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Demand and Supply
Executive Summary The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. Price, therefore, is a reflection of supply and demand. Price and quantity are inversely proportional. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the aggregate of the demands of all individuals within the marketplace. A market price is not a fair price to all participants in the marketplace. Too high a price will likewise attract additional producer competition within the market. When either demand or supply changes, the equilibrium price will change. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. Likewise a shift in demand due to changing consumer preferences will also influence the market price. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. Sugar Crises in PAKISTAN THROUGH demand and supply effect. Rise in sugar prices in Pakistan is the perfect example of demand and supply impact. The supply in the market is not enough to meet the current demand. Since sugar cane and sugar production is low, the mill owners can accumulate marginal quantities of sugar and cause crisis in the market which leads to increase in raise price. Sugar consumption in Pakistan is very high. Limited sugar supplies and increase in prices during the year 2010-11 negatively affected household sugar consumption. Sugar prices have been on the rise since December 2009 and are continuously increasing. Prices during 2011 are estimated to remain stable due to increased sugar production along with the relatively controlled international sugar prices. The future stability of retail prices will also depend on established prices in the international market.
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Demand and Supply
Table of Contents
Table of Contents .......................................................................................................................................... 1 Executive Summary........................................................................................ Error! Bookmark not defined. Demand and Supply ...................................................................................................................................... 4 Introduction .............................................................................................................................................. 4 Demand ..................................................................................................................................................... 5 Law of Demand ......................................................................................................................................... 5 Factors of Demand .................................................................................................................................... 6 1.
Changes in income ........................................................................................................................ 6
2.
Changes in the prices of substitutes ............................................................................................. 6
3.
Changes in the prices of complements ......................................................................................... 6
4.
Changes in the size and age distribution of the general population ............................................ 6
5.
Changes in interest rates and the general availability of credit. .................................................. 6
6.
Advertising and changes in fashion can have a market effect on demand .................................. 6
7.
Seasonal changes .......................................................................................................................... 6
8.
Changes in technology .................................................................................................................. 7
9.
Consumer expectations ................................................................................................................ 7
Supply........................................................................................................................................................ 8 Law of Supply ............................................................................................................................................ 8 Time and Supply .................................................................................................................................... 8 Factors of supply ..................................................................................................................................... 10 1. Production cost: .............................................................................................................................. 10 2. Technology: ..................................................................................................................................... 10 3. Number of sellers: ........................................................................................................................... 10 4. Expectation for future prices: ......................................................................................................... 10 Equilibrium .............................................................................................................................................. 11 Disequilibrium ......................................................................................................................................... 12
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Demand and Supply Shifts vs. Movement ............................................................................................................................... 15 2. Shifts ............................................................................................................................................... 16 Shift in Demand Curve......................................................................................................................... 16 Shift in Supply Curve............................................................................................................................ 17 How Supply and Demand Determine Commodities Market Prices ........................................................ 17 Sugar Crises in PAKISTAN THROUGH demand and supply effect ........................................................... 19 Statistics of sugar industry .................................................................................................................. 21 Production of sugar cane .................................................................................................................... 21 Sugar Production................................................................................................................................. 22 Consumption trends of Sugar ............................................................................................................. 22 Production, Supply and Demand Data Statistics: ............................................................................... 24 Conclusion/ Recommendation ............................................................................................................... 25 References .................................................................................................................................................. 26
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Demand and Supply
Introduction Supply and demand is the most basic concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
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Demand The demand for a particular product or service is actually how much people are willing to purchase at different prices. Therefore, demand may be defined as a relationship between price and quantity, keeping all the other factors constant. The relationship between price and quantity demanded is known as the demand relationship. Demand can be represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 1)
Law of Demand The law of demand states that, if all other factors remain constant then higher the price of a good, less would be the demand of that good. In other words, the higher the price, the lower the quantity demanded. Price and quantity are inversely proportional. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the aggregate of the demands of all individuals within the marketplace. The amount of a good that buyers purchase at a higher price is less because as the price of a good increased, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The diagram below depicts that demand curve is a downward sloping curve.
Figure 1: Demand Curve Afsheen Zaidi
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A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
Factors of Demand 1. Changes in income
If there is an increase in household income, the demand will increase that is there will be a shift of the curve to the right. Usually, this is associated with an increase in the price of the good or service being considered. 2. Changes in the prices of substitutes
With the decrease in price of a substitute, then the demand for the good or service will also decrease and vice versa. 3. Changes in the prices of complements
If the price of a complement good increases, then the demand for the good or service will also decrease and vice versa. 4. Changes in the size and age distribution of the general population
If the population is rapidly aging with the smaller numbers of children per family, demand for many goods and services demanded by older people has risen. 5.
Changes in interest rates and the general availability of credit.
Many households finance consumption is done through borrowing. If interest rates rise, then the demand for many goods and services will decrease; and particularly housing will also be impacted. 6. Advertising and changes in fashion can have a market effect on demand
The producers of goods and services which are close substitutes usually spend large amounts on advertising, reminding consumers that their product is ''better'' than the opposition's product. 7. Seasonal changes
For example, demand for ice creams rises in warmer weather, and falls in the colder month of the year.
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Demand and Supply 8. Changes in technology
Firms are constantly attempting to gain greater sales through improvements in the quality and features of their product. This is seen clearly in the computer market. The introduction of a new personal computer with a bigger memory chip or a faster operating speed soon results in prices of older model computers rapidly falling. 9. Consumer expectations
Consumer expectations also affect demand. People tend to maintain high levels of consumption when they feel confident about their continuing employment in the future. If people, for whatever reason, feel less confident about the future, they tend to decrease consumption and increase saving. If households believe that inflation will rise in the future, or that government taxes will rise, they will increase their demand for many goods and services, to ''beat'' the price rise. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Thus the demand for an agricultural commodity is typically derived from the demand for a finished product. A free market economy is driven not by producers but by consumers. Ultimately the market value for any good or service is determined by its value to the consumer. Higher prices mean higher profits and higher profits provide you with the incentive and the means to expand production of those goods and services that consumers value the most. So profit driven expansion is the market’s response to stronger buyer demand. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits or losses to the producer. Losses reduce the producer’s incentive to produce things that have weak demand which will ultimately force production cuts as farmers lose more and more money. This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce.
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Demand and Supply
Supply Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Supply is represented graphically as an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2)
Law of Supply The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. (Figure 2)
Figure 2: Supply Curve
A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on Time and Supply
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected Afsheen Zaidi
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rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand. The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behavior of producers. The market or total supply represents the quantities producers are willing to sell over a range of prices for any given time period. At the individual level, you may be willing to produce a given product as long as the market price is equal to or greater than the cost of producing that product. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2) An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market; therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behavior include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. With higher prices the producers of goods and services will receive greater profits. Greater profits will result in the means to expand production increasing the supply. This increased supply will ultimately satisfy the existing demand such that any additional production must be met with new demand in order for the price increases to be sustained. The firms which handle your grain or livestock products are not free to set prices as they choose. They can raise prices only if consumers are willing and able to pay more. The law of supply, as was the case with demand, illustrates the discipline of the marketplace. The market doesn’t care what it costs you to produce something. Lower prices are the market’s signal to farmers that they have produced too much of something or that it is something consumers do not want. To be a good marketer, you need to accept the “discipline of the marketplace.’ A good marketer learns to produce for the market.
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Factors of supply When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve. 1. Production cost:
Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. 2. Technology:
Technological improvements help reduce production cost and increase profit, thus stimulate higher supply. 3. Number of sellers:
More sellers in the market increase the market supply. 4. Expectation for future prices:
If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price. A change in quantity supplied is caused by a change in its own price of the good. However, a change in supply is caused by a change in determinants.
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Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
Figure 3: Equilibrium
As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.
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Disequilibrium Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply
If the price is set too high, excess supply, which is surplus will be created within the economy and there will be allocative inefficiency.
Figure 4: Surplus
At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. 2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
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Figure 5: Shortage
In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.
Supply and Demand Relationship Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high. Afsheen Zaidi
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Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Changes in consumer preferences can have either a short run or long run effect on prices depending upon the goods or services, for example whether they are luxuries or necessities. A luxury good may enjoy a short term shift in demand due to changing styles or snob appeal while necessities tend to have stable or long run demand curves. Another major factor influencing market prices is technology. A major effect of technology in agriculture is to shift out the supply curve rapidly by reducing the costs of production on a per unit basis. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products.
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Shifts vs. Movement For economics, the “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena: 1. Movements Movement along the demand curve A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
Figure 6: Movements along the demand Curve Movement along the supply curve Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.
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Figure 7: Movements along the supply curve 2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. Shift in Demand Curve For instance, if the price for a bottle of a Pepsi was $2 and the quantity of the Pepsi demanded increased from Q1 to Q2, then there would be a shift in the demand for Pepsi. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price.
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Demand and Supply Shift in Supply Curve Conversely, if the price for a bottle of pepsi was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of pepsi. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is affected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage; pepsi manufacturers would be forced to supply less pepsi for the same price.
How Supply and Demand Determine Commodities Market Prices Price is derived by the interaction of supply and demand. The resultant market price is dependent upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price which is "equilibrium price", or a "market clearing price”. This can be graphically illustrated in Figure 3 In figure 3, both buyers and sellers are willing to exchange the quantity "Q*" at the price "P*". At this point supply and demand is in balance or “equilibrium". At any price below P*, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in surplus - too much supply relative to the demand. Producers would have to lower their prices in order to clear the market of excess supplies. Afsheen Zaidi
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Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. A market price is not a fair price to all participants in the marketplace. It does not guarantee total satisfaction on the part of both buyer and seller or all buyers and all sellers. This will depend on their individual competitive positions within the market. Buyers will attempt to maximize their individual well being within certain competitive constraints. Too low a price will result in excess profits for the buyer attracting competition. Likewise sellers are also considered to be profit maximizers. Too high a price will likewise attract additional producer competition within the market. Therefore, there will exist different price levels where individual buyers and sellers are satisfied and the sum total will create a market or equilibrium price. When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of grains and oilseeds, with more product being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically as follows: (see Figure 4.) Likewise a shift in demand due to changing consumer preferences will also influence the market price. In recent years there has been a shift in demand on the part of overseas Canadian wheat buyers toward the Canada Prairie Spring varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard Red Spring wheat shifts the demand curve inward, to the left, as illustrated in figure 5 With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of hard red spring wheat brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand.
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Sugar Crises in PAKISTAN THROUGH demand and supply effect Sugar prices started to rise in the year 2009 from Rs. 26 / kg to Rs. 45 / kg and which has now increased to Rs. 75 /kg. Rise in sugar prices in Pakistan is the perfect example of demand and supply impact. The supply in the market is not enough to meet the current demand. Although Pakistan has an agricultural economy and sugar is made from the sugar cane, but the production of sugar cane in our country is decreasing because of the shift from agriculture to industrial sector. Another reason for less sugar cane is lack of irrigation water. Since sugar cane and sugar production is low, the mill owners can accumulate marginal quantities of sugar and cause crisis in the market which leads to increase in raise price. Sugar shortage is rising every year as there is a reduced area of sugarcane crop and on the other hand steady growth in population. The sugar mills are not producing sugar efficiently and investment in this sector is also not up to the mark. Therefore, productivity has decreased. Currently, the rise in sugar prices is actually created by the hoarders, wholesalers and the mill owners. They actually stock sugar and decrease the supply in the market, resulting an increase in the current price of sugar because of large demand. As they know that the productivity of sugar and sugar cane in Pakistan is decreasing, therefore by doing so they can control the supply situation to gain abnormal profits. When there is a change in supply due to market conditions such as production costs, technology, prices of related goods or artificial hoarding. If supply decreases, the supply curve will shift to the left, that quantity will fall and price will rise.
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Other manufacturers using sugar as a raw material are also impacted heavily. Industries of biscuit, bakery items and sweets etc. have increased selling prices. The sugar industry is the second largest agro based industry in Pakistan which includes 81 sugar mills with annual capacity of more than 6.1 million tones. Sugarcane farming and sugar manufacturing has a significant contribution in the GDP. Sugarcane is an important industrial and cash crop in Pakistan The sugar industry is the country’s second largest agro-industry after textiles. At the time of independence in 1947, there were only two sugar factories in Pakistan. The output of these was not adequate to meet the domestic requirements. The country initiated to import sugar from other countries and large amount of foreign exchange was spent on this. There was a need to increase the production of sugar. As a result the Government setup a commission in 1957 to design a plan for the expansion of sugar industry. Therefore, the first sugar mill was established at Tando Muhammad Khan in Sindh province in the year 1961.
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Statistics of sugar industry Current statistics of sugar industry are as follows: No of Mills
81
Crushing Capacity
6.1 million tons
Contribution to Economy
3.0 – 4.0 Million Tons
•Share in GDP
1.9%
•Employment
1.5 million (directly & indirectly)
•Total Investment
PKR 100 Billion (Approx)
Average yield per hector
46.8 tons
Total cane production
45-55 million tons
Cane available
30-43 million tons
Average recovery of sugar
9.1 (vs. world average 10.6%)
Per capita consumption
25.8 kg
Production of sugar cane Pakistan’s sugarcane production is estimated at 54 MMT for the year 2010-11, increased by 5 million tons over the estimated 49 MMT harvested in 2009. The cane crop in fact had an advantage from the floods which hit the country in 2010, as it was followed by favorable weather conditions which boomed the cane production both in Punjab and Sind provinces. In year 2011-12 sugarcane production is forecast at 52.8 MMT, a decrease of 2 percent over the current year due to a projected decline in area planted due to strong competition high priced cotton and sunflower crops. Province Punjab Sind NWFP Afsheen Zaidi
Area (‘000 hectares) 2009-10 2010-11 605 680 234 230 100 100
2011-12 670 225 94
Production (‘000 hectares) 2009-10 2010-11 2011-12 31,612 35,400 34,700 13,000 13,900 13,500 4,400 4,660 4,600 Page 21
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Baluchistan 1 1 1 38 Total 940 1011 990 49,050 (Sources: Ministry of Food and Agriculture and FAS/Islamabad)
40 54,000
40 52,840
Sugar Production For the year 2011/12 refined sugar production is projected to be at 3.8 MMT, 3 percent lesser than the current year’s estimate. Pakistan is still importing sugar from other countries to meet the demand. Industry’s total sugar production capacity is 6.0 MMT in a season. At present, capacity utilization of sugar industry is approximately 60-70 percent depending upon availability of raw material of sugarcane. Current year’s estimates are based on 80 percent crushing and 8.9 percent sugar recovery rate.
Consumption trends of Sugar Sugar consumption in Pakistan is very high. The statistics shows that Pakistan’s per capita consumption and the overall calorie intake has been increasing. Daily Jang reports that “The sweet obsessed Pakistani nation consumes sugar worth of Rs 200 billion annually”. USDA Pakistan Annual Sugar Report states that total per capita sugar consumption is estimated at 25 kilograms. Sugar consumption in the year 2010-11 is estimated 4.25 million tons, 3.6 percent higher than the previous year’s estimate of 4.1 MMT. Pakistan’s population growth rate is exceeding the increased consumption resulting in continued pressure on prices. Limited sugar supplies and increase in prices during the year 2010-11 negatively affected household sugar consumption. The total consumption of sugar is increasing but at a slower rate as compared to the Pakistan’s population growth rate of 2.5%. As a result, per capita consumption of sugar is reducing in Pakistan due to limited sugar supplies. Other bulk consumers including bakeries, makers of candy and local sweets, and soft drink manufacturers for about 60 percent of the total sugar demand. Sugar prices have been on the rise since December 2009 and are continuously increasing. One of the main reason was increased prices of sugar was the poor timing of imports, which are considered to be the deliberate attempt to increase the price of sugar. Sugar imports are controlled by the government. Prices during 2011 are estimated to remain stable due to increased sugar production along with the relatively controlled international Afsheen Zaidi
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sugar prices. The future stability of retail prices will also depend on established prices in the international market.
Table: Monthly Average Retail Prices of Sugar (Rs. per Kg) YEAR/MONTH JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER AVERAGE
2007 31.55 30.83 30.63 30.25 29.85 28.38 29.20 30.17 29.85 29.36 28.75 26.89 29.64 $0.49 USD1=Rs.61
2008 26.06 25.73 25.44 25.18 28.45 29.75 31.68 32.70 33.44 37.61 37.72 35.59 30.80 $0.38 USD1=Rs.80
2009 39.38 42.63 43.83 44.96 45.45 45.65 46.96 52.16 48.97 45.75 45.75 58.50 46.66 $0.57 USD1=Rs.82
2010 66.44 68.55 64.87 62.14 61.28 63.27 66.68 72.26 80.43 81.91 87.98 73.78 70.80 $0.82 USD1=Rs.86
2011 72.57 67.02 68.14 69.24 $0.80 USD1=Rs.86
Trade: For the year 2011-12 sugar imports are forecast at 600,000 MT. There is an import duty of 25 percent on raw sugar whereas there no duty on imports of refined sugar.
Stocks: Sugar stocks at the end of the year 2010-11 are estimated at 680,000 MT which is comparatively less as compared with earlier years. Ending stocks in the year 2011/12 are forecast at 730,000 MT based on projected supply-demand scenarios and trade expectations.
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Demand and Supply Production, Supply and Demand Data Statistics: 2009/2010 2010/2011 Sugar, Centrifugal Pakistan Market Year Begin: Oct 2009 Market Year Begin: Oct 2010 USDA Official Beginning Stocks Beet Sugar Production Cane Sugar Production Total Sugar Production Raw Imports Refined Imp.(Raw Val) Total Imports Total Supply Raw Exports Refined Exp.(Raw Val) Total Exports Human Dom. Consumption Other Disappearance Total Use Ending Stocks Total Distribution TS=TD
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2011/2012
New Post 550 20 3,400
USDA Official 550 20 3,400
730 830 20 20 3,250 3,900
Market Year Begin: Oct 2011 USDA New Post Official 0 680 0 20 0 3,800
3,420 0 1,030 1,030 5,000 0 70 70 4,200
3,420 0 1,030 1,030 5,000 0 70 70 4,100
3,270 750 450 1,200 5,200 0 70 70 4,280
3,920 100 150 250 5,000 0 70 70 4,250
0 0 0 0 0 0 0 0 0
3,820 200 400 600 5,100 0 70 70 4,300
0 4,200 730 5,000 0
0 4,100 830 5,000 0
0 4,280 850 5,200 0
0 4,250 680 5,000 0
0 0 0 0 0
0 4,300 730 5,100 0
New Post
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Conclusion/ Recommendation Sugar industry has a potential to achieve heights in Pakistan if major steps are taken into consideration in this regard. Per capita consumption of sugar is 25 kg and Pakistan’s growth rate is 2.5 %, at the same time sugar industry is only producing to a capacity of 60%. Pakistan has a capacity to produce enough to meet the increasing demand of sugar by taking following steps. The government should facilitate improved varieties of sugar cane having higher sucrose though agriculture research institute and more effective measures
Availability of adequate supply of water and appropriate use of fertilizer Improvement of procurement and storage to reduce wastage.
The recent sugar crisis in Pakistan materialized because of this shortage in supply.
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References http://www.investopedia.com/university/economics/economics3.asp#ixzz1WiGQ9UCQ www.sugaronline.com/ http://en.wikibooks.org/wiki/Microeconomics/Supply_and_Demand http://futures.tradingcharts.com/learning/supply_and_demand.html http://www.sbp.org.pk archives.dawn.com/2005/10/31/ebr13.htm
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Executive Summary The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. Price, therefore, is a reflection of supply and demand. Price and quantity are inversely proportional. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the aggregate of the demands of all individuals within the marketplace. A market price is not a fair price to all participants in the marketplace. Too high a price will likewise attract additional producer competition within the market. When either demand or supply changes, the equilibrium price will change. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. Likewise a shift in demand due to changing consumer preferences will also influence the market price. With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. Sugar Crises in PAKISTAN THROUGH demand and supply effect. Rise in sugar prices in Pakistan is the perfect example of demand and supply impact. The supply in the market is not enough to meet the current demand. Since sugar cane and sugar production is low, the mill owners can accumulate marginal quantities of sugar and cause crisis in the market which leads to increase in raise price. Sugar consumption in Pakistan is very high. Limited sugar supplies and increase in prices during the year 2010-11 negatively affected household sugar consumption. Sugar prices have been on the rise since December 2009 and are continuously increasing. Prices during 2011 are estimated to remain stable due to increased sugar production along with the relatively controlled international sugar prices. The future stability of retail prices will also depend on established prices in the international market.
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Table of Contents
Table of Contents .......................................................................................................................................... 1 Executive Summary........................................................................................ Error! Bookmark not defined. Demand and Supply ...................................................................................................................................... 4 Introduction .............................................................................................................................................. 4 Demand ..................................................................................................................................................... 5 Law of Demand ......................................................................................................................................... 5 Factors of Demand .................................................................................................................................... 6 1.
Changes in income ........................................................................................................................ 6
2.
Changes in the prices of substitutes ............................................................................................. 6
3.
Changes in the prices of complements ......................................................................................... 6
4.
Changes in the size and age distribution of the general population ............................................ 6
5.
Changes in interest rates and the general availability of credit. .................................................. 6
6.
Advertising and changes in fashion can have a market effect on demand .................................. 6
7.
Seasonal changes .......................................................................................................................... 6
8.
Changes in technology .................................................................................................................. 7
9.
Consumer expectations ................................................................................................................ 7
Supply........................................................................................................................................................ 8 Law of Supply ............................................................................................................................................ 8 Time and Supply .................................................................................................................................... 8 Factors of supply ..................................................................................................................................... 10 1. Production cost: .............................................................................................................................. 10 2. Technology: ..................................................................................................................................... 10 3. Number of sellers: ........................................................................................................................... 10 4. Expectation for future prices: ......................................................................................................... 10 Equilibrium .............................................................................................................................................. 11 Disequilibrium ......................................................................................................................................... 12
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Demand and Supply Shifts vs. Movement ............................................................................................................................... 15 2. Shifts ............................................................................................................................................... 16 Shift in Demand Curve......................................................................................................................... 16 Shift in Supply Curve............................................................................................................................ 17 How Supply and Demand Determine Commodities Market Prices ........................................................ 17 Sugar Crises in PAKISTAN THROUGH demand and supply effect ........................................................... 19 Statistics of sugar industry .................................................................................................................. 21 Production of sugar cane .................................................................................................................... 21 Sugar Production................................................................................................................................. 22 Consumption trends of Sugar ............................................................................................................. 22 Production, Supply and Demand Data Statistics: ............................................................................... 24 Conclusion/ Recommendation ............................................................................................................... 25 References .................................................................................................................................................. 26
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Demand and Supply
Introduction Supply and demand is the most basic concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
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Demand The demand for a particular product or service is actually how much people are willing to purchase at different prices. Therefore, demand may be defined as a relationship between price and quantity, keeping all the other factors constant. The relationship between price and quantity demanded is known as the demand relationship. Demand can be represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 1)
Law of Demand The law of demand states that, if all other factors remain constant then higher the price of a good, less would be the demand of that good. In other words, the higher the price, the lower the quantity demanded. Price and quantity are inversely proportional. This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. Market demand is the aggregate of the demands of all individuals within the marketplace. The amount of a good that buyers purchase at a higher price is less because as the price of a good increased, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The diagram below depicts that demand curve is a downward sloping curve.
Figure 1: Demand Curve Afsheen Zaidi
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A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
Factors of Demand 1. Changes in income
If there is an increase in household income, the demand will increase that is there will be a shift of the curve to the right. Usually, this is associated with an increase in the price of the good or service being considered. 2. Changes in the prices of substitutes
With the decrease in price of a substitute, then the demand for the good or service will also decrease and vice versa. 3. Changes in the prices of complements
If the price of a complement good increases, then the demand for the good or service will also decrease and vice versa. 4. Changes in the size and age distribution of the general population
If the population is rapidly aging with the smaller numbers of children per family, demand for many goods and services demanded by older people has risen. 5.
Changes in interest rates and the general availability of credit.
Many households finance consumption is done through borrowing. If interest rates rise, then the demand for many goods and services will decrease; and particularly housing will also be impacted. 6. Advertising and changes in fashion can have a market effect on demand
The producers of goods and services which are close substitutes usually spend large amounts on advertising, reminding consumers that their product is ''better'' than the opposition's product. 7. Seasonal changes
For example, demand for ice creams rises in warmer weather, and falls in the colder month of the year.
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Demand and Supply 8. Changes in technology
Firms are constantly attempting to gain greater sales through improvements in the quality and features of their product. This is seen clearly in the computer market. The introduction of a new personal computer with a bigger memory chip or a faster operating speed soon results in prices of older model computers rapidly falling. 9. Consumer expectations
Consumer expectations also affect demand. People tend to maintain high levels of consumption when they feel confident about their continuing employment in the future. If people, for whatever reason, feel less confident about the future, they tend to decrease consumption and increase saving. If households believe that inflation will rise in the future, or that government taxes will rise, they will increase their demand for many goods and services, to ''beat'' the price rise. Market demand will be affected by other variables in addition to price, such as various value added services including handling, packaging, location, quality control, and financing. Thus the demand for an agricultural commodity is typically derived from the demand for a finished product. A free market economy is driven not by producers but by consumers. Ultimately the market value for any good or service is determined by its value to the consumer. Higher prices mean higher profits and higher profits provide you with the incentive and the means to expand production of those goods and services that consumers value the most. So profit driven expansion is the market’s response to stronger buyer demand. On the other hand, when consumers are unwilling to buy what is offered at the current price, the seller will have to lower the price ultimately resulting in lower profits or losses to the producer. Losses reduce the producer’s incentive to produce things that have weak demand which will ultimately force production cuts as farmers lose more and more money. This is the discipline of the marketplace. Those who produce things that consumers are willing and able to buy are rewarded. Those who produce things that consumers don’t want or can’t buy are penalized. Farmers must produce for the markets. They cannot expect to find or create a profitable market for whatever they choose to produce.
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Supply Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Supply is represented graphically as an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2)
Law of Supply The law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. (Figure 2)
Figure 2: Supply Curve
A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on Time and Supply
Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected Afsheen Zaidi
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rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand. The law of supply can be approached from two different contexts. The first is that it represents the sum total of production plus carryover stocks. The other context for supply describes the behavior of producers. The market or total supply represents the quantities producers are willing to sell over a range of prices for any given time period. At the individual level, you may be willing to produce a given product as long as the market price is equal to or greater than the cost of producing that product. The total supply is the sum of the individual quantities of product that each farmer brings to the market. Market supply is represented by an upward sloping curve with price on the vertical axis and quantity on the horizontal axis (figure 2) An increase in price in most instances will result in farmers wanting to increase the quantity of a given product they will bring to the market; therefore the relationship between the price and supply is positive. Market supply will be affected by other variables in addition to the price. Factors that have been identified as important in determining supply behavior include; the number of firms producing the product, technology, the price of inputs, the price of other commodities which could be produced, and the weather. With higher prices the producers of goods and services will receive greater profits. Greater profits will result in the means to expand production increasing the supply. This increased supply will ultimately satisfy the existing demand such that any additional production must be met with new demand in order for the price increases to be sustained. The firms which handle your grain or livestock products are not free to set prices as they choose. They can raise prices only if consumers are willing and able to pay more. The law of supply, as was the case with demand, illustrates the discipline of the marketplace. The market doesn’t care what it costs you to produce something. Lower prices are the market’s signal to farmers that they have produced too much of something or that it is something consumers do not want. To be a good marketer, you need to accept the “discipline of the marketplace.’ A good marketer learns to produce for the market.
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Factors of supply When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve. 1. Production cost:
Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc. 2. Technology:
Technological improvements help reduce production cost and increase profit, thus stimulate higher supply. 3. Number of sellers:
More sellers in the market increase the market supply. 4. Expectation for future prices:
If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price. A change in quantity supplied is caused by a change in its own price of the good. However, a change in supply is caused by a change in determinants.
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Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.
Figure 3: Equilibrium
As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.
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Disequilibrium Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply
If the price is set too high, excess supply, which is surplus will be created within the economy and there will be allocative inefficiency.
Figure 4: Surplus
At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. 2. Excess Demand
Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it.
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Figure 5: Shortage
In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.
Supply and Demand Relationship Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high. Afsheen Zaidi
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Changes in supply and demand can be short run or long run in nature. Weather tends to influence market prices generally in the short run. Changes in consumer preferences can have either a short run or long run effect on prices depending upon the goods or services, for example whether they are luxuries or necessities. A luxury good may enjoy a short term shift in demand due to changing styles or snob appeal while necessities tend to have stable or long run demand curves. Another major factor influencing market prices is technology. A major effect of technology in agriculture is to shift out the supply curve rapidly by reducing the costs of production on a per unit basis. At the same time if total demand does not increase sufficiently to absorb the excess goods produced at lower costs, the long run impact of technology on the market place will be to lower prices. The rapidly shifting supply curve coupled with a slower moving demand curve has generally contributed to lower prices for agricultural output when compared to prices for industrial products.
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Shifts vs. Movement For economics, the “movements” and “shifts” in relation to the supply and demand curves represent very different market phenomena: 1. Movements Movement along the demand curve A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
Figure 6: Movements along the demand Curve Movement along the supply curve Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.
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Figure 7: Movements along the supply curve 2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. Shift in Demand Curve For instance, if the price for a bottle of a Pepsi was $2 and the quantity of the Pepsi demanded increased from Q1 to Q2, then there would be a shift in the demand for Pepsi. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price.
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Demand and Supply Shift in Supply Curve Conversely, if the price for a bottle of pepsi was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of pepsi. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is affected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage; pepsi manufacturers would be forced to supply less pepsi for the same price.
How Supply and Demand Determine Commodities Market Prices Price is derived by the interaction of supply and demand. The resultant market price is dependent upon both of these fundamental components of a market. An exchange of goods or services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price which is "equilibrium price", or a "market clearing price”. This can be graphically illustrated in Figure 3 In figure 3, both buyers and sellers are willing to exchange the quantity "Q*" at the price "P*". At this point supply and demand is in balance or “equilibrium". At any price below P*, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to pay a higher price in order to get the product they want; while producers would demand a higher price in order to bring more products on to the market. The end result is a rise in prices to the point P, where supply and demand are once again in balance. Conversely, if prices were to rise above P, the market would be in surplus - too much supply relative to the demand. Producers would have to lower their prices in order to clear the market of excess supplies. Afsheen Zaidi
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Consumers would be induced by the lower prices to increase their purchases. Prices will fall until supply and demand are again in equilibrium at point P. A market price is not a fair price to all participants in the marketplace. It does not guarantee total satisfaction on the part of both buyer and seller or all buyers and all sellers. This will depend on their individual competitive positions within the market. Buyers will attempt to maximize their individual well being within certain competitive constraints. Too low a price will result in excess profits for the buyer attracting competition. Likewise sellers are also considered to be profit maximizers. Too high a price will likewise attract additional producer competition within the market. Therefore, there will exist different price levels where individual buyers and sellers are satisfied and the sum total will create a market or equilibrium price. When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of grains and oilseeds, with more product being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically as follows: (see Figure 4.) Likewise a shift in demand due to changing consumer preferences will also influence the market price. In recent years there has been a shift in demand on the part of overseas Canadian wheat buyers toward the Canada Prairie Spring varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard Red Spring wheat shifts the demand curve inward, to the left, as illustrated in figure 5 With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of hard red spring wheat brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand.
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Sugar Crises in PAKISTAN THROUGH demand and supply effect Sugar prices started to rise in the year 2009 from Rs. 26 / kg to Rs. 45 / kg and which has now increased to Rs. 75 /kg. Rise in sugar prices in Pakistan is the perfect example of demand and supply impact. The supply in the market is not enough to meet the current demand. Although Pakistan has an agricultural economy and sugar is made from the sugar cane, but the production of sugar cane in our country is decreasing because of the shift from agriculture to industrial sector. Another reason for less sugar cane is lack of irrigation water. Since sugar cane and sugar production is low, the mill owners can accumulate marginal quantities of sugar and cause crisis in the market which leads to increase in raise price. Sugar shortage is rising every year as there is a reduced area of sugarcane crop and on the other hand steady growth in population. The sugar mills are not producing sugar efficiently and investment in this sector is also not up to the mark. Therefore, productivity has decreased. Currently, the rise in sugar prices is actually created by the hoarders, wholesalers and the mill owners. They actually stock sugar and decrease the supply in the market, resulting an increase in the current price of sugar because of large demand. As they know that the productivity of sugar and sugar cane in Pakistan is decreasing, therefore by doing so they can control the supply situation to gain abnormal profits. When there is a change in supply due to market conditions such as production costs, technology, prices of related goods or artificial hoarding. If supply decreases, the supply curve will shift to the left, that quantity will fall and price will rise.
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Other manufacturers using sugar as a raw material are also impacted heavily. Industries of biscuit, bakery items and sweets etc. have increased selling prices. The sugar industry is the second largest agro based industry in Pakistan which includes 81 sugar mills with annual capacity of more than 6.1 million tones. Sugarcane farming and sugar manufacturing has a significant contribution in the GDP. Sugarcane is an important industrial and cash crop in Pakistan The sugar industry is the country’s second largest agro-industry after textiles. At the time of independence in 1947, there were only two sugar factories in Pakistan. The output of these was not adequate to meet the domestic requirements. The country initiated to import sugar from other countries and large amount of foreign exchange was spent on this. There was a need to increase the production of sugar. As a result the Government setup a commission in 1957 to design a plan for the expansion of sugar industry. Therefore, the first sugar mill was established at Tando Muhammad Khan in Sindh province in the year 1961.
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Statistics of sugar industry Current statistics of sugar industry are as follows: No of Mills
81
Crushing Capacity
6.1 million tons
Contribution to Economy
3.0 – 4.0 Million Tons
•Share in GDP
1.9%
•Employment
1.5 million (directly & indirectly)
•Total Investment
PKR 100 Billion (Approx)
Average yield per hector
46.8 tons
Total cane production
45-55 million tons
Cane available
30-43 million tons
Average recovery of sugar
9.1 (vs. world average 10.6%)
Per capita consumption
25.8 kg
Production of sugar cane Pakistan’s sugarcane production is estimated at 54 MMT for the year 2010-11, increased by 5 million tons over the estimated 49 MMT harvested in 2009. The cane crop in fact had an advantage from the floods which hit the country in 2010, as it was followed by favorable weather conditions which boomed the cane production both in Punjab and Sind provinces. In year 2011-12 sugarcane production is forecast at 52.8 MMT, a decrease of 2 percent over the current year due to a projected decline in area planted due to strong competition high priced cotton and sunflower crops. Province Punjab Sind NWFP Afsheen Zaidi
Area (‘000 hectares) 2009-10 2010-11 605 680 234 230 100 100
2011-12 670 225 94
Production (‘000 hectares) 2009-10 2010-11 2011-12 31,612 35,400 34,700 13,000 13,900 13,500 4,400 4,660 4,600 Page 21
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Baluchistan 1 1 1 38 Total 940 1011 990 49,050 (Sources: Ministry of Food and Agriculture and FAS/Islamabad)
40 54,000
40 52,840
Sugar Production For the year 2011/12 refined sugar production is projected to be at 3.8 MMT, 3 percent lesser than the current year’s estimate. Pakistan is still importing sugar from other countries to meet the demand. Industry’s total sugar production capacity is 6.0 MMT in a season. At present, capacity utilization of sugar industry is approximately 60-70 percent depending upon availability of raw material of sugarcane. Current year’s estimates are based on 80 percent crushing and 8.9 percent sugar recovery rate.
Consumption trends of Sugar Sugar consumption in Pakistan is very high. The statistics shows that Pakistan’s per capita consumption and the overall calorie intake has been increasing. Daily Jang reports that “The sweet obsessed Pakistani nation consumes sugar worth of Rs 200 billion annually”. USDA Pakistan Annual Sugar Report states that total per capita sugar consumption is estimated at 25 kilograms. Sugar consumption in the year 2010-11 is estimated 4.25 million tons, 3.6 percent higher than the previous year’s estimate of 4.1 MMT. Pakistan’s population growth rate is exceeding the increased consumption resulting in continued pressure on prices. Limited sugar supplies and increase in prices during the year 2010-11 negatively affected household sugar consumption. The total consumption of sugar is increasing but at a slower rate as compared to the Pakistan’s population growth rate of 2.5%. As a result, per capita consumption of sugar is reducing in Pakistan due to limited sugar supplies. Other bulk consumers including bakeries, makers of candy and local sweets, and soft drink manufacturers for about 60 percent of the total sugar demand. Sugar prices have been on the rise since December 2009 and are continuously increasing. One of the main reason was increased prices of sugar was the poor timing of imports, which are considered to be the deliberate attempt to increase the price of sugar. Sugar imports are controlled by the government. Prices during 2011 are estimated to remain stable due to increased sugar production along with the relatively controlled international Afsheen Zaidi
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sugar prices. The future stability of retail prices will also depend on established prices in the international market.
Table: Monthly Average Retail Prices of Sugar (Rs. per Kg) YEAR/MONTH JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER AVERAGE
2007 31.55 30.83 30.63 30.25 29.85 28.38 29.20 30.17 29.85 29.36 28.75 26.89 29.64 $0.49 USD1=Rs.61
2008 26.06 25.73 25.44 25.18 28.45 29.75 31.68 32.70 33.44 37.61 37.72 35.59 30.80 $0.38 USD1=Rs.80
2009 39.38 42.63 43.83 44.96 45.45 45.65 46.96 52.16 48.97 45.75 45.75 58.50 46.66 $0.57 USD1=Rs.82
2010 66.44 68.55 64.87 62.14 61.28 63.27 66.68 72.26 80.43 81.91 87.98 73.78 70.80 $0.82 USD1=Rs.86
2011 72.57 67.02 68.14 69.24 $0.80 USD1=Rs.86
Trade: For the year 2011-12 sugar imports are forecast at 600,000 MT. There is an import duty of 25 percent on raw sugar whereas there no duty on imports of refined sugar.
Stocks: Sugar stocks at the end of the year 2010-11 are estimated at 680,000 MT which is comparatively less as compared with earlier years. Ending stocks in the year 2011/12 are forecast at 730,000 MT based on projected supply-demand scenarios and trade expectations.
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Demand and Supply Production, Supply and Demand Data Statistics: 2009/2010 2010/2011 Sugar, Centrifugal Pakistan Market Year Begin: Oct 2009 Market Year Begin: Oct 2010 USDA Official Beginning Stocks Beet Sugar Production Cane Sugar Production Total Sugar Production Raw Imports Refined Imp.(Raw Val) Total Imports Total Supply Raw Exports Refined Exp.(Raw Val) Total Exports Human Dom. Consumption Other Disappearance Total Use Ending Stocks Total Distribution TS=TD
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2011/2012
New Post 550 20 3,400
USDA Official 550 20 3,400
730 830 20 20 3,250 3,900
Market Year Begin: Oct 2011 USDA New Post Official 0 680 0 20 0 3,800
3,420 0 1,030 1,030 5,000 0 70 70 4,200
3,420 0 1,030 1,030 5,000 0 70 70 4,100
3,270 750 450 1,200 5,200 0 70 70 4,280
3,920 100 150 250 5,000 0 70 70 4,250
0 0 0 0 0 0 0 0 0
3,820 200 400 600 5,100 0 70 70 4,300
0 4,200 730 5,000 0
0 4,100 830 5,000 0
0 4,280 850 5,200 0
0 4,250 680 5,000 0
0 0 0 0 0
0 4,300 730 5,100 0
New Post
Page 24
Demand and Supply
Conclusion/ Recommendation Sugar industry has a potential to achieve heights in Pakistan if major steps are taken into consideration in this regard. Per capita consumption of sugar is 25 kg and Pakistan’s growth rate is 2.5 %, at the same time sugar industry is only producing to a capacity of 60%. Pakistan has a capacity to produce enough to meet the increasing demand of sugar by taking following steps. The government should facilitate improved varieties of sugar cane having higher sucrose though agriculture research institute and more effective measures
Availability of adequate supply of water and appropriate use of fertilizer Improvement of procurement and storage to reduce wastage.
The recent sugar crisis in Pakistan materialized because of this shortage in supply.
Afsheen Zaidi
Page 25
Demand and Supply
References http://www.investopedia.com/university/economics/economics3.asp#ixzz1WiGQ9UCQ www.sugaronline.com/ http://en.wikibooks.org/wiki/Microeconomics/Supply_and_Demand http://futures.tradingcharts.com/learning/supply_and_demand.html http://www.sbp.org.pk archives.dawn.com/2005/10/31/ebr13.htm
Afsheen Zaidi
Page 26
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