Cartelization in Sugar Industry- Project

5/25/2018 Cartelization in Sugar Industry- Project

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TABLE OF CONTENTS

TABLE OF CONTENTS............................................................................................................... i

INTRODUCTION........................................................................................................................ 1

DEFINITION ........................................................................................................................... 1

SIGNIFICANCE .....................................................................................................................1

OBJECTIVE............................................................................................................................1

DATA AND METHODOLOGY................................................................................................. 1

ORGANIZATION OF THE STUDY..........................................................................................2

LITERATURE REVIEW..............................................................................................................3

DATA AND METHODOLOGY.................................................................................................... 7

VARIABLES............................................................................................................................7

Con!"#$ion.......................................................................................................................7

T%&'(...................................................................................................................................7

S$o)*..................................................................................................................................+

,%o'!)$ion...........................................................................................................................+

E-#o%$..................................................................................................................................+

S"!/in $o A0&ni$&n....................................................................................................

,%i)( o0 S!&%An I"#o%$&n$ V&%i&4/(.................................................................................

R&5 S!&%.........................................................................................................................12

Co&/i$ion........................................................................................................................... 12

EM,IRICAL DATA AND CALCULATIONS..........................................................................16

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CARTELIZATION IN SUGAR INDUSTRY

INTRODUCTION

DEFINITION

A cartel is a formal agreement among competing firms. It is a formal organization ofproducers that agree to coordinate prices, marketing and production. Cartels usually occur in anoligopolistic industry, where there are a small number of sellers and usually involvehomogeneous products. Cartel members may agree on such matters as price fixing, totalindustry output, market shares, allocation of customers, allocation of territories, establishment ofcommon sales agencies, and the division of profits or combination of these. The aim of suchcollusion is to increase individual members profits by reducing competition.

Cartelization in sugar industry occurs when the owners of the sugar industries !oin handsand collectively decide the price and supply of sugar in the market.

SIGNIFICANCE

In "akistan#s sugar industry, cartelization is there. The sugar industries are determiningthe prices themselves, which are higher than the ones set by the government and since thegovernment has passed strict laws regarding sugar prices, these industries have started storingmore sugar and have reduced the supply. $ecause of which the consumers i.e. the poor public,are suffering and the level of consump!onhas also been affected.

This research tells us how cartelization is formed, what are the reasons behind itsformation and how can it affect different economic factors.

OB"ECTI#E

Through this research we want to understand the impact of cartilization on the price ofsugar and on the consumption of the consumers.

DATA AND $ET%ODOLOGY

The different variables involved in the decrease of consumption due to cartelization are,increase in sugar prices including low sugarcane and sugar productions, coalitions among theindustrialists, income of consumers, high international prices, population growth which leads toscarce resources i.e. less supply but more demand of sugar, smuggling to Afghanistan and thegovernment#s late decision of importing sugar. The sugarcane production remained low in %&&'(&) and its price went up resulting in increase in sugar prices. *ow sugarcane also impacted theproduction of sugar and it became clear in +ecember %&&' that there would be sugar shortage inthe country by uly or August %&&).

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The method that we will use in this case is regression analysis, which includes anytechni-ues for modeling and analyzing several variables, when the focus is on the relationshipbetween a dependent variable and one or more independent variables. In this case consumptionis the dependant variable, while price, demand, supply, coalitions, raw material, smuggling,export, production and trade are the independent variables.

The time period that we have chosen for our research is of the past & years, from )))(%&&).

ORGANIZATION OF T%E STUDY

In this research we have first introduced cartelization, then cartelization in sugarindustry, and then the importance and the purpose of conducting this research. After that wehave listed down our variables, the method that we will use to conduct research and the timeperiod for this research.

/ow we will discuss the literature review of the research papers, which will be followed

by a detailed discussion of the data and methodology, which will cover detailed informationabout the different variables selected, the model specification and the estimation techni-ues i.e.the 0rdinary *east 1-uare method, which will be followed by the empirical results and theirexplanation and then we will derive the conclusion.

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LITERATURE RE#IE&

There is cartilization in the sugar industries of "akistan, which leads to higher prices,less supply of sugar to the market and decreased level of consumption. 1ince the beginning ofthe current year, the international sugar prices have been on the increase. 2lobal sugar marketshave entered a period of radical structural change.

The decrease in consumption of sugar is due to the fact that since the sugar industries areholding back sugar and are storing it, so there will be less sugar available for the consumers.3hen there are more consumers and less supply, the demand will increase, and since morepeople will be willing to purchase sugar, its price will also increase.

If we understand the reason behind this cartelization and its causes, we will be betterable to eliminate it.

Adler suggests that industrialization plans may cause two economic difficulties for

underdeveloped countries4 inflationary pressure and unfavorable balance of trade.The shift of population from rural to urban areas may accentuate the increased

consume' (em)n(and lead to additional capital outlays, especially for housing. "resumablythe new demand will exert upward pressure on prices like in case of sugar. There was increaseddemand and supply was cut down by the suppliers in order to increase prices.

0n the suppl* s!(eof the market, many developing countries continue to rely heavily onone or two primary commodities for the bulk of their export earnings, and primary commodities5including fuel and energy6 constitute, on average, about half of export revenues of developingcountries. 0n the demands side, commodity markets play a non trivial role in transmittingbusiness cycle disturbances and in affecting inflation rates in industrial nations. Classical

economists suggested that the long(run trend of raw material prices was rising, because oflimited supplies of natural resources in the face of diminishing returns to commodity productionand growing population

1upply concentration is a further necessary re-uirement. 1upply should be in the handsof a few producers and7or sellers. This makes possible a cartel or might in an extreme case meana monopoly of supply like in the case of sugar industry. If the supply, on the other hand, isdistributed amongst a number of producers7sellers, competition will result and the consumermay be able to purchase the commodity without ties. 8igh price induces technologicaldevelopment as well as increased production of the commodity, easily resulting in the breakupof the cartel7monopoly as in developing countries sugar prices have increased resulting in abreakup of cartel.

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8,&*i$&n S!&% Ann!&/ R(#o%$ 299, http477www.thebioenergysite.com7articles799:7pakistan(sugar(annual(report(%&&)6

The research article analyses the position of sugar industry during the period ))&7) ()))7%&&&. The output of sugar as well as the production of sugarcane increased at an averagerate %; percent and .< percent. $ut the increased output could not meet the re-uirements.Although consumption is dependent on various factors, we should gear up our resources andformulate policies in a manner that we are self(reliant in the years to come and are notconfronted with shortages in future. Cuba, India and Thailand have had series of droughts whichresulted in scarcity of sugar. There is no way a natural calamity could be predicted or pre(empted but all these countries have well(defined policies.

"akistan sugar industry has a role to play in the local market and can also strive for ashare in the international market in view of the emerging global perspective provided practicaldifficulties are removed to ultimately strengthen the sugar economy.

The 1ugar Act, as amended in )%:& per raw pound= 5d6 a tax at wholesale on allsugar of &.:&? per raw pound= 5e6 small payments to producers conditional upon their keepingwithin their -uotas= and 5f6 the setting of minimum wages to be paid to workers in the sugar

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http://www.thebioenergysite.com/articles/335/pakistan-sugar-annual-report-2009http://www.thebioenergysite.com/articles/335/pakistan-sugar-annual-report-2009http://www.thebioenergysite.com/articles/335/pakistan-sugar-annual-report-2009http://www.thebioenergysite.com/articles/335/pakistan-sugar-annual-report-2009


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industry. @rom the viewpoint of avoiding low domes( tic prices, the Act was undoubtedlysuccessful.

3orld sugar production in )


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like all other army dictators of this poor country, and to counter the existing influence oftraditional political families as one sugar mills control at least one national assembly#sconstituency. Therefore, it is a political industry, and need a political or administrator solution tosave the domestic consumers from this fleecing who consider white crystalline sugar as animmediate source of energy.

All along the current sugarcane crushing season, from /ovember %&&; to April %&&:,millers have been fighting on three fronts G cane growers, the government and consumers.Influential growers, who are said to be entrenched in the federal and provincial governments,have managed to get relatively good price for sugarcane, reportedly at Es:: to Es>& a maund insome cases this season. $ut the government maintained its pressure and imported raw sugar andthen allowed duty free import of fine sugar.

Cartels dominate the "akistan market, be it of sugar millers, wheat traders and flourmillers, cement manufacturers or auto makers. The government has been found wanting inmaking timely intervention. 0ne of the solutions for the sugar problem is to impound the entiresugar stock of the millers. The government should release it under strict vigilance and

monitoring. The millers should be paid after a realistic assessment of production cost with somereasonable profit.

At the other end of the distribution channel in underdeveloped countries we findconsumers who typically buy in very small amounts. 2iven such supply and demand conditions,marketing necessarily is an expensive business.

3orld sugar consumption which is around ;:,:;) million tons is likely to increase by& per cent in year %&& to >&,9million which again is a & per cent increase of %&& estimates.

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The onus of the sugar industry is now on the policy makers to devise a long term draftsolution, where farmers are given regular contracts from sugar mills on fixed bottom line prices,farmers are paid promptly by the industry on delivery of sugar cane. That sugar cane is pricednot by its weight, but by its sugar content D age. There should be a minimum pric

Certain fixed sugar contents and above that farmers should receive a premium price,

while the sugar industry sector is given access to improve process technology generation, wherethrough the help of experts they can improve on their plants and processes, with bottom linebeing to drop the cost of producing sugar per ton. This will also re-uire improvement in thesugar cane crop being cultivated and Investment in research for better sugar yielding varieties ofsugar cane crop. The large scale improvement in the yield of sugar cane crop with better sugarrecoveries will be a right step to improve efficiency of the sugar mills.

DATA AND $ET%ODOLOGY

#ARIABLES

Consump!on

H %&&)7& sugar consumption is forecast at ;.9: HHT. Total per capita refined sugarconsumption is estimated at %: kilograms, based on improved domestic supply and strongdemand. Eetail sugar prices are expected to continue to hover around Es. ;: 51J &.:>6 perkilogram, which is ;> percent above the last year#s average prices. Huch of the price hike isattributed to currency devaluation followed by a rise in international prices. The stability ofretail prices will depend upon timely imports and prevailing prices in the international market.

1ugar consumption stands at ; to ;.% million tonnes. The buffer stocks of the millers and

Trading Corporation of "akistan are around >&&,&&& tonnes.

T')(e

H %&&)7& sugar imports are forecast at


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Soc+s

H %&&)7& stocks are forecast at .&: HHT, based on pro!ected supply(demandscenarios and trade expectations.

,'o(uc!on

The "akistan sugar sector has the capacity to produce over %.: million metric tons5HHT6 of molasses available for processing into ethanol. To maximize returns, the sugarindustry processes molasses to produce anhydrous and hydrous ethanol. Countrywide, nineteendistillery units have an annual ethanol production capacity of over half a million tons. In %&&


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Smu..l!n. o Af./)n!s)n

Another reason of sugar shortage in "akistan was smuggling of sugar toAfghanistan.Around %&&,&&& tonnes of sugar was smuggled to Afghanistan as gur export was not banned andit created shortage, where price of sugar is more than Es 7&< increased the official cane purchase price for ;&kilograms to Es. >& for "un!ab, Es. >: for /3@", and Es.>& for 1indh NJ K Es. >&O. 8owever,

prices were a volatile issue between the growers and processors for much of the season. Thegrowers refused to sell the cane at the official price and millers in some areas of "un!ab and1indh delayed the start of crushing season. As a result, market prices for cane ranged from Es.


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1enior member of arachi 3holesale 2rocers Association, Anis Ha!eed said though theprices of sugar at international market were also going higher but P3e are still in a position toimport the sugar on reasonable prices and control the situation within fortnight.Q

International scenario4 The sugar prices in the international market increased by around


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magistrates to control prices of food items, no action could be initiated due to the prevailinguncertainty.

The price of sugar shot up from Es 9' per kg in Harch to Es :; due to artificial demandand supply mechanism controlled by the hoarders, the sources said. There are around '& sugarmills in "akistan with a production capacity of < million tonnes while the demand of sugar is

estimated at ; million tonnes only. Around more than )& percent of the sugar mills are ownedby politicians both from the ruling and opposition parties.

$esides controlling the supply(demand gap and discouraging hoarding there is a direneed to take steps for the welfare of the farmers who sow sugar cane and are also exploited bythe mill owners.

A well(placed source in the TC" informed this scribe that that a number of sugar millsowned by renowned political persons are involved in artificial shortage of sugar and areinvolved in collusive pricing.

T/e 'e)sons fo' lo3 *!el( !n ,)+!s)n )'e )s un(e'

5i6 nscientific7nsystematic agriculture practice.

5a6 Improper selection of land.

5b6 Improper preparation of land.

5c6 Conventional planting methods.

5d6 *ate "lanting

5e6 Hoisture 1tress at critical stage of crop growth.

5f6 Marly and late harvesting.

5g6 "oor Hanagement of ratoon crop.

5ii6 Mnvironmental Eesistance

5iii6 *ow soil fertility

5iv6 +efective verities

5v6 "ests, disease and weeds

5vi6 Credit shortage

5vii6 Eapid7 nplanned increase in 1ugar cane acreage in unsuitable areas of "akistan.

"akistan 1ugar Hills Association 5"1HA6 in a recent advertisement appearing on all the front pages of

almost all the leading newspapers of country has pointed out the emergence of, as they claimed, aRmiddle man mafia# which is supplying sugarcane to "1HA members at Es ): per ;& kg after buyingfrom farmers. @ederal and provincial governments have been urged to take action against this Rmafia#

because it will render sugar industry non(competitive, a claim made in this advertisement.

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R)3 Su.)'

The "akistan 1ugar Hills Association 5"1HA6 also re-uested the government to importraw sugar to overcome the possible shortage in the country. 8owever, the government did notallow import of raw sugar. The price of raw sugar in the international market was roaming atJ%%: per tonne 5Es %% per kg6 in +ecember %&&', when it was clear that there would be shortagein the coming time. In April %&&) raw sugar in international market remained at J;%& per tonne5Es ;% per kg6 and the government decided to import refined sugar through TC".

Co)l!!ons

A coalition in economics refers to a group of companies that create a mutual trustbetween each other in order for increased profit.In "akistan, it is observed a great coalition insugar industry as sugar prices started rising ahead of Eamadan, because the people usuallyincrease their en!oying of sweet dishes at iftar and sahoor.

There are


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This year the nation however is going through Rthe most difficult time# contributed bythe hoarders during the sacred month. /onetheless, the authorities claim that there was noshortage of sugar in the country and blamed hoarders for artificially creating such a shamefulsituation. The Trading Corporation of "akistan has 9&&,&&& tons of sugar in stock. Anotherimport of 9&&,&&& tons of raw sugar and billion in !ust two weeks, and the 1tate has not been able to rescue thepoverty(stricken people. The cabinet held detailed discussion on the prevailing sugar crisis, butcould not come up with any impressive solution to pull the country out of crisis. The cabinetcommittee however has been trying to reshape the future line of action with particular referenceto giving incentives to the sugarcane growers along with increasing the sugarcane support price.$ut, as the "akistani under(flourished democracy is still passing through a rough time, the 1tateapparatus e.g. the Competition Commission of "akistan 5CC"6, Chief Controller5prices6 in the

Hinistry of Industries L "roduction and the R"rice Hagistrates# of provincial governments arealmost devoid of courage and determination to discipline the influential tycoons. Horeover, thedominant sugar mill owners always find a way to influence the decision(making process of theMconomic Coordination Committee 5MCC6 of the cabinet and other federal forums. Although,the International 1ugar 0rganization 5I106 says, Pworldwide sugar supplies are expected tofall,Q yet, the sugar mill owners in "akistan d an artificial shortage causing a shameful loss of3rit of the 1tate. A kilo of sugar cost %: rupees at the start of %&&) and now costs around :&rupees. /o doubt, there is a %9 per cent decline in sugar crop production. Hill owners hoardedsugar and increased prices thinking the government will ultimately import. "akistan is Asia#sthird(largest user of sugar and the world#s fifth largest producer of sugar cane, according to the"akistan 1ugar Hills Association. +espite this production, @inance Hinister 1haukat Tarin told

A@" imports were now needed. 0n the other hand, *ahore 8igh Court has ordered "un!abgovernment to ensure the supply of sugar at Es;& per kg in the province. $ut the millers arereluctant to obey such orders to sell at the slashed price. Above all, it is worrisome for the"un!ab government that the slashed price will encourage inter(provincial smuggling and thischeap sugar may end up in the neighboring countries. 8ence, the "un!ab government#s demandfor a Runiform sugar price# across the country is -uite reasonable. 3hen the international priceof sugar is low, the suppliers urge the government to impose duties on sugar to discourage itsimport, but when the price is high in the international market, the suppliers raise domestic priceson that pretext. 3hat would cure the ailing sugar industry? 0nly time will tell. The "akistanAgricultural Eesearch Council 5"AEC6 is trying to develop new varieties of sugarcane to helpovercome sugar crisis in the future. The concerned officials should be brave enough to enforce

and implement the public policy in the best interest of the people and keep a strict eye on thedemand and supply graph. A Runiform# national price for sugar would settle the issue ofsmuggling. 0n the other hand, the media should educate people about the dangers of consumingsugar especially the white sugar and by(products.

These sugar mills have stocked '& percent of sugar production to create artificial sugarshortage in the country so that price could be manipulated on their whims.

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+espite the fact there has been an increase in per capita income, the consumption ofsugar decreased due to availability of other sweeteners= health hazards associated withconsumption of sugar and= life style changes focused on health food intake.

CK f 5", Sd

, Ss

, Cs, E.H., 1g, Mx, "rod., Tr6

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E$,IRICAL DATA AND CALCULATIONS

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T)1le 42,RO"ECTION OF DE$AND AND SUGAR ,RODUCTION CA,ACITY

4555065

ear"opulation In

Hillion+omestic Consumption

in Tones"ro!ected 1ugar "rod4

Capacity In Tones

)))(%&&&

9'& 99&;9>&

%&&(&% ;;.;< 9& 99&;9>&

%&&;(&: ::.:' ;9%%& 99&;9>&

%&&:(&> :).%> ;;9);&

%&&>(&< >%.;) ;::)9;& 99&;9>&

%&&:&:%< 9:>&&&&

%&&'( &) >).9; ;&&&&

Source: Government of Pakistan, Economic Survey, 1999-2000, Islamabad, 2000,Statistical Section P0!

51ugar industry in "akistan, http477www.pakistaneconomist.com7issue%&&%7issue9'7iLe9.htm6

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http://www.pakistaneconomist.com/issue2002/issue38/i&e3.htmhttp://www.pakistaneconomist.com/issue2002/issue38/i&e3.htm

Cartelization in Sugar Industry- Project

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