Analysis of Pakistan Industries SUGAR INDUSTRY

Presented by: Hashim Mamsa

Sameer Rahman
Syed Usamah Ahmed Date: 20/04/2013 Presented to: Mr. Shujahat Mubarak Topic: Sugar Industry

Table of Contents
Introduction .................................................................................................................................................. 2 Overview: ...................................................................................................................................................... 3 Competitive analysis: .................................................................................................................................... 3 India: ......................................................................................................................................................... 4 Political Elites ................................................................................................................................................ 5 Government Role .......................................................................................................................................... 5 Average Pricing ............................................................................................................................................. 6 Porters five forces model ............................................................................................................................ 11 Threat of new entrants ........................................................................................................................... 11 Threat of substitutes ............................................................................................................................... 13 Bargaining Power of Suppliers ................................................................................................................ 13 Bargaining Power of Buyers .................................................................................................................... 14 Rivalry among competitors ..................................................................................................................... 14 Sugar crisis .................................................................................................................................................. 15 Diamond Model .......................................................................................................................................... 16 Factor Conditions .................................................................................................................................... 16 Demand Conditions ................................................................................................................................ 20 Related firms ........................................................................................................................................... 21 Production Policy .................................................................................................................................... 23 PROBLEMS PERTAINING IN THE SUGAR INDUSTRY .................................................................................... 24 RECOMMENDATIONS AND CONCLUSION................................................................................................... 27

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Introduction
An Introduction to Pakistans Sugar Industry Pakistan is the 5th largest country in the world in terms of area under sugar cane cultivation, 11th by production and 60th in; yield. Sugarcane is the primary raw material for the production of sugar. Since independence, the area under cultivation has increased more rapidly than any other major crop. It is one of the major crops in Pakistan cultivated over an area of around one million hectares. The sugar industry in Pakistan is the 2nd largest agro based industry comprising 81 sugar mills with annual crushing capacity of over 6.1 million tones. Sugarcane farming and sugar manufacturing contribute significantly to the national exchequer in the form of various taxes and levies. Sugar manufacturing and its by-products have contributed significantly towards the foreign exchange resources through import substitution Sugarcane is among the most valuable crops of Pakistan. It is a source of raw material for entire sugar industry. Production efficiency has become an important determinant for the future of this industry in Pakistan due to declining competitiveness of the domestic sugar industry because of increasing imports, and high costs of production. The Development and adoption of new production technologies can improve productive efficiency. But at present it is difficult due to limited income and credit to the out growers. Therefore, this industry can improve the efficiency of its operations using currently available technology. Measures of productivity, its growth and sources for the sugar industry of Pakistan play a significant role for policy development. Productivity growth can be decomposed into three components: technical change, scale effects, and changes in the degree of technical efficiency.

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Overview:

Source: Pakistan Sugar Mills Association Annual Report 2010-2011

Competitive analysis:
Pakistan sugar industry is recognized as uncompetitive in nature, mainly due to low sugarcane yield per hectare and low content of sucrose ranging between 7-9 percent. On the other side, growers claimed that sugar industry is not uncompetitive and blamed that sugar crisis is artificially created by the mill owners by not lifting available sugarcane with a twin motives of keeping sugarcane prices below the support prices and reaping abnormal profits. Farmers monopolies access to state institutions that mediate between farmers and sugar mills. Many rich farmers are routinely involved in corrupt activity aimed at improving their access to lucrative marketing channels. Farmers frequently complain about the technical faults within the sugar mills that delay the processing of sugarcane. They are also frustrated by the long waits to deliver cane and subsequent increase the amount in that factory deducts from sugarcane price for drying of the crop in transit.

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Country Australia Egypt Brazil USA Colombia Mexico India Pakistan World Avg

CaneYield (T/ha) Sugar Recovery (%) Sugar Yield (t/ha) 100.4 13.8 13.85 110.8 11.5 12.74 68.4 14.5 9.91 80.2 11.7 9.38 80.5 11.5 9.26 79.5 11.6 9.22 66.9 9.9 6.64 49.0 9.2 3.54 64.4 10.6 6.82 Cane Sugar Yield of World, source: http://www.pakboi.gov.pk/pdf/Sugar%20.pdf

According to the Table, Egypt is the highest in terms of sugarcane yield per hector which is 110.8 tons per hector while the Pakistan is the lowest in terms of this yield. As far as the sugar recovery is concerned, Brazil has the highest percentage and again Pakistan is at the lowest. If we analyze the sugar yield from sugarcane, Australia has the highest sugar yield in these countries and again Pakistan is at the lowest with 3.54 tons per hector. It indicates that in Pakistan, improvements can be made in terms of sugarcane yield, sugar recovery and sugar yield.

India:
India is the largest consumer of sugar in the world and Indian sugar industry is the 2nd largest agroindustry located in the rural India. With 453 operating sugar mills in different parts of the country, Indian sugar industry has been a focal point for socio-economic development in the rural areas. About 50 million sugarcane farmers and a large number of agricultural laborers are involved in sugarcane cultivation and ancillary activities, constituting 7.5% of the rural population. Besides the industry provides employment to about 2 million skilled/semi skilled workers and others mostly from the rural areas. The industry not only generates power for its own requirement but surplus power for export to the grid based on byproduct bagasse. It also produces ethanol, an eco-friendly and renewable energy for blending with petrol. The average cane crushing capacity in India, Brazil and Thailand is given below:

Country Thailand Brazil India

Avg. Capacity (TCD) 10300 9200 3500

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Political Elites
Sugar is the second largest Agro-industry in Pakistan. 1980 is the initiating year of sugar crises, when sugar mills were sanctioned through political connections and state owned banks extended money to finance the industry. After nearly 10 years, 1990, those loans were written off. Hence this economic issue was made political. The fact remains there that 50% of the sugar producers in Pakistan are influential politicians from all major parties. Adeel Malik, sugar and politics. News, 5 September 2009. Majority of the politicians in Pakistan are the owners of sugar mills. Almost every mill Board has a member in National Assembly. So in the policy making process these sugar barons influence the policies through their say in parliament. Sugar requirements are fulfilled by domestic production, import through Trading Corporation of Pakistan and private imports. Mill owners and their representatives always act in planned and organized way to ruin the public interest. Timely import of sugar might have averted the crises. It is crystal clear fact that the mill owners played important role in delaying the import of sugar. According to a report Pakistan sugar annual 2009 published by U S department of agriculture, production forecasted 3.56 million metric tons, consumption 4.35 million metric tons and imports 730,000 metric tones. But the import of sugar was cancelled which was a wrong step. Farrukh Saleem, Sugar daddies. News, 30 August 2009. Stoppage of import of sugar plays a decisive role in the creation of crises. Later on sugar was imported on a higher price and such higher priced imported sugar provided a plea to the local suppliers to sell sugar on skyrocketed rates. Such things lead the Government to face current problems and still Federal Government finds itself unable to provide the public relief due to the powerful lobby of the sugar mill owners with the power benches of parliament.

Government Role
About a decade old issue, but Government has failed to adopt measures to tackle this issue. Mismanagement and lack of planning has plunged us into this crisis. Due to prolonged drought and heat stress in 1999-2001, there was decrease in productivity. This acute shortage of water resulted in 65% reduction in productivity. ). Although we are facing acute shortage of water, no attention has been paid to the construction of dams. Government is also involved in exporting sugar at low prices and at the same time importing it at higher prices. There is lack of planning at governmental level that they even could not strike a balance between imports and exports. Undue intervention of government is also responsible for sugar price hike. Government issues export permits to mills. When mill owners start exporting sugar then it became difficult to cater the needs of sugar at National level. After exporting sugar at relatively low prices, government import it at relatively higher prices in case of shortage. Government tries to control retail distribution below the market price through utility stores. This results in hoarding and shortage of sugar. Production, consumption and demand plays an important role as

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production depends on support prices. Government has failed to strike a balance between demand and supply, so ultimate result is sugar price hike. Then is no coordination between Federal and Provincial government, the reason being is different party government in centre and Punjab. Provincial government has been accusing Federal of late importing sugar. Government has failed to maintain a proper price structure, which is one cause of price hike. The price structure is that out of the sale price 35% of cost goes to farmers and 24% to the Government in taxes 21% to millers with 9 and 6% to whole seller and retailers respectively. Thats why most of farmers switch from sugar to other profitable crops.

Average Pricing

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Porters five forces model

Threat of new entrants
Capital outlay required to set up a sugar mill is as significant as compare to other industries. Also sugar being moderately capital intensive industry, there are no momentous recurring capital expenditure which may serve as an entry barrier. Inconsistent policies in the industry also make it unattractive for the new entrants. The low standard of infrastructure also makes it unattractive for new entrants. Over dependence on the agriculture sector also leaves little scope for economies of scale. However government regulations along with lobbying by powerful existing players may create barriers and make it difficult for new entrants to enter the industry.

The competition in an industry will not be so higher, as sugar is essential commodity; but the Government is encouraging & taking more interest in developing & increasing the number of Sugar Company. Another reason for government encouragement is because when a mill is established the surrounding rural areas also get developed. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These are typically: 1) Economies of scale (minimum size requirements for profitable operations), 2) High initial investments and fixed costs, 3) Scarcity of important resources, e.g. qualified expert staff 4) Access to raw materials is controlled by existing players, 5) Distribution channels are controlled by existing players, 6) Existing players have close customer relations, e.g. from long-term service contracts.

Other associated risks and challenges include: 1. Sugar price fluctuation Sugar prices like most commodities primarily depend on supply and demand. International prices also play an important role in determining local prices. In addition, the cost of production especially cane price affects sugar prices as well. It has been noted that international and domestic sugar prices have continued to remain extremely volatile which doesnt allow one to forecast future revenue streams. 2. Plant efficiency during the season Proper maintenance during the off-season enables the plant to run smoothly during the season. Since the season is for a limited duration, a major breakdown could affect financial results for the entire year.

3. Cyclical nature of sugarcane crop

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Change in the size of the sugarcane crop can have an effect on the financial results of a company. Sugarcane crop sizes vary depending on the weather, water availability and pricing of competitive crops. Sugarcane disease can have a detrimental effect on both farmer and factory yields. 4. Correlation between Cane and Sugar prices Cane prices have a minimum support price and are determined through a free market mechanism. Whereas sugar prices though supposedly free market are met with resistance when prices co-relate with cane prices. Thus government intervention cab be a benefit and yet a challenge for the industry. 5. Law and Order Sugar mills are typically located in rural areas which are more susceptible to Law and Order situation. The movement of our cane team as well as farming team in specific areas can also be difficult and restricted. 6. Inflation Inflation affects the business due to unprecedented cost increase. It also reduces the consumer buying power. Pakistan has been going through near double digit inflation since the last 5 years. 7. Sugarcane Varieties With the passage of time, the sucrose recovery from traditional varieties is reducing. The need of the time is to bring new varieties with high sucrose recovery to mitigate the reduction and improve our overall sugar production. Therefore, research and development need to be given preferred attention for continuous improvement. This will give long term sustainability to the industry. Currently many varieties are being sown without any formal attestation from recognized research institutes which is a risk. 8. Regulatory Environment Changes in taxation regime (Sales Tax/Excise duty) and Provincial levies (Road Cess/Market Committee fee) also affect the sentiments of sugar market and cause abrupt change in supply demand cycle. Similarly control on foreign sugar trade also deprives the country availing timely opportunities for exports in case of surplus production and imports during shortage. The procurement or sales policy of the TCP which is now a major player in the sugar market can be a challenge.

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Threat of substitutes
There are very few substitutes available. Gur and artificial sweeteners are considered as close substitutes. While market for artificial sweeteners is quite tiny and Gur being popular majorly in KPK and tribal areas, these do not pose any serious threat. Honey is another substitute but an expensive one. It would be safe to say that there are no major threats to the industry when it comes to substitutes. A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. Similarly to the threat of new entrants, the treat of substitutes is determined by factors like: 1) Current trends- this is most important because the sugar industry do not have any trend for consumption of sugar. 2) The substitute products like gur & khandasri which are substitutes of sugar. But there is no such impact of substitutes which create a threat to sugar industry.

Bargaining Power of Suppliers

Bargaining power of supplier is high even though the raw material used in the production is homogenous. Unions and landlords producing sugar cane are powerful and may increase prices of the raw materials. Since the demand for sugarcane is high as it is the main raw material in the sugar industry, sugar mills have to comply. Now mill owners are buying land to grow sugarcane so theyre not exploited in terms of prices by the suppliers. However they fail to produce in large volumes and since the production is seasonal, timely delivery of raw materials is very important. The price of raw-materials (sugarcane) is fixed by the Government. The suppliers are farmers and the total of suppliers is very high. So, there is no such bargaining power of suppliers in sugar industry. Furthermore, sugar mill owners give advances to growers in the form of cash, fertilizers etc so that the best yield may be harvested in due time of the crushing season.

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Bargaining Power of Buyers

Since sugar is an essential and basic commodity the bargaining power of buyers is very low. Another factor is lack of substitutes or if any they are expensive. Sugar mills can transfer the cost they have incurred while bargaining with the suppliers by charging high prices to consumers. The bargaining power of customers determines how much customers can impose pressure on margins and volumes. But in sugar industry the price of sugar is fixed by the Government. So, there is no bargaining power of customers in sugar industry. Another important factor to consider is that there are no close substitutes for sugar available. Those which are do not provide the same energy levels to humans and artificial sweeteners are harmful to health. Also we must consider that the average person uses around 5-10 Kgs of sugar a month, which suggests that even a Rs. 10 spike in prices will only cause a change of 100 in the consumer spending per month for a household.

Rivalry among competitors

This force describes the intensity of competition between existing players (companies) in an industry... Competition between existing players is likely to be high when: 1) There are many players of about the same size- the sugar industry have many players almost many are of same size, so there exist the competition between the existing players. 2) There is not much differentiation between players and their commodities, but there is much price competition- the commodity sugar is similar but the quality of are different so the prices followed according to the size & quality ex: large size, medium size or small size. There is no much competition between competitors as sugar is controlled commodity &the prices, the quantity of sugar supplied to market is fixed by the Government. The Pakistan Sugar Mill Association is a governing body that regulates all the member mills. It sees that all matters are dealt with diplomatically and that no single firm suffers. There is less rivalry seen in the industry as entry barriers are high and existing firms share almost equal proportion of market share in the industry. So no singular mill can dominate the market for sugar.

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Sugar crisis
High sugar prices would put the government in tremendous pressure and would create political problems. In the past, a number of governments faced public criticism due to increase in sugar prices. The price of sugar has reached Rs78 per Kg in open market and it is expected that in the coming weeks the price would touch Rs85-90 per Kg level, as the country would be facing shortage of 300,000 metric tonnes. However, the government circles in general and Trading Corporation of Pakistan (TCP) in particular are not ready to accept the ground reality that there will be shortage of sugar and they are insisting that we have surplus stocks. The expected sugar shortage is only because of negligence of the concerned departments who failed to stop smuggling of sugar to Afghanistan and Iran, where sugar price is in excess of Rs100 per Kg. TCP and Ministry of Industries are insisting that there are enough stocks of sugar in the country and there will be no shortage.

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Diamond Model
Factor Conditions
The factor conditions for sugar industry can be classified into 3 categories 1. Labor 2. Raw Materials 3. Capital (Machinery) Labor compromises of 3 sub categories Management (Supervisors) Labor i) Permanent workers ii) Seasonal workers Engineers i) Mechanical Engineers ii) Chemical Engineers

The management in sugar industry lacks sound HR policies needed for the efficiency in this particular industry. There are no policies for improving the workers operating in the mill and are just designed to follow a fix a pattern of procedures. There is also lack of expertise in strategy making as to how to save cost in production and utilize the wastage caused by the production of sugar. Even though sugars by products are being utilized but the yield of these by products can increase if there is a proper strategy laid out by the management to control this factor. Labor in sugar industry is classified into permanent workers and seasonal workers. Permanent workers work for the whole year round while the seasonal workers work during the crushing season only. The labor required is unskilled as most of the process of sugar making is automated and the labor is used to unload the sugarcane on to the belts and monitor the process. Since the sugar mills are situated in rural areas the labor force are hired from the nearby villages. This factor reduces the rate of turnover and provides for cheap labor force to work in the sugar mills. The labors are from nearby colonies hence the labor force moves from generation to generation meaning the fathers would bring their child into this line of work once they are old enough. Engineers consist of mechanical engineers and chemical engineers. Mechanical engineers are responsible for the maintenance of the machines and ensure the machines are functioning properly. They are also responsible for installing of the new machinery and equipment and their testing. Chemical engineers are responsible for the processes involved in making the sugar. They run frequent tests from the sample obtained to ensure sound quality and higher yields. Agriculture graduates are hired to work as engineers in the sugar industry and these are agriculture graduates are available in numbers.

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The list of agriculture universities in Pakistan are as follows:

Faculty of Agriculture, Bahauddin Zakariya University, Multan Balochistan Agriculture College, Quetta Faculty of Agriculture, Gomal University University College of Agriculture and Environmental sciences, Islamia University, Bahawalpur Khyber Pakhtunkhwa Agriculture University, Peshawar Lasbela University of Agriculture, Water and Marine Sciences, Othal, Lasbela District Pir Mehr Ali Shah, Arid Agriculture University, Rawalpindi, Punjab Sindh Agriculture University, Tando Jam University College of Agriculture, Rawalakot Dera Ghazi Khan College of Agriculture, University of Agriculture, Faisalabad Department of Agriculture and Agribusiness Management, University of Karachi, Karachi University of Poonch Rawalakot, Azad Kashmir University College of Agriculture, University of Sargodha Institute of Agricultural Sciences, University of the Punjab, Lahore Zulfikar Ali Bhutto Agriculture College, Dokri

Raw Material Pakistan has a suitable climate and soil for the production of sugarcane however the yield per acre has been significantly low due to the following factors: Improper selection of land, Improper preparation of land Conventional planting methods, Late planting, Moisture stress at critical stages of crop growth, Poor management of ratoon crop Early and late harvesting, Defective varieties, Pests, disease and weeds, Credit shortage, Rapid/Unplanned increase in sugarcane acreage in unsuitable areas of

Solutions to these problems are: As Grower is the main key factor which can help to increase the sugarcane production from the field. In Pakistan most of the growers dont know the proper method or procedure of sugarcane cultivation. So thats why the cane produced is of no good quality and we have less cane and sugar recovery. So it is recommended that there should be organizations who should guide the growers to increase their production. Here are some of the steps that if taken properly can improve the sugar cane production.

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Improvement in Production Technology Land Preparation Sugarcane is a deep-rooted crop and proper land preparation plays an important role in the development of cane root system, and achieving optimal growth of the crop. Land should be prepared by deep ploughing at least after every two years. The soil should be disked. It is very important that well-rotten farmyard manure (FYM) should be applied a month prior to land preparation. Press mud from the sugar industry is another excellent source of organic matter and nutrients. Green manuring may also serve the purpose. Soil in the prepared field should be friable and well worked so that full germination takes place and later on plants grow without any inhibiting barriers (compact sub-soil layer). Planting time: The selection of an appropriate planting method and schedule greatly influences crop growth, maturity, and yield. Since low temperature and moisture stress are detrimental to germination and subsequent establishment, the planting season in subtropical regions is preferably spring. But in areas where winter is severe enough to restrict growth or even kill sugarcane, planting material may only be available in autumn, thus necessitating pre-winter planting. In tropical regions, particularly where irrigation is not practiced, a sufficiently moist season should be selected for planting and establishment. Varieties: Use healthy seed of improved varieties of sugarcane. This can increase cane yield from 20 to 25 per cent.

Fertilizer application According to rough estimate the farmers are using one fourth of chemical fertilizer against the sugarcane crop requirements due to non-availability as well as high cost of the same. Apart from this haphazard use of fertilizer brings no fruit and therefore the farmers do not get the crops to their expectations. The very important job getting the soil tested before the use of any particular fertilizer is not practiced in our country. As mentioned earlier fertilizer use in Pakistan is imbalanced, inadequate and improper. Most of the cane growers in the country use only nitrogenous fertilizers while others use an imbalanced combination of N and P. Use of K is almost neglected in cane crop. It is very important to use proper doses of balanced fertilizers to exploit the maximum yield potential of cane crop. 18 | P a g e

Weed control Good land preparation is a key factor in controlling weeds. For proper weed control, Gesapax combi (80 WP) may be applied @ 1.4 kg per acre in medium textured soils and @ 1.8 kg per acre in heavy soils in 100 to 120 litres of water. The weedicide should be used with the advice of the technical experts. Integrated Pest Management For Sugarcane: Insect pests play an important role in reducing the sugarcane yield. The most serious insect pests are sugarcane borers, Pyrilla, and whitefly. In some areas mealy bug, black bug and army worm are also causing damage. These losses in sugarcane can only be minimized by proper protection of the cane crop from insect pests with scientifically designed IPM Programme throughout the year. Pesticides are applied as and when needed in combination with cultural practices, resistant varieties and introduction and conservation of natural enemies. Pesticides will continue to play an important role in the IPM Programme. The primary difference, however, is that these products will be used selectively and judiciously. Control of diseases For controlling sugarcane diseases, use healthy seed which is disease-free and preferably plant diseaseresistant varieties. Treat the seed with fungicide/s before planting. The diseased plants from the field should be removed and either buried or burnt. Seed may be treated with hot water at 520 C for 30 minutes. The practice of heat therapy is becoming more common at seed-production centers to rid seed of ratoon stunting disease, grassy shoot, and leaf scale. This treatment consists of submerging the cane setts in water heated to 520 C for two hours. In the hot air treatment or the moist hot air treatment, whole cane stalks are treated at 540 C for eight and four hours, respectively. The most hot air treatment is preferred, however, because the hot air treatment injures the buds which ultimately reduce germination. When planting a new crop, it is essential to use seed from samples of the best patches of cane crop, free of disease and insect pests. Disease-free, good-quality seed increases yield by 10-15%. Ratoon crop management If the ratoon crop is properly managed, it could give higher returns than the plant crop because of savings in certain field operations and inputs. It is important to remember that ratoon crop requires 30

to 40 per cent higher fertilizers than the plant crop. The end of January to beginning of March is the best time to keep the crop for ratooning. Cane from the fields to be kept for ratoon should be cut
at ground level.

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Harvesting Stop irrigation 25 to 30 days before the harvest of crop and do not leave the harvested crop for long in the field. In case it has to be kept for a prolonged period, it should be covered with trash. Different varieties planted may be harvested according to their maturity. Harvesting of early maturing varieties may be started during November, mid season varieties during December and the late maturing varieties during January. The crop harvested during February-March gives good ratoon crop.

Capital The sugar industry have switched from using obsolete machinery to new modern machinery in order to increase efficiency and reduce the production cost of sugar. The machinery however, is not imported but bought locally from Gujranwala and Lahore.

Demand Conditions
Demand conditions can be categorized in to domestic market and international market. Domestic Market - Since sugar is an essential and basic commodity the bargaining power of buyers is very low. Another factor is lack of substitutes or if any they are expensive. Sugar mills can transfer the cost they have incurred while bargaining with the suppliers by charging high prices to consumers. The bargaining power of customers determines how much customers can impose pressure on margins and volumes. But in sugar industry the price of sugar is fixed by the Government. So, there is no bargaining power of customers in sugar industry. Another important factor to consider is that there are no close substitutes for sugar available. Those which are do not provide the same energy levels to humans and artificial sweeteners are harmful to health. Also we must consider that the average person uses around 5-10 Kgs of sugar a month, which suggests that even a Rs. 10 spike in prices will only cause a change of 100 in the consumer spending per month for a household. International Market Pakistan exports sugar mostly to African & South Asian countries. Sugar is usually imported when there is a shortage internationally in any country. Pakistans sugar is competitive in terms of both price and quality. The importing countries conduct international surveys which compromises of 2 parts i) Quality Supervision ii) Loading Supervision. In quality supervision the sugar is tested by an international agency to check the quality and loading supervision ensures that the sugar being imported is properly loaded as per the requirements.

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Related firms
Forward: MDF (Medium density Fiber) Bagasse which is a byproduct of sugar is used in making MDF also know as chip boards. However, the industry for MDF is weak in Pakistan. Mud Can be used as fertilizers but Pakistan has a weak industry due to lack of awareness. Molasses Molasses used to be exported before but now it is made into ethanol and exported. Ethanol has a weak domestic market. Transportation High transportation cost due to poor infrastructure in rural areas. Government also levies taxes from the sugar mills for the development of infrastructure. International Market - Pakistan exports sugar mostly to African & South Asian countries. Sugar is usually imported when there is a shortage internationally in any country. Pakistans sugar is competitive in terms of both price and quality. Energy Some of the sugar mills generate enough electricity to provide to the villages nearby and hence have immense potential to generate electricity on a large scale.

Backward: Fertilizers Sugar mills provide subsidized fertilizers to the farmers in order to ensure that their crop yield is given to them and not any other sugar mill. Packaging Sugar used to packed in paper bags earlier and have no moved towards polythene bags which have a strong domestic industry. Raw Material - Pakistan has a suitable climate and soil for the production of sugarcane however the yield per acre has been significantly low due to the factors already mentioned above. Firm Structure, strategy & rivalry The firm structure in sugar industry is mostly owned by individual groups and there are no sugar companies run by any MNC. United sugar was once owned by an MNC from Belgium however it was not able to cope with the volatility in the sugar market. Thatta sugar mill was once state run by the government of Pakistan. The sugar mills in Pakistan have started moving towards the automation of the operating mills in order to increase efficiency but these companies are not highlighting the major problem of low crop yield and the immense energy potential that the byproducts of sugar (bagasse) have. It is said that cogeneration potential of the sugar sector stands at 21 | P a g e

3000 MW which may be a little exaggeration. By comparison, Indian sugar sector is about 5 times larger than Pakistan's and they estimate their potential at 5000 MW of which only 1666 MW has been achieved by now. In that comparison, Pakistan potential comes out to be 1000 MW. My own estimates are of 2000 MW based on a cane crushing of 50 million tons per year. It should be reasonable to expect a realizable potential of 1000 MW and if coal is added, as we shall see later, this may go up to 2000 MW. The most important thing that has to be kept in view is that sugar sector has the dynamism, organizational and institutional capacity and the financial muscle to undertake capital intensive ventures of this nature. All sugar mills have experience of power production, albeit for their own self use. So if a reasonable framework is developed, it is reasonable to expect that progress would come by. The Rivalry among existing companies is low since prices are regulated by the government and it is a homogenous product hence there can be no product differentiation. The only basis of competition is to reduce the cost of production and be efficient and that is the reason why sugar industry is moving towards automation.

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Production Policy
The Federal government generally does not procure sugarcane, but it authorizes provincial governments to fix respective sugarcane prices in consultation with representatives of both the sugar industry and farmer organizations. For MY 2010/11, none of the cane producing states; Punjab and Sindh, increased sugarcane prices. To assist sugar processors in the economic downturn, the Ministry of Food and Agriculture (MINFA) and the Ministry of Industries and Production are in consultation with the Pakistan Sugar Mills Association (PSMA) to finds ways of making sugar operations run more efficiently. The sugar industry is also searching for opportunities to develop value added by-products, reducing costs, and promoting cultivation of high sucrose cane. The GOP is also considering PSMAs proposal to use sugarcane in electricity production.

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PROBLEMS PERTAINING IN THE SUGAR INDUSTRY Working Capital

Unfortunately, Pakistans sugar industry is mostly owned by political personalities and majority of the sugar mills were setup with the help of DFIs normally trapped with the working capital crisis. Consequently, some of the mills have already been closed down and it is feared that some more sick units will also close down. A collapse of sugar mill is a loss of national assets, reduction in the sales tax revenue and an increase in unemployment. It is the prime responsibility of entrepreneurs to arrange for working capital required for smooth start and uninterrupted production during a season. A minimum cash of Rs. 40 million is required to rotate the crushing and production cycle in the first month of a season. Setting up a project is one thing, which in most cases, is financed by DFIs, but availability of working capital is the life blood for a project. Some companies prefer to use the option of borrowed funds both from commercial banks and by way of using suppliers. credit, which does not help the company in long-term survival of the project. Availability of the working capital plays a critical role.

Fixation of Sugarcane Support Price and System of Payment of Quality Premium

Sugarcane growers are negatively motivated for earning more money based on price structure ignoring the importance of adopting recent technologies for increasing yield of sugarcane per hectare thus hampering the national economy. Late maturing and better quality cane is being produced of unapproved variety. Sugarcane growers interested in growing good quality cane are being discouraged due to existing payment procedure of quality premium based on average recovery of bad and good cane both thus benefiting those who are growing bad quality cane of unapproved varieties at the cost of good grower planting good quality cane.

Middlemen making Pakistani Sugar Costlier

Those sugar mills who were in operation in the previous season are also striving hard for working capital finance for purchase of cane and initial startup expenses for the cane crushing. Some of the sugar mills are forced to make agreements with the middlemen who would purchase sugarcane from the growers at the rate of Rs.36 per 40 kg on commission basis and sell it out at the rate of Rs.40 to Rs. 55 to sugar mills. Such middlemen also receive commission from cane growers and pay to poor growers lesser than the support price. This situation would definitely increase the ex-factory cost of sugar production, which may be avoided if sugar mills are provided initial working capital finance by the commercial banks. It happened for the first time in the history of Pakistan that sugar an essential commodity for human consumption as well as pharmaceutical products and other commercial usages is sold at very exorbitant rates ranging from Rs. 27 to Rs. 40 per kilogram. As compared to this, the retail price of sugar in India is not more than Rs. 18 per kilogram.

Gur manufacturing a cause of tax revenue losses

One of the major reasons for the shortfall in sugar production is Gur manufacturing. The demand of Gur has increased for the last five years due to influx of Afghan refugees who use Gur for meeting their nutritious requirement. But it should be noted that whitened Gur is injurious to the health of human body due to use of unapproved chemicals to change the colour of Gur to whitening.
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De-zoning
Since de-zoning, the incentive of sugar mills to direct resources for development of good variety cane in its area has almost diminished because the growers who have 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. It is also one of the causes of sickness of sugar industry. Large interest of the growers of the area and those 19 associated with such project, which collapses due to non-availability of cane is badly affected. The following table is a survey carried out by the Technology Transfer Institute, Tandojam, Pakistan during 2008-09 to analyze sugar industry competitiveness in Pakistan.

Low Percentage of Sugarcane Utilization by the Mills

PSMA has recorded the historical fact that during the low sugarcane production years the percentage of sugarcane supply to the mills drop drastically by as much as 20% and vice versa, during the high crop years supplies to the mills is in high proportion. This phenomenon always misleads the sugar production estimates, and so is the case with MINFALs estimate that are devoid of facts i.e., requirement of seed and fodder depends on a basic required quantity and not on a certain fixed percentage i.e. usually taken as 15% of the total crop. Such assumption does not work, as the 15% of the crop size 63 million ton and of the crop size 42 million ton brings a large difference. Hence assuming 80% utilization of sugarcane by mills is optimistic and is designed to blame mills showing low production. Furthermore, during low sugarcane harvest, farmers supply sugarcane filled with trash, as a result, around 0.10% of the sugarcane recovery is consumed by the trash and burned in the boilers, this year; around 35,000 ton of sugar lost in trash has been burnt by the mills.

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The following tabulated data shows the historical trend of the low utilization of cane by the mills during the low crop size years connected to un-favorable weather cycle. 1995- 19962000- 2004- 20052009Years 96 97 1999-00 01 05 06 2008-09 10Est. Plantation Area Ha 963,100 964,500 1,009,800 960,000 966,600 906,980 1,029,400 951,500 Sugarcane Prod. 45.23 42.00 42.00 43.59 43.53 44.29 50.05 48.62 Mils Cane Utilization 28.15 27.35 28.98 29.41 32.10 30.10 33.73 34.03 % age of Utilization 62.24 65.13 69.00 67.47 73.74 67.94 67.41 70.00 Low Sugar Production Years On the contrary during the sugarcane high production years much higher percentage of the sugarcane is supplied to the sugar mills For instance:Years 1997-98 1998-99 2001-02 2002-03 2003-04 2006-07 2007-08 Plantation Area Ha 1,056.200 1,155,000 999,700 1,099,700 1,074,700 1,029,000 1,241,300 Sugarcane Prod. 53.10 55.19 48.04 52.05 53.80 54.87 63.92 Mils Cane utilization 41.06 42.99 36.71 41.79 43.66 40.48 52.78 % age of Utilization 77.32 77.90 76.33 80.28 81.15 73.78 82.54

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RECOMMENDATIONS AND CONCLUSION

The Government should seriously think about this critical problem and make remedial measures along with those suggested below to avert the crisis in future. Balanced policy for cultivation of four major cash crop wheat, cotton, rice and sugar. An incentive should be provided to the growers for cultivation of sugarcane on 1.150 million hectares. Indian variety of seed which has totally degenerated and diseased affect the production yield should be avoided. Instead the government should import high yielding varieties of sugarcane from other countries for averting any sugar crisis in the future. The government should make a publicity campaign for minimizing use of Gur so that a substantial quantity of cane becomes available for crushing and making white spoon sugar. The State Bank of Pakistan should earmark a sum of about Rs. 2.7 billion and direct all commercial banks to finance working capital requirement of operating sugar mills in every season through proper and vigilant loaning methods. Sales Tax @ 15% is fixed on ex-factory price of Rs. 14 per kilo in case of supplies to registered person. A move to charge the sales tax on the price other than the fixed price of Rs.14/= will further create problem for the consumers whose purchasing power is already very low due to industrial sluggishness and stagnant economy. It is suggested that sales tax should not be charged on market price. The Government should impose restrictions on excess production of Gur equivalent to 12.5% of the expected cane production of 40.614 million tons from the current year crop 2000=2001 to reduce the shortage of sugar in the country as well as earn sales tax revenue of more than one billion Rupees. The support prices of sugarcane cannot work at all through the free market forces due to the simple reason that retail price of sugar is controlled by the Government and further, the support prices of other cash crops such as wheat, rice and cotton are also fixed by the Government. Two economic theories (1) principle of supply20 and demand governed by market forces and (2) Government control of retail price cannot work together and will further widen the sugar crisis in the country. The provincial Governments should fix the support price of Rs.40 per 40 kg for purchase of sugarcane at the factory gate as well as at the cane purchase centers under section 16 of the Sugar Factories Control Act1.

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