SHARE OF SUGAR INDUSTRIES IN PAKISTAN FOREIGN TRADE Sugarcane shortage was foreseen last year in this meeting which was estimated to about 9.0 million tonne lower than 2003-04 crop, a fall of almost 20%. Beside the shortage of the crop the sugar industry faced the pressure for the early start of crushing. The Mills in Sindh zone were being forced to start as early as the 1st week of Oct04, while the sugarcane supply was no where in sight. Twice negotiated, the crushing date was finally set for the 1st of November04. Ironically only few mills in Sindh zone could hardly continue beyond end February even with the intermittent stoppages, crushing almost 5.0 million tonne less sugarcane than the year 200304 i.e. 40% lower. The anticipated shortfall in the sugarcane supply encouraged the sugarcane growers to demand higher price for their product. This trend immediately started to reflect in the price of sugar in the market. The retail price of sugar had hardly moved out of its lowest ebb of three years in a row of depressed prices, when Government expressed its concern and in an effort to arrest the upward move announced import of Raw as well as the Refined Sugar. Simultaneous to this the International Sugar Prices started escalating due to a major crop failure in India for the second year in a row. This encouraged the millers to procure sugarcane at almost double the sugarcane price to break the cartel formed by the sugarcane growers. With the situation still slipping out of hand, Government allowed duty free import of refined and raw sugar. At the first announcement the import of raw sugar, which was blocked by few importers, was now released to the millers. This was done too late resulting in the most sugar mills who wanted to refine raw sugar decided not to import raw sugar as the crushing season was coming to an end. To bring the sugar prices to a desirable level the ECC in its subsequent meetings took further steps including steady release of sugar from TCP stocks through Utility Stores and doing away with the withholding tax on the import of sugar. Further to the imports by traders TCP was directed to call for international tender and procure additional 200,000 tonne sugar to supplement the sugar already floated in the market by the importers. In an effort to attempt importing cheaper sugar the sugar import ban imposed on the Indian sugar was also relaxed despite PSMAs advise regarding its high sulphur content which could be hazardous for health. Till the preparation of this report import of 622,040 tonne of refined sugar and (partly utilized) 282,200 tonne of raw sugar has taken place. Sugar retail price upward surge has subsided as shown in the following table. Month Jan'2005 Feb'2005 Mar'2005 April'2005 May'2005 June'2005 July'2005 Av. Retail Price 24.35 27.00 26.33 26.27 26.15 26.60 28.54

Aug'2005 27.85 Sept.'2005 26.65 Due to the seasonal effects and the shortage of the crop, the shortfall in the sugar production is a common and regular phenomenon. After every 2-3 years consecutive good harvests our crops falls under the low production cycle that remains effective for an year or two depending on the return of the heavy rains. Unmoved by the rising sugarcane prices and sensitive to the rising sugar prices, the attitude of the Government representatives was aggressive and scornful towards the sugar industry. Ignoring the ground realities it was rather easy to blame the sugar industry for the price hike and the short production. Ignoring the past data, the crop condition, the lack of research and development work and the seasonal effects on the crop, the Government officials stuck to their assumed high yields and the desired results. Even after the early end of the crushing the sugarcane production, estimates were inflated by the Agriculture Ministry and during meetings with PSMA the industry was blamed by design for the following deeds. 1. Sugar mills utilized a low percentage of sugarcane. 2. Sugar mills must have crushed more sugarcane, which is not on record. 3. Sugar prices were increased through cartel. On the basis of the above assumptions the image of the sugar industry was regularly tarnished through media campaign, uncalled for threats were given through the media and cases were initiated against sugar mills. While reviewing 2004-05 we shall also discuss the facts on the above-mentioned accusations. The year under review 2004-05: As forecasted last year, the sugarcane & sugar production ended well below the projected domestic consumption and the milling capacity. As per data provided by the MINFAL sugarcane plantation Area was reduced to 966.6 Ha in 2004-05 against 1074.0 Ha. for 2003-04 crop. Low Crop Yield & Causes Beside a noticeable reduction of 10% in the crop area, weather conditions i.e. winter and monsoon rains, irrigation water supply, both have been below normal due to which a lower yield was expected. Though reports from the MINFAL claim the sugarcane yield for 2004-05 crop as high as 49.0 tonne / Ha, PSMA crop estimate does not indicate yield exceeding 45.0 tonne per ha. The exaggerated sugarcane production adjusted upwards after the crushing campaign caused a lot of controversies and misleading basis for the sugar production 2004-05. Seasonal changes always had dynamic effects particularly on the sugarcane crop that has been observed in the past. On the contrary insufficient rains and low water supply had severe adverse effects on the crop. 1995-96, 1996-97, 1999-00, 2000-01 & 2004-05 fell under the low cycle of unfavourable weather conditions, which can be matched with the meteorological reports. Sugarcane requires a huge quantity of water for its survival. It is cultivated on irrigated land and requires 60-80 acre-inches of water from plantation to maturity. Water shortage severely affects the quality of sugarcane crop. According to statistics provided by IRSA (Indus River Authority)

the canal head withdrawals were decreased by 10.3% for Kharif and 26.7% for Rabi 2004-05. The short supply in the irrigation system shows acute shortage in Punjab and Sindh provinces. (Economic Survey of Pakistan 2004-05) Pakistan has a well-known irrigation system that provides security to the cropping intensity and diversity. The system is dependent on rainfall, snow and reservoirs etc. Our monsoon and winter rains supplement the irrigation system and it contributes directly and indirectly by about 15 MAF annually. The sugarcane crop in Pakistan alone draws almost 10 million-acre foot of water, which is about 10% of the total water requirement for different crops in the country. Sugarcane crop 2004-05 faced shortage of the irrigation water as well as the low rainfall. Based on the last 25 years data, the rainfall in winter and monsoon is established as Normal when the rainfall measures 70 mm in winter and 137 mm in monsoon as a benchmark. Keeping this in mind let me inform you that the rains feeding 2004-05 sugarcane crop were as low as 42mm in the winter and 86mm in the monsoon season, this makes the total rainfall 38.5% lower than normal. With the above information along the low canal withdrawal report, no further reason is required to believe the fact for the low yield of sugarcane 2004-05 which is estimated by PSMA to as low as 45.0 tonne/ha. Low Percentage of Utilization The sugarcane production, yield & percentage of utilization by the mills during the above mentioned years are tabulated hereunder for a quick glance. Low Sugar Production Years You will observe that the plantation area during the abovementioned years was not much different and the utilization of sugarcane by the mills during these low yield years ranged 62% to 68%. So assuming 80% utilization during 2004-05 is merely a wishful thinking. You will also observe that during the low sugarcane production years the percentage (%) of other utilizations of sugarcane i.e. (seed, fodder, gur etc) remained high. The diversion towards Gur production has always been more attractive during the short supply of sugarcane. High prices of Gur with no sale tax have encouraged the production of Gur. Surprisingly the market Gur price remained 30% higher than the refined sugar. Sugar Production:( 2004-05) Sugarcane plantation area decrease together with the low yield caused 25% reduction in sugar production in comparison to 2003-04, which was a record production of 4.0 million tonne. Pakistan ranks 5th in the sugarcane plantation acreage and has 15th position in the sugar production because of the low yield and recovery percentage. The statistic reveal that after high production years a low production year is always bound to follow with a severe blow in the absence of a significant improvement activities in the irrigation system and research and development work. During this year 32.10 million tonne of sugarcane was utilized by the mills to produce 2.92 million tonne of cane sugar at the recovery rate of 9.10 % Beet sugar production was also down by 50% with a production of only 11,400 tonne. A limited quantity of raw sugar was utilized by the mills to supplement the sugar production by 182,300 tonne. Thus the total production stood at 3.12 million tonne, the availability of sugar raised to 4.55 million tonne with the inclusion of carryover stock and import of 622,000 tonnes of refined sugar resulting in a carryover stock of 577,650 Tonne.

The sugarcane supply to the mills in Punjab was down by about 6.0 million tonne resulting in 21.28 % less sugar than 2003-04. Sugar Mills in Sindh faced the severe impact of the sugarcane shortage inspite of record utilization of crop to 84.6%. the sugarcane utilization was down by 5.0 million tonne in comparison to 2003-04 and thus sugar production from cane was 38.2% lower than the previous year. NWFP mills faced the traditional diversion to gur making. Though the cultivation area and the sugarcane production indicated minor improvement, the utilization by mills remained under 30%. The production of sugar was down by 31.33%. The overall zone-wise scenario is presented hereunder for a quick assessment. Domestic Consumption Domestic consumption as well as the per capita consumption has been on the rise during the past three years. Consumption that was once 10.70 KG per capita in 1987-88 has alarmingly increased to over 25kg per capita. Past two years consumption shows that at least 200,000 tonne of extra market supply was made over and above the projected estimates, part of it was accredited to the Afghan Refugees returning home. Based on the available supply / sale data, the domestic consumption for the year 2005-06 would not be any less than 4.0 million tonne. The unexpected sudden increase in the consumption that made an obvious impact on the supply is one of the causes contributing the bullish trend in the sugar market. Other Events of the Year Ministry of Industries and Production on the directive of the President and the Prime Minister of Pakistan initiated to formulate policies to add value to the sugarcane by-products such as bagasse and molasses. PSMA was actively represented and presented the initial project summaries in the two separate committees constituted to prepare a project study for: i. Formulation of National Policy on Indigenous Fuel Ethanol / Gasohol production & use programme in Pakistan. ii. National Policy for Power co-generation by the sugar industry. Rigorous PSMA inputs and discussions were made during the separate meetings called for the above projects by the Ministry of Industries & Production during the past seven months. Sugar industry was always blamed in the past for the lack of initiative on the use of the byproducts as been practiced in the rest of the World. The industry having initiated nearly ten ethanol-manufacturing projects with huge investment was glad to see Government support on the use of ethanol. During several meetings on the formulation of blending ethanol with petrol and the required legislation for this affect, the sugar industry observed a very tough resistance from the oil companies whose vested interests were involved. They took a strong plea on the basis of already surplus petrol available in the country. To derail the formulation of policy they went to the extent of a special presentation to the Prime Minister in the absence of the representatives of Ethanol Manufacturers. Efforts are now being made by the PSMA to put the project back on track. In the mean-time due to high production and export of Ethanol from Pakistan, the European Union has levied high import duties and is considering Anti-Dumping Measures as well, against which the Government of Pakistan has been approached for prompt action.

Similarly a number of meetings took place at the Ministry of Industries for the formulation of National Policy for power co-generation by the sugar Industry. In this case representatives of WAPDA, NEPRA, Sui Northern and Sui Southern participated. For a regular supply of Electricity the basic requisite of Power Co-generation by sugar mills was the supply of gas during the period when the mills are non-operative. The representatives of the gas companies came-up with their own problems of shortage of gas. After detailed deliberations during the meetings chaired by the Minister for Industries certain condition and criterion were laid out for the initial start of the setup for power co-generation by the mills. The basic criteria for consideration included the crushing capacity, self-sufficiency in bagasse, the financial performance of the mill and the most important, the location of the mills in relation to the access distance from the main gas supply line. The recommendations were to be forwarded to the Inter-ministerial Committee for evaluation purposes. During March2005 PSMA delegation held meetings with the Chairman CBR and discussed the various issues of sales tax, further sales tax, audit procedures and other problems in documentation. CBR also explained the general complains they had regarding the low sales tax collection in 2003-04 which was due to the low sugar prices and elimination of additional sales tax. The chairman CBR was informed that low collection of sales tax was not due to tax evasion as been stated in the print media referring to the CBR reports. Production 2005-06 Initial reports indicate a further decrease in the plantation area for the sugarcane. Against 967,000 Ha last year the plantation is reduced by 7% to 900,000 Ha. PSMA estimates slightly higher cultivation as the farmers are being encouraged by the high price of the sugarcane. Water supply has been in abundance and is likely to continue during the maturity season of sugarcane. High winter rains snow and moderate monsoon has assured an above normal irrigation supply for the rest of the year which may result a higher yield of 50-51 tonne per Hectare. Sugar production 2005-06 is not foreseen any better than the last year though diversion for fodder consumption may be at its lowest. Sugar production is foreseen at 3.0 million tonne, against the estimated consumption of 4.0 million tonne. Carry forward stocks at mills including TCPs reserved stock stands at 577,650 tonne while the import is still in progress for utilization in the month of October and November. With the balance stock of 577,650 tonne on 30th Sept05, the estimated production 2005-06, the availability of sugar would be around 3.6 million tonne, which needs to be supplemented with the in-time import and refining of raw sugar to a considerable quantity. Research and Development The soaring sugar prices in the domestic and global market with expanding demand is a wakeup call for the industry and the Government. There is fresh warning and demand for research, development and innovation today more than ever, unless the country is let to future consumer market. It is high time to develop and extend the applied research services to the growers and the mills for the enhancement of sustainable production of sugarcane and its products. Comprehensive and extensively involved sugarcane varietal research with specific targets are urgently required with special emphasis on the sugarcane varieties of less water dependency. To increase the per acre yield there is also need to adopt new means and methods for water

conservancy and controlled irrigation system like drip and sprinkle irrigation. The proposal for implementation and extensive use of drip irrigation system was put up in the meetings with the Ministry of Food in the presence of scientists & irrigation experts called in on the occasion. As indicated earlier the per hectare sugar production in Pakistan is 4.5 tonne, where as in our neighbourhood India has achieved 50% higher production i.e. 6.5 tonne, Thailand at 6 tonne, Egypt at 12.5, Brazil at 10 and above all Australia at 14 tonne are the examples in front of us that we need to follow to achieve at-least self sufficiency based on the economic growth of the farmers and the millers both. Continued depressed prices of sugarcane and sugar will never lead to any growth vital for an agro-based industry. Economic survival of the growers and the millers should never be forced to depend on the short supply of the commodities. Whenever interest of the growers and the miller is sacrificed to offer favour to the consumer the option is short lived and the commodity ultimately suffers. International Scenario Sugar production 2005-06 is indicated as deficit for over 2.0 million tonne. The world consumption is projected to 151.3 million tonne against the production estimated of 149.1 million tonne. Though various agencies have minor difference for the shortfall forecast has alerted the international market with visible activity. The annual growth in consumption is catching up with the production and nearly half the deficit is due to low production forecast in Pakistan. Brazils sugarcane and sugar continues playing a leading roll in the world. It is expecting a jump of 35% in the sugarcane production in the next five years from 420 million tonne to 565 million tonne. The ethanol production is also expected to move along from 16.7 billion litters to 26.5 billion litters for which 50 new ethanol and sugar refineries are under construction. Brazil will continue dominating the sugar exports in the world as the sugar production in 2005-06 is indicated 6% higher than 2004-05. Brazil has another credit of reaching 63% of the light vehicles market share using flexi fuel and pure ethanol cars besides exporting ethanol to many countries. India alone buys around 1.0 billion liters of ethanol from Brazil. China is expecting increase in the demand as per capita sugar consumption is moving to 8.0 kg from 7.0 kg few years back. With its sugar production expected to 9.6 million tonne China will be looking for import of over 1.0 million tonne. Sugar reforms proposed to the European Union, which were formally presented by the European Commission in July, demands 39% cut over guaranteed sugar prices in two years. This could bring significant reduction in the domestic production and export availability of sugar. CONCLUSIONS

After three consecutive high sugarcane production years 2004-05 was a low production year with a shortfall of at-least 10.0 million tonne in comparison to 2003-04. Sugar production was low by 1.0 million tonne in comparison to 4.0 million tonne produced in 2003-04 The shortfall was well with in the PSMA estimate discussed in this meeting last year.

Reduction in sugarcane plantation and low yield due to the below normal rains & water supply resulted in high sugarcane prices, high sugar production cost and consequently a bullish trend in the sugar market beyond expectation further encouraged by the climbing international prices.

Mishandling of the sugarcane crises by the Government triggered further rise in the sugar prices. By over stating the magnitude of the crises market players were taking advantage. As suggested by PSMA an import of 500,000 tonne of raw sugar should have been allowed to supplement the shortfall and at the same time keep the sugarcane prices down to an affordable limit. It is observed that misleading data, subsequent ECC decisions for unlimited imports and zero rated duty did not bring the desirable results as the reports on the increase in the sugarcane prices was totally neglected which was the major factors for the start of the sugar crises. The decisions at higher level are always made adversely to the data & advice conveyed by PSMA during the sugar crises, both, in the case of surplus and in shortfall. Instead of taking corrective measures the industry faces a punitive tune and threatening decisions. Due to shrinkage in the plantation area the 2005-06 crop is expected around 45.0 million tonne and the sugar production may also remain under 3.0 million tonne. The consumption of sugar has dramatically increased with in the last two years and thus the consumption in 2005-06 could be more or less 4.0 million tonne. To fill the gap, import of at-least 700,000 tonne raw sugar is unavoidable which should be made at the early stages to supplement the sugar demand and keep the sugarcane prices at a level to promote the sugarcane crop meet the future demand. In addition to the delay in the legislation for blending of ethanol in petrol the distilleries are faced with the loss of their preferential access to the European Union alcohol market. Import duty plus Anti-Dumping Measures by the European Union is seen as a serious threat to the ethanol manufacturers in Pakistan. The High P.O.L. prices can only be countered by introducing Alternate / Renewable source of energy. The Government of Pakistan should immediately announce its policy on co-generation using bagasse as fuel. Dedicated zones must be announced to give incentives to the sugar mills to develop good varieties of cane increasing the growers yield and the mills sugar recovery. The price of sugarcane must be linked with the quality of sugarcane by giving incentives to the growers to grow high yielding and high recovery cane. Similarly growers growing the low yielding and recovery cane must be penalized by the cane pricing system. Government should take up extensive research and development work with participation of PSMA to achieve higher yield, recovery and development of less water dependent varieties. All out efforts be made to make this valuable crop viable.

2005-06 The Year Under Review Production

Unaware of the severe effects of the frost in the coming months, PSMA was optimistic in forecasting sugar production of just over 3.0 million tonnes against the domestic consumption estimated of 3.9 million tonnes. Continuation of the last years short production, the frost attack further deteriorated the situation. As usual, the sugarcane price immediately sparked the situation, with the result that sugar market started reflecting the production cost, which had always been a sensitive issue for the Government. Right in this meeting last year, a million tonne shortage of sugar was forecasted based on the official information for production of sugarcane crop. The need for the import of raw sugar was also ascertained to supplement the production. The severe frost attack on sugarcane crop in Northern Punjab and NWFP further disturbed the supply of quality sugarcane. Beside the above loss the lucrative business of Gur making flourished as the demand was high at home and Afghanistan seriously hurting the milling sector. Overall situation remained below average as 30.00 million tonnes of sugarcane was utilized by the mills to produce 2.58 million tonne of sugar, supplemented by 372,500 tonnes refined from raw sugar and a marginal addition of only 8,700 tonnes from beet. Thus the total production was registered at 2.964 million tonnes, apparently below 50% of the production capacity of the mills, thus Pakistan experienced second crop disaster in a row. Sugar Price Structure & Crises The Government of Pakistan supports the cane production by setting a market support price announced before or after planting. The local demand is always above the minimum price fixed as a result mills renegotiate the procurement price. Provincial Governments in 2005/2006 increased the official cane purchase price for 40 kilograms to Rs 45/- for Punjab & NWFP and Rs. 48/- for Sindh. Sindh Government later revised this price to Rs. 60/-. However, during the entire season the price fixation remained a volatile issue between the growers and the millers. The growers refused to sell the cane at the official price and millers in some areas of Punjab and Sindh were forced to delay the start of crushing season. The milling sector ended up bearing the bulk of the risk when the circumstances changed. While the support price varies significantly when there is shortfall during a particular harvest, there is no similar level of adjustment when the harvest is good and cane is in abundant supply. With intermittent stoppages the seasons cane price averaged to Rs. 80/- in Punjab and up to Rs. 95/- in Sindh province resulting in a significant rise in the production cost to above Rs. 32/- to 34/- per kg without addition of 15% sale tax which was immediately reflected in the market sentiments and retail sugar market shot up to Rs. 38/- to Rs. 40/-. The unprecedented increase in the minimum support price in the province of Sindh triggered the situation in the whole country. Increase of sugarcane price twice in the same crushing season by about 50% encouraged the growers to further dictate cane prices and cartel supplies. As a result of the situation the sugar market immediately started reflecting the trend in sugar prices, the sugar production was also termed as deficit by about a million tonne. The disturbance in the sugar market was immediately noticed by the Government concerned authorities who labeled the millers as profiteers involved in cartel under declaring the sugarcane procurement and production of sugar.

The Government was candidly informed of the situation and the deficit of sugar for the season to arrange import of the required quantity of the sugar, who beside allowing duty free import of raw and refined sugar approved import of about 850,000 tonnes of sugar by TCP for sale and distribution through Government managed outlets, with an obvious objective of subsidizing the sale to bring the market prices down. The unlimited import of refined sugar to the tune of 1.5 million tonne along 0.5 million tonnes of raw sugar already refined has now converted the 1.0 million tonnes deficit year into a million tonne surplus year. The situation thus developed hampered the economy of all concerned and the over sensitiveness has resulted the year ending with large stocks held by TCP, Mills and by the traders who imported sugar at high price. Ironically the international prices started subsiding as soon as Pakistan had enough of selfdumped sugar. The sugar crises during the year caused the industry face the blame game with all Government agencies actively involved. In this connection few actions are being mentioned without going in to details.

Monopoly Control Authority charged the sugar mills for cartel of sugar and registered cases against mills for their sale being below the desired assumed percentage by the MCA. National Accountability Bureau was asked to investigate corrupt practices leading to the sugar crises in the country. The investigation was later withdrawn. CBR appointed custom-armed staff at the mills gates to supervise and monitor procurement of sugarcane and the sale of sugar looking for tax evasion and sale to unregistered buyers. The monitoring was withdrawn with the end of crushing. State bank of Pakistan imposed 50% margin restrictions for financing against the security of sugar stock and instructed for immediate adjustment of all advances against the security of sugar stock. The final date for adjustment was later extended from 31st July to 31st Oct2006.

After the hectic meetings at PSMA and with the concerned Government officials some of the restrictions have eased down. Government intervention through bringing down the import duties, subsidizing the supplies through its outlets and blaming the industry hardly matters without taking necessary measures to support production of a better crop in a competitive environment. Past experience and record shows that the sugar price has been moving up and down inversely proportional to the quantum of the sugarcane and same was the affect on the price of Gur where no factories are involved, contains impurities and remains tax free. The graph hereunder clearly indicates that the factor controlling the sugar price is the quantum of sugarcane, the main raw material. Sugar production totally dependent on the sugarcane production has always reflected the weak link in the overall value chain.Pakistan Sugar Mills Association Sugarcane Production & Av. Sugar Retail Price Years Sugarcane Av. Retail Sugar Av. Gur Retail Price

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Production 38,058,900 44,427,000 47,168,400 45,229,700 41,998,400 53,104,200 55,191,100 42,000,000 43,620,000 48,041,000 52,049,000 53,800,000 43,533,000 44,312,000

Price 12.62 12.80 14.36 17.86 21.44 18.75 19.63 22.85 26.73 21.97 20.12 19.26 25.34 35.00

10.03 10.49 11.07 14.54 18.67 18.91 17.19 19.81 26.31 23.31 20.45 19.79 23.98 30.26

OUTLOOK 2006-2007 Per data provided by the MINFAL there is 14% increase in the plantation area of sugarcane. Cane production had dropped significantly in the past two years in a row limited to 44 million tonnes. The increase in the plantation area along promising weather conditions i.e. supply of irrigation water & rains sugarcane production is expected to over 50 million tonne which ensures increase in the sugar production to about 3.5 million tonnes. Though cane production in 2006-07 shows better prospects yet the utilization of sugar mills will remain around 50% capacity provided 40.0 million tonnes supply is made to the mills. Government of Punjab has already announced indicative minimum price of sugarcane as Rs.60/40 kg, which means that delivered price at the mill-gate with the inclusion of transportation, cess and price competition would be around Rs.70/40kg on average. Sindh Government has also recently announced Rs. 67/40kg and NWFP Rs. 65/40kg. With such enhanced sugarcane price the production cost of sugar cannot be less than Rs.34/kg ex mill i.e. retail price expected to a minimum Rs.38/kg. Confusion prevails over the price structure due to the following reasons, which have been brought to the attention of Government of Pakistan at a higher level I. 2005-06 a deficit year of sugar production by one million tonne ended with a surplus of over one million tonnes. II. Crushing season 2006-07 starts with a carryover stock of 1.3 million tonnes. III. 2006-07 producing 3.5 million tonnes will have availability of 4.8 million tonnes against a consumption of 3.9 million tonnes. IV. Major stock held at the end 2005-06 belongs to TCP which Government intends to off load at a highly subsidize rate to the market threatening the domestic sugar price. V. International sugar market prices are down where as Government of Pakistan has yet to clampdown any import duties to stop further inflow.

Whereas the industry bears a strong feeling to pay better sugarcane prices to ensure a better sugarcane crop in future there is confusion as how to maintain a balance in the minimum indicative price and a matching production cost. Government has been approached at several occasions explaining these issues of utmost importance. Despite these hurdles government of Sindh has already issued directions for an early start of crushing on 1st Oct2006. As a regular phenomena every year millers are pressurized for an early start of the crushing with the plea to vacate some portion of the land from sugarcane for the sowing of wheat, whereas the millers resists to accept the plea for the reason that the sugarcane quality at the early season is of very low recovery, the fact is very well known to the all concerned Ministries and the growers as well who irrespective of the facts force for the early start as the payment system of sugarcane has still continued based on the weight and not the quality. Per our estimates early start of the sugar mills with the low recovery is causing a loss of minimum 150,000 tonnes of sugar costing mills billion of rupees, which is a phenomenal loss to the industry and the country. Overlooking the technical and the positive aspects in favour of the late start, the main cause can be spelled out as the row between the Growers and the Millers over the price hike and the nonavailability of the crop. Shortage and the immaturity of the crop in the beginning normally results the early closure of the season at the higher recovery period. An adverse step for achieving the optimum production. International Scenario: - The leading analysts had been changing stance on the world sugar production and consumption and as the year went by the deficit gap was closing. On average remained within 148-150 million tonnes against the consumption of 149-151 million tonnes. The continued deficit and imbalance in demand and supply kept the prices significantly stronger during the year (See table below) While the high white sugar prices deterred its import more and more attention was diverted towards the raw sugar, which prompted a higher premium and soon the import of raw sugar for processing was no more profitable. Instead the exporters who could export both the refined as well as raw started giving preference to exporting refined sugar. Brazil and Thailand both switched to more attracted option by increasing the export of more white sugar. Later the Sugar prices in the International market started sliding down due to big global supply and soft demand. The prices sunk by almost 25% since July06 after touching US$ 490/- a tonne down to US$ 370/- in Sept06. The prices started ascending in Nov05 right at the beginning of the season 2005-06 from US $ 288/-, apparently over Speculations and sudden large demand. London white sugar featured peak in July when it hit record US$ 498/- a tonne. Raw sugar had its 25 years peak price of 20.46 US cents/lb at New York market in February with the news of drought in many sugar producing countries. The prices rose and tumbled sharply during the year. 2006-07 Global production estimates for the year 2006-07 shows a surplus of about 3.0 million tonnes against a similar amount of deficit last year (2005-06). The global stock/consumption ratio which has always played a pivotal role over the global sugar prices will remain low and could cause price rise in the future year for the 10% estimated production fall in Australia due to smut and the ongoing drought in the Central and South Brazil,

which might reduce the seasons output as well as cane supply for sugar production. India is expecting its record sugar production of over 23.0 million tonne in the year and is about to lift ban on export of at-least 2.0 million tonne out of its surplus, unhappy over the fall of international prices now matching its production cost. EU sugar output is expected to fall from 22.0 million tonne down to 16.5 million tonne in 200607 due to E.U sugar regime reforms suggesting price slashing. Presently the world production is expected around 2.5 million tonne higher than the consumption for the first time since 2002-03. Consumption and stock ratio is expected to grow nominally to about 38.5% having significant affect on the prices. Conclusions

Sugarcane plantation area (906,988 Ha) for the year 2005-06 was the lowest in the past decade after 1992-93 when the plantation area was 885,000 Ha Low plantation area coupled with the frost attack resulted in low yield, the sugarcane production was limited to only 43.5 million tonnes Sugar production for the year remained below average producing 2.58 million tonne of cane sugar supplemented by refining of raw sugar and a small quantity of beet sugar. The total output remained within 2.964 million tonnes i.e. 50% of the production capacity For millers & growers both, the year was the second crop disaster in a row. Low sugarcane production increased the demand and the high cane price caused the sugar production cost to a record high. Duty free import of unlimited raw and refined sugar was allowed to fill the gap and bring the domestic prices under control. By the end of the year 1,581,000 tonnes of refined sugar and 454,000 tonnes of raw sugar has been imported. Such a large quantity import had significant effect on the international prices while the year was considered as global deficit. At the same time the year ended with a glut like condition. End September stock at mills were at around 445,400 tonne, at TCP godowns 660,000 and other importers holding about 200,000 tonnes, with further supply of 128,000 expected shortly by TCP. Domestic sugar falling price, release of stock by TCP at subsidize rate, duty free sugar import condition along SBP new financial restrictions jeopardized the start of new crushing season. After challenging meetings at the concerned ministries and SBP the Prime Minister of Pakistan was approached through a letter apprising him with the total scenario. Details were further discussed at the Federal secretaries meetings seeking stabilization of domestic sugarcane and sugar prices and fixing appropriate crushing dates practically possible.

Following the discussion between the secretaries committee of Government of Pakistan comprising Secretary MINFAL, Secretary Industries, Secretary Finance, and Secretary Commerce held on 3rd and 4th Oct.2006, the main points resolved were as under:

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006 while

Punjab & NWFP will start the crushing campaign after mid of Nov.2006

The minimum indicative price of sugarcane were approved as following ? Sindh Rs. 67/40kg ? Punjab Rs. 60/40kg ? NWFP Rs. 65/40kg Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that the banks provide financing to the sugar mills without undue and additional security margin conditions While it was agreed that TCP will continue to play its interventionist role to guard against escalation of sugar prices in the domestic market, the Government of Pakistan will take necessary steps to clamp measures to control & guard against disruptive dumping of imported sugar in the domestic market. Quality Premium applicable in Sindh was suspended for the season 2006-07. Further decision for its removal through the system of sugarcane payment on quality basis will be worked out for adoption throughout Pakistan. Last but not the least, it was decided that all issues pertaining to the sugar industry will be resolved by the Government in consultation with PSMA, and the Industry to ensure that the retail price in domestic market remains stable.

With the start of the new sugar year 2006-07 we hope that Government of Pakistan and the Provincial Governments will take extensive research and development work for the sugarcane crop with the participation of PSMA to develop better yield & recovery and improve the economics of sugarcane growers by increase in per acre yield while the industry will be more competitive in producing more sugar due to the increase in sugar recoveries to meet the national demand. 2006-07 The Year Under Review Production: Blessed with the favourable weather conditions, availability of irrigation water and 14 percent increase in the plantation area of sugarcane, the sugarcane production showed considerable positive affects. Out of 54.9 million tonnes of sugarcane, supply to the mills was limited to 40.47 million tonnes, i.e. 73.75%. The production of cane sugar as forecasted, ended at 3.52 million tonnes, nearly 1.0 million tonnes in excess to the production 2005-06 the deficit year. The carryover stock of 1.3 million tonnes, stored mainly at the TCP reserve stock and mill godowns made the total availability to 4.93 million tonnes with the inclusion of about 100,000 tonnes of imported sugar as against 1.6 million tonnes of sugar imported last year. Production estimates and availability against the domestic consumption remained exactly within the forecasted figures of PSMA discussed at this meeting last year. Though sugarcane crop promised better prospects, the recovery was marginally higher than the last years as 8.70 % against 8.60%. It could not achieve the sort of recovery of 9.15% and 9.10 % as in 2003-04 and 2004-05 that could make a significant affect on production. Unfortunately the sugar recovery, the most important factor has been ignored by the Government concerned Ministries particularly at the time of forcing the early start of crushing campaign each

year. Length of the crushing season is misquoted from an obsolete document the Sugar Factory Control Act ignoring the maturity of the crop. Due to the pressure from the Government and the growers, recovery losses in the month of October November could be as much as 2% followed by the height of a miserable joke, that at the period of achievement of high recovery the sugarcane crop is exhausted due to early start and thus a minimum of 250,000 tonnes of sugar is lost. Based on the fortnightly production reports of PSMA for the last five years, the recovery percentage in Punjab though accumulated, shows a vast variation that confirms the magnitude of the loss in production.

Periodic Recovery of Sugar Mills in Punjab (Accumulated) End Crushi ng 15-25 2002-03 15-25 Nov 6.97 7.71 8.06 8.29 8.47 Apr. 15-30 05-25 2003-04 7.50 8.37 8.72 8.94 9.09 Nov. Apr. 15-30 2004-05 1st. Nov. 6.88 7.87 8.41 8.67 8.91 8.96 March 15-30 2005-06 15-20 Nov 6.85 7.45 7.71 7.83 8.05 March. 10-15 2006-07 25-30 Nov 7.32 7.84 8.08 8.24 8.50 Apr. Although the domestic market was fully supplied with the commodity, small quantity import, leakages of sugar import through Afghan Transit Trade and its reported unauthorized sale within the territory of Pakistan, kept destabilizing the domestic market prices already under pressure. Years Start Crushing Nov 15th Dec 15th Jan 15th Feb 15th April 15th Sugar & Sugarcane Price Situation (2006-07) Before the start of the sugar year 2006-07 Prime Minister was apprised with the sugar crises and the reasons for the fluctuating price situation, who constituted Secretaries Committee to look into the affairs of the industry with an effort to bring an amicable and workable policy. The committee in its meeting held on 3rd & 4th Oct2006 agreed on the following few points for the crop year 2006-07.

Marc h 15th

All sugar mills in Sindh province will start crushing in the 1st week of Nov.2006, while Punjab & NWFP will start the crushing campaign after mid Nov.2006 The minimum indicative price of sugarcane were approved as following Sindh Rs. 67/40kg Punjab Rs. 60/40kg NWFP Rs. 65/40kg Government of Pakistan will issue directive to the State Bank of Pakistan to ensure that the banks provide financing to the sugar mills without undue and additional security margin conditions

While it was agreed that TCP will continue to play its interventionist role to guard against escalation of sugar prices in the domestic market, the Government of Pakistan will take necessary steps to clamp measures to control & guard against disruptive dumping of imported sugar in the domestic market. Quality Premium applicable in Sindh was suspended for the season 2006-07. Further decision for its removal through the system of sugarcane payment on quality basis will be worked out for adoption throughout Pakistan. Last but not the least, it was decided that all issues pertaining to the sugar industry will be resolved by the Government in consultation with PSMA, and the Industry to ensure that the retail price in domestic market remains stable. Since the agreement the whole year was spent negotiating and requesting the implementation of the decisions. Several breaches were notified to the concerned Ministries such as: TCP was to intervene against the escalating prices, but it continued intervention during falling prices causing further decline in the domestic market. Government of Pakistan did not take necessary measures to stop the import of sugar to the extent that Indian surplus sugar started pouring in Pakistan without consideration of quality control standards. No Provincial Notification was issued for the suspension of the quality premium in Sindh Province. Sugarcane payment system based on quality is yet to come to replace the system.

Sugar Retail Market Average Price (2006-07) Month Rs. / Kg October 32.87 November 33.15 December 30.86 January 31.55 February 30.74 March 30.63 April 30.25 May 29.85 June 28.38 July 29.20 August 30.03 September 29.77 Average 30.61 Domestic sugar prices remained continuously under pressure due to over supply whereas Government of Pakistan did not make any effort to stabilize the situation, even through the above noted pre-agreed steps. The millers had to pay the notified sugarcane prices in-spite the fact that market sugar prices did not match the announced sugarcane prices. The retail price structure is given hereunder for record and reference. With the gradual fall in the domestic market, the sugar price ended with a minimum loss of Rs. 4/- per kg against the price of Rs. 34/- per kg assumed as a base at the time of fixation of the sugarcane prices for the season, causing a

minimum loss of Rs. 12.0 billion to the mills and Rs. 4.0 billion to the ex-chequer through loss in Sale Tax. Sugar & Sugarcane Price Situation (2007-08) After continued negotiations, meetings were held at the Ministry of Industry & MINFAL and finally with the Secretaries Committee on 18th Sept2007 with fresh decision and promises. The committee was informed by PSMA representatives candidly about the non compliance in implementation of the decisions made last year and the losses faced by the Industry as a result. On presentation of a resume by the Secretary MINFAL the following was agreed upon as minuted by the Finance Division.

PSMA would ensure production of sugar by 1st week of November in Sindh and Punjab to raise the total availability of sugar to 0.7 to 0.8 million tonnes in the month of November 2007. The provinces will be requested not to change minimum price of sugarcane from the last year level i.e. Rs. 65/- per 40 kg in NWFP, Rs. 60/- per 40 kg in Punjab and Rs. 67/- per 40 kg in Sindh. MINFAL will take action in this regard. The Ministry of Commerce and MINFAL in consultation with PSQA and PSST will take steps that the quality and standard of sugar is checked. TCP will continue to off- load the old imported stock of sugar, and will purchase fresh sugar from PSMA to replace the old one. TCP will maintain strategic buffer stock of 400,000 tonnes. It will purchase 300,000 tonnes sugar from PSMA on open tender basis with a quantity of 25,000 tonnes each tender on weekly basis during the months of November, December 2007 and January 2008 by adding to the leftover strategic stock with TCP to make it total of 400,000 tonnes. The stock shall remain within the premises of sugar mills and will be replaced with fresh stock. These reserves will be increased to 500,000/ 550,000 tonnes, if needed, for which approval of the ECC will be sought. Sindh Government will be requested to defer implementation of Quality Premium in Sindh till a consensus on uniform formula is developed. MINFAL will take action. TCP will not import sugar if the price per Kg remains within Rs. 31/- per Kg in the market. Class B sugar from the positive list is to be deleted.

PSMA in response reminded for an amendment in the minutes to add a point already agreed for recommendation i.e.

The recommendations must include exemption of sugar from the Special Excise duty of 1% levied vide Finance Act 2007, missing from the memorandum. TCP was to maintain & improve its buffer stock at 550,000 tonnes regularly by purchase from sugar mills. Contrary to the decisions Sindh Government has already issued the levy of quality premium like last year. Concerned authorities are informed of the action.

International Scenario: -

World production and consumption 2006-07 crop year was the year of recovery from long consecutive deficit to a surplus year, estimated up to 3.0 million tonne that ended with an average of 10.0 million tonne. The world market remained under bearish pressure due to the sizeable surplus. High production expectations for 2007-08 has further put the international market prices under pressure and is likely to continue for the year. The sugar glut in India is the main cause of the depressed sugar prices in the world. The production 2007-08 in India is likely to overtake Brazil as world top sugar producer. International Sugar Organization forecast Indias production as 33.0 million tonnes raw value against Brazils 29.20 million tonnes, both struggling hard to get rid of the surplus to the international market. The world sugar is facing heavy surplus for the second consecutive year in 2007-08. The latest forecast of the world sugar suggests production at 163-173 million tonnes consumption at 157160 million tonnes with the surplus forecast for over 10 million tonnes. Thus the distinctive excess in the global production over consumption and the high export availability is expected to have direct impact on the sugar economy. Consumption and stock ratio is to grow considerably. Its affect on the domestic process would be significant and particularly in the case of the good harvest expected. Outlook 2007-08 (Domestic) For the second consecutive year the prospects for the sugarcane crop have been highly favourable as the weather conditions and availability of irrigation water remained optimum for the sugarcane crop. The plantation area of sugarcane crop has shown increase of 11 % to 1.147 million hectare. Province of Punjab and Sindh both, have shown equally the area increase. With such an increase and the expected yield of 50.6 tonnes per hectare the production of sugarcane is expected in excess of 58.0 million tonnes, which itself would be a record production of the sugarcane in Pakistan. Per statistics the sugarcane utilization by the mills remains on higher side to around 80% when the production is on higher side as the requirement for seed and fodder is low. In case the supplies to the sugar mills exceed 47.5 million tonne the sugar production is expected to reach around 4.2 million tonne with a recovery of 8.75 % i.e. With a carryover stock of 1.0 million tonne the availability of sugar for the year 2007-08 would be around 5.2 million tonne or even higher. The consumption projected to 4.20 million tonne the end stock on 30th Sept2008 could be repeatedly 1.0 million tonne or more enough for the desired buffer stock for the period prior to the start of the new crushing season 2008-09. In short there would be no room for import of sugar throughout the season and the prices are to remain stable with a bearish trend due to global surplus, low prices and high availability in the neighboring India and internationally. Diversification of by-Products remained untapped 1: Use of Ethanol Blended Petrol Encouraged by the Government and the formulation of the policy on the use of ethanol being actively persuaded, the sugar industry promptly responded by establishing more ethanol refineries. At present the annual production capacity of ethanol at 21 refineries in Pakistan has

reached 400,000 tonnes. With the advent of high crude oil prices in the global market, ethanol is increasingly seen as an alternative, renewable and environment friendly fuel of the future. However, in the absence of a prompt legislation for the use of locally produced ethanol blended with petrol in Pakistan, ethanol producers had to face anti dumping measures by the European Union. Pakistan State Oil and Hydro Carbon Institute of Pakistan on instruction from Government of Pakistan last year launched a pilot project to introduce and encourage the use of 10% ethanol blended petrol. PSO started the introduction in three of its petrol pumps, one each at Karachi, Lahore & Islamabad. Instead of straightforward legislation for the use of 10% blended petrol, as is being done worldwide the initiative was handed to the oil lobby who succeeded in proving the experiment unsuccessful. As long as the policy for fuel ethanol is controlled by the oil sector the substitution process will remain slow. Pakistan imported petroleum products worth US$ 3.10 billion in 2006-07 that constitutes major chunk of its deficits, likely to increase in the current situation, shift to use of ethanol blended fuel could save considerably keeping its environmental aspect of importance. Despite the potential advantages, progress in promoting bio-ethanol lacks policy impetus. The oil refining companies in collusion with the ministry of Petroleum have managed to keep a lid on private sector involvement. Rather than enjoying incentives, the private sector is burdened with domestic taxes on industrial alcohol sales. Such domestic policy biases have been compounded by import restrictions abroad, which have compromised the countrys export potential. 2. Re-consideration of Power co-generation by the Sugar Mills Under the policy 2002 for independent Power Plants incentive were available for the power Cogeneration units including the sugar mills and it was decided that the power generated by the sugar mills will be purchased by NTDC or DISCO concerned at agreed rates approved by NEPRA. The proposed project was delayed since the acquired gas was not available. Being a major shift the alternate fuel use was studied. In recent meeting consideration was given to the Power Co-generation of sugar mills establishing independent power projects based on duel-fired system of bagasse and coal. PSMA urges the Government to decide an upfront tariff. Hence the main potential in the diversification of the Pakistans sugar industry still remains untapped and needs to be promptly addressed to take advantage of the developments in the field where sugarcane is increasingly seen as an energy crop. Though the sugar industry in Pakistan has come of age, it faces formidable exciting challenges in the foreseeable future. PSMA has always expressed hope that Government of Pakistan will start extensive research and development work on sugarcane crop and its optimum utilization. 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 byproducts, 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. Crop area, yield and in effect sugarcane production portray fluctuating fortunes. Area fared in range from 907 thousand hectare (2005-06) to 1241 thousand hectare (in 2007-08) variance at 36.82% has indeed been quite wide. 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. Sugar crushing fared in range from 28.983 million tonnes (of 1999-2000) to 52.75 million tonnes (of 2007-08), denoting a big variation of 82.2%. Sugar recovery rate was in range form 8.21% (of 1998-99) to 9.15% (in 2003-04), making significant at 0.94%. Sugar production in range from 2.415 million tonnes (of 1999-2000) to 4.741 million tonnes (in 2007-08), made a sizeable variance of 96.14%. Likewise, sugarcane supplies to industry for processing created range band form 62.07% (of 1999-2000) to 82.53% (of 2007-08). It made a marked variance of 32.96%. 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.

COST- PRICE DISEQUIBRIUM A record sugar production of 2007-08 did not cast a desired wholesome influence on bottom line of the sugar industry, contrary to a general impression of more the production more the profit. This tendency does not make a match with sugar segment due to markedly different traits governing sugar manufacturing and marketing. Sugar production takes place in about 110 days. Sugar sales stretch out to 365 plus days in event of larger production rollout, a record of it taken place during 2007-08, making sales further extended. This peculiar situation is attributable to inelastic demand characteristic of sugar. Sugar consumption remains steady, with normal increase by population and income growth. Sugar purchase by public tends to be in small quantity of packet sizes, not in bulk. Inflationary trend in the economy dented disposable income part, which in turn suppressed to an extend demand element of population increase as well. Besides, carry forward to review year sugar stock at 445,399 tonnes made aggregate sugar supply volume hefty at 5.182 million tonnes. Another element in price imbalance, rather distortion, carrying adverse influence on sugar industrys 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 farmers 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. This proved distress-laden situation which prevailed. The Government of Pakistan, however, agreed to procure 400,000 tonnes sugar. Its purchase was made through Trading Corporation of Pakistan. However, the rescue design was inadequate and so incompatible. Procurement by TCP was through tender system for competitive price. This did not serve the purpose it was designed. Had it been at assessed price of Rs.29,000/tonnes, the sugar industry could have safe sales to the extent of sugar procured. The quantity picked fell short of 10% of the output. PSMA had some solace that its proposal of carrying strategic/buffer stock by the Government was acknowledged and acted upon. We are hopeful that the system brought on track will be

maintained, improved and strengthen to deliver. Developing countries, like Pakistan, are often exposed to uncertainty of the crop size. It needs to hold strategic stocks of food stuff to serve society as a safety valve. 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. Sugar recovery rate at 8.92 (8.53)%, modestly up was the second best set during the past decade, the highest being 9.09% of 2003-04 and the lowest marked at 7.80% of 1998-99. 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 at 16.737 (11.627) million tonnes was at its best by giving an inspiring increase of 43.94%. The lowest of the past decade was at 7.915 million tonnes hit in 2004-05. Sugar rollout at 1.561 (1.062) million tonnes, higher by 46.98% and highest of the decade, was exciting, more so, it was attained by the modest sugar recovery rate of 9.33%, falling behind 9.83% of 2005-06 and 9.53% of 2004-05. Sugar recovery at 8.96% was the lowest in 1998-99. Barring this, recovery rate has been above nine percent. Scope of improving upon it to over double digit existed, calling for attention to its exploits, certainly to be in interest of the stakeholders and the national economy. 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 During the review season 8(7) sugar mills were functional. On average per mills, sugarcane crushing increased insignificant by 0.96% to 372,045 (368,485) tonnes. Sugar production was 28,344 (27,540) tonnes, up meager 2.91%. This zone holds promising potentials for growth. This is checked and prevented by predominance of unorganized gur making segment. PSMA and its NWFP zone have been pointing out the problem of tax free status of gur. This problem impacting adversely investments made in the industry and so also the federal and provincial revenues. Hopefully this problem shall be addressed soon. 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 valueadded 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. As ethanol holds positive prospects of domestic use and growth in global market, it needs concerted efforts to keep dynamics. Simultaneously it is desirable to keep molasses market abroad lively alive and online. This can be achieved by augmenting sugarcane production, as emphasized earlier, by intensive sugarcane cultivation method. Scope in both spheres is sizeable and need to be exploited in earnest. 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. Ethanol production, spearheaded by its export, registered an impressive growth. It was 34,888 tonnes in 2002 and rose to more than 300,000 tonnes in 2008. It has been an impressive increase, translating into average growth of 125% a year. Eighteen distilleries with sugar industry segment hold capacity to produce 2.300 million litres of ethanol a day. Effective capacity, however, remains variable by quantity and quality of sugarcane available to sugar industry as these carry direct influence on by-products, including molasses. 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 industrys 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 cogeneration could be started immediately. FINANCING FACILITATION: Due to seasonal short term functioning, sugar industrys 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. Sugarcane production is estimated at 53.498 million tonnes, down by 16.31% from 63.920 million tonnes of 2008-09. Yield is likely to remain in narrow range of 51.5 (50) tonnes/hectare. At an average of 75% sugarcane, flow to sugar mills for crushing, to be 40.124 million tonnes and average recovery of 8.6%, sugar production may be 3.451 million tonnes, provided the first estimate stays put, chances of which seem not firm. However, with stocks of about one million tonnes of sugar in hand at the start of 2008-09 season, sugar availability in aggregate at 4.450 million tonnes shall not complicate situation to a serious shortfall. However to keep sugar prices fair in a reasonable range, import of raw sugar is a desirable option. PSMA has presented a proposal in this regard for consideration of the authorities. 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. PERSPECTIVE 2008-09 International sugar market, inherent part of the wider commodity markets, during the year 200708 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. Current price trend indicates sugar production to slip lower, first time in the past four years of high tide in a row. Aggregate production projection for October 2008-September 2009 is 161.248 million tonnes, to be 6.602 million tonnes lower than at 167.850 million tonnes of 2007-08. European sugar production during 2008-09 season is 22.69 million tonnes from 26 million tonnes of 2007-08. Drop in Asia will be more from 64.7 million tonnes to 60.5 million tonnes. Production is poised to dip both in Pakistan and India. However, South America and Africa may go up in sugar output. * Excluding unrecorded disappearance

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. During 2008-2009, the year under review, as forecasted, the sugarcane and sugar production ended far below the projected estimate for annual consumption. According to MINFALs data, plantation area under sugarcane was reduced to 1,029,400 Ha in 2008-2009, against 1,241,000 Ha for 2007-2008 which was a record bumper crop year that established a bench mark production of sugar at 4.741 million tonne. The sugar prices remained depressed for the past three years due to high production and low global prices. Lack of policies of the government, converted the huge harvest of 2007-2008 to economic disaster and did not bring any jubilation to the growers of sugarcane and the millers, that resulted in 17% reduction in the plantation area depicting preference to the other cash crops. The capacity utilization of the sugar mills and season working days was very low comparing the past two seasons. The below mentioned data is self explanatory: Punjab 2007-2008 2008-2009 Shakargan Da 174 104 j ys Hamza 168 105 " Indus 168 95 " Haq Bahu 167 117 " JDW 165 107 " SINDH Sanghar 180 132 " Habib 171 120 " Khairpur 171 119 " Larr 170 68 " The low capacity utilization of the mills affected the production cost of sugar, the overall capacity utilization of the mills was 39.40% as compared to last years 64%. The production during 2008-2009 ended at 3.19 million tonne i.e. 1.55 million tonne short compared to previous years production i.e., 32.7 %. While the crop itself was lower by about 14 million tonnes, the crop utilization by the mills was further reduced because of commercial manufacturing of Gur which has become a lucrative business in the Peshawar-Mardan Valley of Pakistan and being exported tax-free to Afghanistan and onward to Central Asian Republics. Despite the sugar shortage in the country, exports of gur was allowed in violation to the commitment made by GOP in the Supreme Court that there would be a complete ban on its exports.

The low production, deficit of consumption was foreseen by PSMA and the Government of Pakistan was in-time informed to import raw sugar to supplement the production to a comfortable level to avert any crises at the end of the year while the international prices had started picking up, unfortunately, our advise was ignored. The carry over quantity of 1.19 million tonne to supplement the production of 3.19 million tonne enhanced the availability to 4.4 million tonne provide