Slight increase predicted in sugarcane production, yet challenges loom for upcoming season

January 09, 2024 (MLN): Sugarcane production is expected to increase slightly to around 83.5 million metric tons for the upcoming season 2023-24, compared to the 82.40m metric tons achieved in 2022-23 due to a slight recovery in plant areas affected by the flood in Sindh in the last season.

Sindh Abadgars Sugar Mills Limited (PSX: SASML), in its transmission report, has highlighted the potential challenges that are to be witnessed by the sugar industry in the upcoming season.

The government of Sindh has set a minimum support price of Rs425 per 40 kgs compared to Rs3,021- per 40 kgs in the preceding crushing season, exponentially increasing it by 41% citing a reason worked out after analyzing the cost/volume relationship.

Consequently, the sharp spike in sugarcane prices will have a direct negative impact on the cash flow of the sugar industry.

Since more bank borrowing is required for payment to growers during the ongoing crushing season, ultimately the financial cost will dent the profitability of the sugar industry.

If the prices of sugar do not align with the cost of sugarcane, there is a likelihood that the sugar industry will incur colossal losses, posing a potential threat to its survival.

As such the ensuing financial year is more challenging given the very low and discounted selling price of sugar on the local market which is now about Rs130 kg being now the lowest in the world when compared with the international price of sugar.

As it is widely speculated, that there will be less production of sugar in the country which may prompt the government to import sugar at a price of approximately Rs250 per kg.

Therefore, SASML urged the government to allow the market to regulate the price of sugar to curb smuggling in the market, ultimately leading to savings in foreign exchange if the country is not in a position to spend on the commodity in which it is self-sufficient.

Moreover, the six-month Kibor at 22.57% remains a constant thorn for the industry given unabated inflation and the weakening of the Pakistani Rupee (PKR) against the dollar.

This trend seems to continue and no respite is foreseen in the near term. Consequently, the markup on short-team borrowing will be significantly higher during the ongoing crushing season.

"We reiterate that the government will resolve all issues of the industry at the earliest especially regulation of the sugar price commercially for which to ensure a fair and transparent policy that would support the industry," the company added in its outlook.

There is a need of the hour to allow a spike in the price of sugar to cater to unprecedented inflation and markup costs.

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