive of the sugar mills, to direct resources for development of good variety cane in its area has almost diminished because the grower who has borrowed money from a sugar mill for development is free to take

his sugarcane to any mill irrespective of which mill advanced the loan for development. As a result, the sugarcane recoveries have gone down consistently every year. Only the decline in the last two years has been 0.51 % in recovery which translates into a loss of Rupees 3.6 billion to the industry. The situation is worst in Punjab because of the most prevalent variety COJ 1148 (Indian Variety) which formed almost 70% of all cane grown there. This variety has totally degenerated and was so diseased that in some sugar mills of Punjab the average annual recovery was down to 6.5% making the sugar mills totally sick.

The reason for continued deterioration is that there is no incentive for the grower to improve the quality of his cane. The government fixes a flat rate per 40 Kg. for the cane and the grower gets this guaranteed price irrespective of the quality of cane. Thus, the grower supplying cane with a recovery of 4% will get the same price as the grower supplying cane with a recovery of 10%. Even the quality premium does not distinguish between the producer of the bad and good quality growers of sugarcane because it rewards the growers of the mill as whole including individuals growing bad quality. Sugarcane is the only product for which the loss of the bad variety is born by the buyer and not the seller. With the continuation of this system, the recoveries of sugarcane will continue to fall and force the shut down of the sugar industry. There has to be a reward and penalty system for good and bad cane supplied to the mills on an individual trolley basis.

Here under the data compiled, provides at a glance total scenario of "sugarcane and sugar" reflecting lack of improvement in the quality of sugarcane, inconsistency and downward trend in recovery as well as domestic and international trade prices.

Pakistan is one of those very few countries in the world where a fixed price system still exists. Australia introduced system of cane payment based on sugar content in early 20th century has the highest recoveries in the world. Thailand introduced this system four year ago with considerable increase in recovery during that period. For Pakistan, every one percent increase in recovery would mean an additional sugar production of 400,000 metric tonnes valuing approximately Rupees 7.2 billion. The fact is established that for sugar industry to survive we have to introduce the system of sugarcane payment on quality basis. The farmer has to realize that he will get more money if his product is of superior quality and that he will be paid less if his product is of inferior quality.

At 33rd A.G.M formulation of a report in connection with linkage of sugarcane price with the quality was requested through an appointed committee. The report on completion was submitted to the Government. My above statement was also presented at recent PSST convention at Karachi with a request to all experts concerned to evaluate the proposal into a workable plan. You are also requested to consider its workability till Government approval is achieved, which would take its normal course, naturally with the consent of all concerned.

Research and Development

PSMA, at all its meetings and in discussions with the governments has been pressing hard the need for serious work on Research & Development to breed suitable sugarcane varieties. It was with our efforts that a portion of Cess fund was directed to fund the Research & Development work.

Experience has educated us that unless and until the sugarcane price is linked with its quality, there will be no change in the attitude. After harping for

years, suggesting R & D we have reached the conclusion that fix support price of sugarcane has not left any room for improving the quality of the sugarcane crop. We are now firm that R & D work will bring all positive results only when the price is linked with the quality, so I need not complain anymore on this subject.

Reports indicate 10-15% fall in the sugarcane plantation area and therefore in accordance with the Ministry of Food & Agricultural estimates sugarcane production based on preliminary crop condition, would be around 50 million tonnes.

At PSMA level, all efforts will have to be made to export any surplus quantity of sugar from the beginning of season to facilitate payments to the growers and avoid building up stocks blocking cash.

Export prospects for the year 1999-2000 are very dull. With international sugar prices still sliding downwards, reports suggest promising record yield from most of the sugar producing countries. European Union beet tests, Central and South Brazil, Central American and Caribbean, China and Indian crops already suggests upward revision.

The Government of Indonesia has already issued a decree which aims to curtail import of sugar to protect its industry and restrict imports to raw sugar. Indian crop is promising export of sugar in 1999-2000.

Conditions indicate an uphill task ahead i.e. to find new avenues where export of our surplus sugar could accommodate. In our recent meeting at Karachi prospects of export to Iran was discussed and it was agreed that if required, proper delegations be formed and sent to potential sugar importing countries. In

this connection, correspondence is already initiated with the Ministry of Commerce to consider our proposal at the Pak-Iran Bilateral Trade Committee. The proposal includes special freight charges for export through Iranian Railway to Central Asian Countries, and the use of road transport. Similarly special attention be given to sugar needs of Iraq to whom a substantial quantity was exported through commercial parties.

Domestic Marketing

During last three years of crises and historically, Government pressure constantly remained on the mills to keep the domestic prices at lowest. Government agencies are to realize the cost structure of the sugar, which is 80-85% influenced by Government. It must ensure that the industry gets a fair market price for its product plus economic return on equity, which in turn will ensure in time cane payments and ease the heavy loans. It must also realize that in all sugar exporting countries domestic price support and export subsidies are quite common. Only 25% of world sugar is traded and International trade prices are never allowed to influence the domestic prices. In fact, exports are subsidized in support, to stable domestic price, which at times in some countries is three times higher than the International trade prices.

At conclusion, I must pay my thanks to all our members, the Central Executive Committee and Zonal Committees for continued co-operation & help.

Thank You
(S. M. Tahir)

30th Sept.1999