Distinguished Members.

It is an honour to present to the members, on behalf of the Central Executive Committee, annual report of the Pakistan Sugar Mills Association for the year ended September 30, 2008. It has been a year of some excellence and certain short comings, as usual. Being absolutely an agro-cum-rural based, besides seasonal, sugar industry has been portraying peculiar profile of it. This report deals with some key issues which have for long dominated this trend and now need to be addressed, as early as possible. PSMA wants, being concerned stakeholder to place critical issues in focus to facilitate their resolution. This has emerged as a pressing need and, therefore, quite imperative to break impasse. As national sugar industry holds immense inherent potentials for growth, these shall be efficiently exploited. It is in the interest of the stakeholders and the national economy.

Sugar year 2007-08 heralded happy tidings by setting a record production volume of sugarcane at 63.920 million tonnes, sugarcane crushing at 52.757 million tonnes, sugar production at 4.737 million tonnes, similarly extending proportionate increase in production of its four main by-products, namely, bagasse, molasses, filter mud and crop wastes. From each of these four by-products, as many as 40 plus derivatives can be made. No other crop or commodity offers scope for such a sizeable number of derivatives.

From bagasse can be made 20 derivatives, including generation of renewable energy, paper and board, packing materials etc. Molasses processing can give 15 derivatives, inclusive of ethanol as energy source, cattle feed, viscose yarn, bakers’ yeast etc. Filter mud is useful as fertilizer. Crop waste useful to make five derivatives, including power generation. Exploiting these resources into value-added products is awaiting attention.

A record production has indeed been a gratifying feature of 2007-08 season. This deserves analysis both on national and zonal levels, for comprehension so as to evolve more material input for solving problems. We look at 10 years record of sugarcane production in Pakistan, in terms of area under the crop, yield and recovery which represent sugar production trend.

Yield fell in range from 47.33 tonnes/hectare (in 2003-04) to 53.12 tonnes/hectare (in 2006-07), having 12.23% variance which makes it noticeable. Sugarcane production was in range form 44,099 thousand tonnes (in 2000-01) to 63,920 thousand tonnes (in 2007-08) giving variance of 44.94%, indeed significant.

A record at 63.920 million tonnes sugarcane crop, having no use other than of its processing by the national sugar industry, its supplies to sugar mills soared to 52.757 (40.484) million tonnes, forming 82.53 (73.72)% of total output level. Sugar recovery improved to 8.98 (8.70) % contributed further in making the highest ever at 4.741 (3.516) million tonnes of sugar production.

These figures underline significant, fluctuations in the relevant production parameters. This reflects inconsistency, derailing a steady, sustainable growth flow inevitable for managing economic gains. This precisely points out absence of a precise policy format fairly conceived and designed, to be in place. Unless it is made available, sugar segment will stay locked in deceptive dilemma, which tends to deny due benefits.

During 2007-08 season 79(77) sugar mills were operational. Sugarcane crushing on an average by mills was 66,773 (52,555). Production of sugar on average per mills at 59,963 (45,662) tonnes was higher by 31.31%. Higher production level was not as much rewarding, which by normal feature of ‘economies of scale’ should have been more rewarding. National sugar industry, by crushing at 52.751 million tonnes during 2007-08 season achieved 2.661 (1.911) million tonnes of molasses by-product, at 5.04(4.71)% recovery rate.

A profound policy framework, taking care of sugar and derivatives of its key by-products is needed. Now is the time, to make move in this direction.

Another element in price imbalance, rather distortion, carrying adverse influence on sugar industry’s bottom line has been huge at about 72% being cost component of sugarcane in sugar production. Besides provincial governments fix sugarcane minimum price, usually endorsed by the Federal Government authorities.

Provincial authorities carry tilt in favour of farmers, while federal functionaries keep concern for consumers about sugar price. This leaves sugar industry alone, grinded by such contrasting policy pursuit as a permanent feature being followed. There has been no rationale in price tag of sugarcane and sugar, exposing the sugar industry to heavy hazards. As a result fixed cost component of sugar manufacturing stays above 90%, leaving fraction to chase for economies of scale by increased production volume.

PSMA has been agitating the problem of price imbalance on lacking linkage between sugarcane and sugar cost/price equation, and reiterating to take up this case with care jointly by the provincial and federal authorities. This time, it received a hearing, followed by a hesitant effort to reconcile the issue. Cost of sugar production was critically assessed for ‘striking’ some equilibrium. A Committee of Federal Government Secretaries from three Ministries of Finance, Industry and Commerce was formed for the purpose. It worked out ex-mills sugar price at Rs.29,000/tonnes to safeguard sugar industrial segment. However, over supply of sugar, compounded by a short time prescribed for payment to sugarcane farmers, 15 days from the supplies, compelled as always happened, to sugar industry desperate sales during the crushing campaign, to care for cash flows for farmer’s payments. This has been a distinct feature of sugar industry, so it was always being brought to authorities’ attention but has been of no avail. Sugar prices fared through out the season markedly subdued, trailing far below the safe price level earmarked. Month-wise wholesales sugar price, containing 16% sales tax, besides transport cost, trade margin etc. has been as given hereunder. This information provides a clear picture of the crisis consistently over-riding the national sugar industry.

INTENSIVE CROPPING INEVITABLE

Sugarcane production figures of the past decade, in it output level above 50 million tonnes of sugarcane for five years, seems attractive. This achievement has largely been by more hectares brought under the crop. Yield has been above 50 tonnes/hectare but for three years.

Pakistan, with on an average one million hectares under sugarcane crop holds potentials to double sugarcane and sugar production by improvement in quality of sugarcane and its marketing, particularly of supply schedule ensuring instant crushing of sugarcane on its harvesting.

Potentials exist of producing more than twice the record sugar production at 4.737 million tonnes reached in 2007-08 season. It demands intensive crop pattern, to be inducted by improvement in the existing system. Greater dynamics can be infused in this regard by setting up of a sugarcane research institute. It is as imperative as important, more so as challenges on economic front in global circuit are increasing day by day.

Each country cultivating sugarcane has to create a research and development institute of its own, to evolve new varieties, suitable to their soil and climate, in brief echology. Seeds can not be brought from abroad. Institutional structure is imperative for evolving seed/fuzz, its multiplication and distribution. Besides the institute shall become a centre of excellence for training of manpower in farms and factories engaged in sugarcane cultivation and processing respectively. Creation of such a superb and inevitable institutional set up shall not cause strain on government revenues. Huge funds running into billions of rupees contributed by mandatory requirement in form of sugarcane cess for decades by the sugar industry and sugarcane farmers, remain unutilized with Governments of the Punjab, Sindh and NWFP Provinces. Symbolic structures do exit in the public sector in all the three provinces but have been good for being entities. Their rise and sustainable future squarely lies with the stakeholders, being beneficiaries and having raised funds. Sugarcane cess fund carries two specific usage, creating ‘pucca’ road network connecting sugarcane farms with sugar mills and undertake useful research and development work about sugarcane varieties and allied areas.

PSMA has identified ideal location for sugarcane research and development institute, being Gharo in Sindh, by its being close to Arabian Sea. PSMA prepared a study about cost and benefits of the institution. PSMA has approached all the concerned authorities, at Federal and Provincial levels, for release of funds so that the institutional structure is earnestly brought into existence and pressed into functioning.

Once the institutional structure comes into being, Pakistan shall have a steady, sustainable growth dynamics in sugarcane and sugar production, on lively intensive pattern of crop cultivation. On the present average one million hectare, sugarcane crop size can be more than doubled the latest record level achieved of 63.920 million tonnes. No extra land will be required.

Similarly sugar production of a record at 4.737 million tonnes achieved at 8.89% recovery for 2007-08 season will be more than doubled in a short time. Sugar industry presently holds sugarcane crushing capacity considerably more than its record crushing of 52.757 million tonnes during 2007-08 season. No dose of fresh capital outlay is required. Sugar industry is now running on average of 110 days which makes it short for economic uplift. Standard period of its working has been spelt out at 150 days. It can be extended to 210 days by varietals development of sugarcane of early, mid term and late maturities to keep sugar industry operational for longer, so as to provide it economic viability, serving the national interests more effectively.

ZONAL VIEW, REVIEW

Information and analysis of sugar industry on national level, on modest macro-scale, in aggregate is reflection of performance of three zonal segments. By and large, no material difference is discernable on end-result between national and zonal levels. This, nevertheless, implies to have at a glance on important features of zonal performances, with relevant observations of priority points.

PUNJAB ZONE:

Sugarcane was cultivated on 827 (712) thousand hectare, higher by 16.15%, setting a record. Season 2000-01 with 581 thousand hectares fared the lowest of the latest decade. Variance in range at 246 thousand hectare i.e. 42.34% has obviously been significant.

Sugarcane production at 18.793 (12.592) million tonnes, up 49.24% was also a record, so highest of the past decade. The lowest sugarcane production was at 26.700 million tonnes of 2000-01, coinciding with area under the crop being at the lowest. Yield at 49 (52.74) tonnes/hectare dropped by 7.10% has emerged a case of concern, the lowest at 40.64 hectare/tonnes was struck in 1999-2000.

Sugarcane crushing at 33.045 (26.584) million tonnes, up 24.30% was note worthy. It was the best of the past decade. The lowest at 18.068 million tonnes harvest was in 1999-2000 season. Sugarcane crushing fared fine at 81.98 (70.81)% of the crop, not on top in the decade. It was 83.53 in 2002-03 and the lowest run was 60.88% in 1999-2000. Sugarcane production at 2.949 (2.268) million tonnes, up admirable 31.12% was the best ever achieved. Sugar production fared in range of 1.316 million tonnes being the lowest in 1999-2000 season. Variance of 124% was indeed huge. It gives good reading by rise registered. The momentum needs to be maintained for multiple benefits of it.

During 2007 season 42 (41) mills were functional. On average a mills sugarcane crushing increased to 786,757 (684,381) tonnes, up 21.34%. Sugar production was up 26.91% to 70,202 (55,315) tonnes. On average capacity utilization per mills fared better but not at an optimum level, leaving much scope for further improvement. Molasses output was higher by 31.50% at 1.607 (1.222) million tonnes on 4.86 (4.60)% recovery. Higher molasses recovery means proportionately lower sugar output. This reflects upon quality of sugarcane, besides supply system and a large crop impact.

SINDH ZONE:

Sugarcane cultivation spread over 308(214) thousand hectare, up 43.92%, was a record. Lowest hit at 183 thousand hectare was in 2005-06. Sugarcane harvest at 18.793 (12.592) million tonnes, up 49.24%, was also a record, while the lowest fared at 9.357 million tonnes in 2004-05. This had happened due to yield then touched the lowest at 43.52 tonnes/hectare. The highest of the decade at 62.96 tonnes/hectare was fetched in 1998-99. This feature reflects marked fluctuation in sugarcane quality, besides disruptions in supply system.

Sugarcane crushing formed 89.05 (92.80)% of the crop size, ranking the third best of the decade. Highest of it was in the preceding season and the second best at 89.98% in 2002-03. The number of sugar mills functional remain unchanged at 29 units. On average sugarcane crushing per mills notched up by 34.94% to 577, 138 (400,930) tonnes. Sugar production per unit moved impressively up by 46.96% to 53,841(36,635) tonnes. However, capacity utilized was not at the desirable optimum level. Working was contained to net 125 days with a record sugarcane crushing so far, obviously providing a good scope to improve on the time scale, similarly on supply schedule.

Molasses production of 889,566 (578,833) tonnes, up 53.68%, was achieved by recovery rate higher at 5.31 (4.98)%. It proportionately reduced sugar production. Reason for it tend to be higher volume of sugarcane besides hitches associated in supply schedules.

NORTH WEST FRONTIER ZONE:

NWFP zonal working bore a little variance during the 2007-08 season over the previous. Sugarcane cultivation was on 105,000 (106,400) hectare, rolling out production of 4.800 (4.792) million tonnes, with yield being constant at 45.11 tonnes/hectare. Sugarcane area and crop size fared in narrow range during the past decade. Highest crop harvest at 5.049 million tonnes was in 2002-03 and the lowest at 4.100 million tonnes in 2005-06.

A notable feature was sugarcane supplies to the organized sugar industry segment improving to 62.11 (47.03)% of the crop size, increasing sugarcane processing to 2.976(2.579) million tonnes, up 15.38%. Sugar production went up by 17.62% to 226,750 (192,777) tonnes. Sugar recovery rate dropped to 7.62 (8.54)%. It fared the second lowest of the decade. Highest at 8.59% was in 2004-05 and the lowest at 7.22% in 2000-01

One sugar mill sliced 64,095 (83,580) tonnes of sugar beet, produced 5,532 (7,143) tonnes of sugar, at recovery unchanged 9.04%. Molasses production was 2,576 (2,973) tonnes.

MOLASSES:

Molasses has conventionally been considered a key by-product of Pakistan sugar industry. Substantial part of its production was normally geared for export. Domestic consumption, in context of production, used to be just peanuts. However, molasses has been progressively replaced by ethanol from 2002 and a steady increase. A record sugarcane harvest and crushing during 2007-08 season gave molasses production at 2.661 million tonnes, being the highest. This created a space for molasses exports jump to 911,065 (339,595) tonnes becoming the best of the past three years. Replacement of molasses exports by ethanol has been a right pursuit, of having value-added forex revenues. Domestic market for molasses had been small all along. Similar situation unfortunately has been found for ethanol. Hopefully, it shall be short lived. Rising exports of ethanol provide clear credentials of the products, being useful in domestic market as well, by its acceptability abroad. This fact shall do away apprehensions, if any, about its utility as a gasoline supplement.

Molasses market in the country has been very limited for want of its diversification into value-added products. Its use in the past, and now for ethanol, was 1989 and actively from 1994 confined to animal feed and processing of it by four old distillery units.

ETHANOL:

Ethanol is a renewable source of fuel. Prices of gasoline registered a steep increase on a faster track, during the past five years, beginning form 2004. The phenomenon of consistently rising price made ethanol more popular as gasoline mix in several counties, leaving Pakistan still in lurch. The Government of Pakistan have in principle agreed and decided to promote ethanol as gasoline mix to begin with at five percent and increase it to 10% on faster track. Resistance to it is being consistently made on flimsy grounds. Initial 5% inter mix of ethanol with gasoline shall not be made an issue, but pave the way for its steady gear up intermix to 10%. PSMA has been persistently pursuing, urging and advocating this matter for prompt implementation.

During 2007-08 season, 18 of the 22 functional distillery units were attached with sugar units. Three more are online to join the foray. Some more are to follow the suit. Prospects of ethanol tend to be tempting, being bright.

Ethanol production and its almost entire export reflect a rising trend in store. Its growth potentials are promising.

CO-GENERATION:

Economy of Pakistan for the past several year has been suffering power shortage, assessed to the tune of 5,000 MW. It has been due to consistent increase in energy requirement outpacing generation, sharply contrasted by no capacity creation taken place for power generation. In view hydel power generation less expensive though, no new project has been set up. Efficiency of the existing dams eroded by silting and reduced water supplies. This phenomenon pushed to increasing reliance on thermal power generation, being considerably expensive, due to steep increase in fuel prices. It compelled to look eagerly for renewable-cum-sustainable source of power generation. Sugar industry merits in category of renewal source of power. Pakistan Sugar Mills Association has been pursing this matter with the Federal Government since 1994 and actively since. Sugar industry being functional during November to March period has capability to generate power in excess of its own requirement to operate the mills. Its working to be during winter months, while hydle power supply tends to be at the lowest level, acute power shortage is being felt in this period. Sugar industry can generate now up to 2240 MW of electricity by using sugarcane by-product bagasse, besides distillery spent wash. Each sugar mills can generate extra electricity by using bagasse. Sugarcane has been acknowledged as renewable, besides sustainable source of energy in several countries, by use of ethanol and bio-fuel of bagasse. The bottleneck in its energizing to combat energy shortage, specially in typical acute scarcity time of winter season has been not yet won acceptance of authorities for a competitive tariff as Independent Powers Projects (IPPs) By economics parameters and logical dispense, energy being energy, of similar use, shall get an uniform tariff. PSMA has given presentation on it, dealing with scope and feasibility study, with economic benefits of acquiring electricity from sugar industry. In principle the project details provided have been acknowledged, leaving tariff factor under consideration. This restraint on sugar industry hopefully will soon settle down, enabling the national sugar industry with its 79 performing units, located in three provinces. All the mills in rural areas, strategically placed, play its role resuming to provide electricity making the oasis already created by it to become sparkling and contributing more to GDP.

PROBLEMS, PROGNOSIS, SOLUTION

Basic problem of sugar industry identified by consultations among the stakeholders has been lack of linkage between sugarcane and sugar prices. Sugarcane minimum price is being set by provincial governments. Sugar price stays afloat, left to market forces set it! Sugarcane processing spell is seasonal, production takes place on average in about 110 days. Sugar sales spread over a year, may be above it, by inelastic demand. Besides, sugar industry is directed to make payment to farmers in a week of supplies of sugarcane. How to manage finances of inventory piling up each month at least by 17% of production rollout and accumulating to 68% by the end of spell and simultaneously payout within one week of supplies of sugarcane, which forms above 72% of sugar production cost. This situation compels for desperate sugar sales by the industry, often in advance and more so during

sugarcane crushing period to have cash flow! This issue has always been brought to the authorities attention, but solution has not yet come off.

During the review 2007-08, season certain move ahead took place. The Federal Government prevailed to hold minimum price of 2006-07 season unchanged for 2007-08 season.
MINIMUM SUGARCANE PRICE PER 40KG

Season 2007-08 2006-07

Punjab Rs. 60/= 60/=
Sindh Rs. 67/= 67/63*/=
NWFP Rs. 65/= 65/= (*Revised)

Besides, the Federal Government worked out sugar price to be Rs.29000/tonne
ex-factory, based on given minimum sugarcane price and related other costs of production. However, mechanism was not structured that be in place to ensure sugar price as determined. This left sugar industry in usual distress. PSMA persevered to have some system in place that sugar price, as worked out, was assured. At best, the Federal Government procured 527,949 tonnes of sugar through the Trading Corporation of Pakistan, but this was neither made during the sugarcane crushing spell as envisaged nor at the break-even price of Rs.29000/tonnes worked out. TCP purchases were by tender pushing sugar industry in same shape as in open market. Hence, no desired support could be had of it to save national sugar industry form pinching impact of the policy defects! In desperate sale for liquidity, mills exported about 277,339 tonnes.

PSMA hopes that a positive view of it will lead to progress, so as to put in place proper modalities to protect sugar industry from perils but place it in sound shape so that it contributes to the national economy to the full extent of its huge potentials.

USES OF ETHANOL AS GASOLINE MIX:

PSMA has been pursuing this case for years. In principle, five percent use of ethanol as gasoline mix has been accepted. However, modalities are being worked out for its implementation. Once the preset impasse created by other interests is overcome, ethanol use is bound to gather a steady rise.

POWER CO-GENERATION:

PSMA proactively took up this matter to address the problem of acute huge at about 5000MW power shortfall being faced by the country, much adversely affecting the national economy. Sugar industry holds potentials to provide 2400MW of power. Each sugar mills is capable to generate surplus power by using bagasse. Power to be available during critical
winter months, the time of sugar industry’s working, while hydle power goes to the lowest ebb, shall prove exceptionally convenient.

PSMA is perusing with the authorities to give a standard tariff to the sugar mills so that co-generation could be started immediately.

FINANCING FACILITATION:

Due to seasonal short term functioning, sugar industry’s financial position stays vulnerable, as sugar industry has to procure the raw material in 140 days and hold the finished product for 360 days. Thus creating huge mismatch of financial resources.

SUSTAINABLE FUTURE:

Sugar is an energy food item. Its sustainable availability is essential. Besides, there must be a firm foothold in exports, rather succumb, time and again, to imports. Four by-products rollout of sugar production and their 40 derivatives offer huge potentials to exploit. For this, increase in sugar production is prerequisite and essentially to be by intensive crop pattern, pursuit and practices. This can be achieved on having a seed evolving and breeding research institute. Proposal of PSMA for setting up such an institute at Gharo in Sindh and release of cess funds need Government attention and prompt approval, so that this vital project is taken in hand at the earliest.

PERSPECTIVE 2008-09
NATIONAL:

As expected, since sugarcane production trend is of cyclic tendency and it has not been broken as yet, it is essential that steady sustainable growth in sugarcane and sugar production is attained. Sugarcane crop is poised to be lower during the ensuring 2008-09 season. The first estimate of the crop size drawn officially portrays the position to bring distinctly lower sugarcane and similarly sugar output.

The provincial governments have increased minimum sugarcane price for 2008-09 season. In view of this increase and short crop size, economies of scale will operate but unfavorably. This odd situation added by inflationary tendencies in the national economy will have a significant impact on cost of sugar production, bound to increase.

International sugar market, inherent part of the wider commodity markets, during the year 2007-08 witnessed volatile price trend. It was in backdrop of financial ‘tsunami’ gripping the United States of America and its spillover the global circuit. Currency values fluctuation carried a direct impact on commodity markets. Fear of recession rocked the boats of once considered durable strong economies, dictating terms on global business spectrum. The last quarter of October–December 2008 is likely to give some insight to the future trend in sugar prices.

End stock estimate despite lower production and higher consumption during the last quarter of 2007-08 is indicated to be larger than the corresponding period of the preceding two years.

Sugar consumption in Pakistan is likely to go up slightly in 2008-09 to 4.7 (4.6) million tonnes, due to population growth of 2%, against GDP growth lower to 4.2(6.08)%. Rising prices by falling output is the reason for it. Sugar consumption in Asia may rise by 3.2% in 2008-09 to 74.200 million tonnes. Off take by the largest sugar consumer India may go up by 4.4 (7.1)% at lower pace, to 25.5 (24.5) million tonnes.

Two preceding sugar years were of record breaking in crop size creating sugar surplus. It will be on back foot in 2008-09. However, it can not create supply slide and rise in prices as stocks hang higher by bumper crops of 2006-07-08 years. However, hedge fund operations may create artificial instability. Fundamentals of supply-demand-stock seem to keep cool.

At the conclusion of this report, I would like to register my appreciation for the co-operations extended by the Central Executive Committee, Zonal Chairmen and Secretariat staff, with my good wishes to the new elected management of PSMA.