Opinion: The absurdity of Pakistan’s sugar market

Why do we subsidize a surplus water-intensive crop we export

ASSAD AHMAD– Over the coming weeks, the business of sugar will come alive across much of this great land. Thousands of mighty convoys will rumble along country roads, lugging sugarcane from farms to mills. Barons and lords alike will count their fortunes and their blessings, as they harvest and process their heavily watered prize. The sweet smell of commerce will fill the air, as the nation’s mills will work to produce the five odd million tons of sugar we will consume, mostly in the form of processed beverages, sweets, candy, and cakes (the food processing industry accounts for over 60% of domestic sugar demand).

But the mills won’t stop there. Thanks to the government’s guaranteed minimum price (or, support price) policies, our farmers will likely harvest enough sugarcane to produce 6.5 million tons of refined sugar. This will be nearly 30% higher than domestic demand. And the mills will buy and process all that cane, knowing that when they end up with surplus stocks, their cousins in the government won’t leave them holding the bag (85 billion rupees of extra sugar would need a very big bag indeed). They will figure out a way, as they usually do, for the mills to sell whatever they make, at a profit.

This would be no different to what transpired last season, when, thanks to a cane surplus, our mills produced one million tons more sugar than domestic demand. The excess wasn’t released domestically, where it would have led to a price-crash—a windfall for local consumers. Instead, it was retained by the mills. And there the sugar waited patiently, knowingly, until the government fell in line. Last month, the cabinet approved a 10 rupee per kilogram subsidy for the uneconomical export of 500,000 tons of sugar from mill stocks.

Comparable subsidies were granted the season before that. In every year since 2012, we have harvested more sugarcane, and produced more sugar, than we used, with exports ranging from 200,000 to around 1,000,000 tons a season. In some years, this was economical (without accounting for realistic water use costs), and in the years that it wasn’t, the mills were typically subsidized to export. And throughout this period, the support price for sugarcane wasn’t reduced; in fact, it was raised.

What’s wrong with that, one might ask. We make sure our farmers are supported to grow an important crop. Because we set the price of the mills’ raw material, we should assure them a reasonable profit. Right?

Oh, where does one begin.

Sugarcane is literally the definition of a thirsty crop. While estimates differ, and, of course, they depend on several variables, it is fair to say that a farm in the Indus basin, growing sugarcane (which is a year-round crop) uses at least 25% and up to 100% more irrigation water than a farm that grows wheat and cotton (half-yearly crops).

The differences are even more dramatic for farmers who grow wheat and fodder (rice can be as thirsty as sugarcane, but isn’t a year-round crop, and isn’t aggressively supported with a minimum price). Most farmers who can count, know this, and there is no shortage of research on this subject for sceptics to google. And of course, unless you spent the last twenty years asleep in a field of cane, you will know that Pakistan is severely water stressed. What you may not know, however, is that more than 80% of our water use is agricultural. So you can turn off the faucet while you brush your teeth all you like but know this: your savings count for less than a drop in the ocean of farm water usage. Real solutions to our water woes must focus on our country’s farms, where absurd policy is rife.

The World Bank has been raising the alarm, highlighting the frighteningly high water-intensity of our national income. The State Bank’s recent annual report devoted a section to the coming water crisis, and its policy recommendations focused on reforming agricultural water supply and pricing. Specifically, with respect to sugar, across the border, in Maharashtra, there is actually some debate over banning sugarcane cultivation altogether. And while smart people around the world are making smart noises, what are our policy makers up to?

First, they are paying farmers more and more to grow more and more of the thirstiest crop available. Then, we are ending up with more than we need to sweeten our candy. And finally, we are paying mills to export it, because, most of the time, no one will buy it at the price they want to sell it (except Pakistani consumers, who have no choice but to pay above global prices, thanks to stiff import restrictions). Like water for chocolate, Pakistan style.

This is not necessarily an indictment of the mills (although there may be many other reasons to indict the mills—just ask the competition commission). They are responding rationally to the incentives they have been given. The export of sugar is uneconomical not because they are terribly bad at making it, but mainly because of the high, government-set, raw material price.

Neither is this a criticism of our country’s farmers. They too, are responding rationally to their incentives. First, there is a cane price that has not responded to a glut for at least five years. Second, our water prices are negligible, in the form of abiana unrelated to volumetric consumption. In this environment, they have, of course, worked to increase yields, and also steadily increased the area under sugarcane cultivation.

If there is an indictment here, it must be directed at the policy apparatus of our federation and provinces, across the political divide. Through a combination of inertia, conflicts of interest, political fear, and no small measure of vision-less incompetence, they have been giving our water away for a song. And we have been paying for the privilege.

Which brings us back to the upcoming sugar crushing season, when the announcement of a minimum purchase price is due any day. In a world that was not absurd, before announcing it, the state’s representatives would ensure that everyone understood the answers to two key questions.

First, rather than quibble over where the price should be set, answer this: Why is sugarcane considered critical enough to have a mandated support price at all? If the state were to answer this question honestly, it would be hard-pressed to justify it. Ensuring the domestic supply of wheat, the source of nearly 70% of the calories we consume, through a generous support price, is a crucial aspect of food security policy. Ensuring the supply of refined white poison, which we export, at the cost of our water security, is not.

But can the state answer the question honestly? It is no secret that the most powerful politicians in this country are also its biggest sugar mill owners. Can they pursue a policy that jeopardizes their raw material supply in the long run? And can politicians who don’t own sugar mills afford to alienate the thousands of farmers who will be less than pleased with the removal of their support price? This is a situation where our politicians will have to graduate to becoming leaders, making tough and unpopular decisions for our long run good.

The second question is broader. How does the state plan to incorporate the cost of scarce water supplies into decision-making throughout the agricultural sector? How will it make a farmer decide between growing fodder, or growing rice or sugarcane, and take water usage into account? Here, the recent report by the State Bank is instructive, advocating for market-based approaches and higher water-consumption charges. This must be the foundation of a water policy to answer these questions (unbelievably, we don’t have a water policy). Again, starting to charge farmers higher, consumption-based rates for water, is not going to be an easy political sell, and will have to be done gradually.

These are difficult asks, and will require an immense amount of political will and vision, coupled with efforts to educate the public about the need for major changes. But the danger of doing nothing is becoming clearer and clearer, as our water table sinks further and further. The absurdity of our sugar market is a symptom of deep-rooted flaws in our policy-making. Deep-rooted flaws, require deep cuts to fix.

The writer is a Lahore-based columnist and consultant. He has served as a director in the global markets division of a major European investment bank.

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