A Twitter thread by Ahmed Jamal Pirzada.

(Thread on sugar report: 1/n) Sugar inquiry report has done a good job highlighting systematic problems in sugar industry. But it has not answered y sugar prices increased between Dec-18 & Aug-19. This thread provides an explanation for y prices increased during this period.

(2/n) But first, lets recall what the report tells us. This table clearly shows that ex-mill sugar prices increased by about Rs18 between Dec-18 and Aug-19. The report finds this odd since there was no indication that cost of production had gone up during this period.

(3/n) The report also notes that 'prima facie' there were sufficient stocks to meet domestic demand. Therefore, according to report, allowing export of surplus stocks should not have led to any increase in sugar price.

(4/n) The report also calculates how much profit sugar mills earned during this period. The table attached is for JWD & shows tht JWD's margins increased almost four time during this period - frm Rs5.6 per kg in Dec-18 to Rs21.8 in Aug-19. This is also true for other sugar mills.

(5/n) After putting all this together, the report gives an indication that this may be due to market manipulation. It goes in a lot of detail discussing how brokers bid-up sugar prices during early 2020.

(6/n) But there is not much on y prices increased between Dec-18 & Aug-19. It also doesn't explain y brokers entered into forward contracts with sugar mills at a much higher price than current price? In other words, y did brokers expect sugar prices to be higher in near future?

(7/n) The report also doesnt explain why margins increased between Dec-18 and Aug-19 ... then fell back to single digits in Oct-19 ... then increased again in Jan-20. Perhaps speculators stopped speculating fearing that govt may take action? Possible, but ...

(8/n) To make matters worse, the report also shows that the practice of speculative trade in sugar industry is nothing new. This table shows JDW group entering into forward contracts going all the way back to 2017. Possibly this practice existed in preceding years as well.

(9/n) Any reasonable theory shuld be able to explain: i) Y prices increased between Dec-18 & Aug-19? ii) that the reason was not increase in costs; iii) that this also led to an increase in margins; iv) which fell back to single digits in Oct-19 before increasing again in Jan-20.

(10/n) Now let's see if we can explain this. The figure plots the price of white sugar in the international market (red line) & the cost of production taken from inquiry report (dash-black line). Think of red line as wat sugar mills will get if they were to export sugar.

(11/n) To be precise, sugar mills get less than what is shown by the red line due to transportation and other costs associated with exporting. This is an important point. It matters for whether subsidy was needed or not. But lets forget it for a while. We will return to it later

(12/n) Let's start with STAGE 1. It is clear that it was not profitable to export sugar between Apr-17 & Nov-18. The price in international market was less than cost of prod. during this time. This explains y the then govt had to give subsidy to sugar mills for exporting sugar.

(13/n) But the previous govt banned export of sugar before elections. Therefore, when new govt came, sugar mills started lobbying for permission to export surplus stocks and also asked for subsidies arguing that it was not profitable to export otherwise.

(14/n) Now lets move on to STAGE 2 on the previous graph. Things started to change from Sep-18 onward. ECC gave permission to export in Oct-18 but without any subsidy. Also, after remaining stable for few months, exchange rate started to depreciate once again.

(15/n) By Dec-18, exchange rate had depreciated enough to make Pakistani sugar competitive in the world market. In other words, the price sugar mills could get from exporting their sugar was now slightly greater than production costs.

(16/n) This is also the time when Punjab govt approved export subsidy. At first it looks suspicious that Punjab govt approved subsidy just when it was no longer needed: price sugar mills were getting from exporting for higher than their production costs. Hold that thought ...

(17/n) All this meant was that it was now profitable to export. Exports started from Jan-19 onward and kept increasing all the way until May-19. But y did exports come to a standstill in Jun-19? I think this is because the export subsidy came to an end in May-19.

(18/n) It seems the gap between red and black line frm Oct-18 until May-19 was not enough to cover export related costs e.g. transport. This may explain y most sugar was exported to Afg - due to geographical proximity. I was surprised wen i saw previous fig but it makes sense now

(19/n) But then the second round of depreciation happened between Apr-19 and Jul-19. This made Pakistani sugar more competitive and allowed sugar mills to get a higher price in international market than before. This meant that they did not need any further subsidy for exporting.

(20/n) As a result, exports increased again in Aug-19. Now this is the time (i.e. between Dec-18 and Aug-19) when domestic sugar prices increased the most. And this is also the time when profit margins increased by almost three to four times for almost all sugar mills. Why?

(21/n) SIMPLE: As exchange rate depreciated and Pakistani sugar became competitive, total demand (domestic + foreign) for Pakistani sugar increased. Since supply was fixed, it obviously meant that prices would go up. Econ ppl shud think of this as demand curve shifting outwards.

(22/n) Too simple? Consider wat happened in 2014. Inter. prices were higher than cost of prod. Wen govt lifted export restrictions, prices in domestic market increased by 13.7% in 10 months time. In contrast, wen exports were allowed in 2017, domestic prices did not increase. Y?

(23/n) Bec, in 2017, Pak sugar was not competitive in inter market. As a result, allowin exports did not lead to an increase in demand for Pak sugar thus keeping domestic prices stable. We hav now explained (i) (ii) & (iii) in (9/n). I now explain y profit margins fell in Oct-19.

(24/n) The report notes that sugarcane procurement prices increased substantially at the start of new season. This sudden increase in cost of prod meant it was no longer profitable to export (see end of STAGE 2).

(n/n) Profit margins fell (supply curve shifted inwards). But, in Dec-19, intern sugar prices started increasing for other reasons. Since exports were still allowed, brokers expected domestic prices to increase. This explains y profit margins for sugar mills increased again! 🙏

P.S. 1: Now I suspect that you think sugar exports should not have been allowed. This is not correct. The logic in this thread holds for almost everything. For example, why not ban exports of textile products as well? It will make clothes more affordable in short term.

P.S. 2: Rather, aim shud be to undertake serious reforms and move away frm uncompetitive practices which subsequent govts have sustained across every industry. Policy discourse need to move beyond worrying about fluctuations in prices toward serious institutional reforms!