Satta players are planning to game the price of sugar in Ramazan as high as Rs100, a government inquiry as revealed. One kilo costs Rs90 today. This kind of speculative trade is being done to artificially inflate prices.
Satta is the underhand system of making virtual sales in which no physical quantity is traded. The scheme was exposed Saturday in a Prime Minister’s Inquiry Committee report into the market, which was made public in a well-vaunted act of transparency.
The provincial governments know who these satta players are because of information made available through their special branches and intelligence agencies, the report said, recommending strict and immediate action against speculation.
Pakistan produces enough sugar to meet domestic demand and when there is a bumper crop, the surplus sugar is exported. However, the country faced a crisis last year after prices went up. A kilogram of sugar, which was selling at Rs55 in February 2019, rose to Rs80 by February 2020, making headlines across Pakistan.
In February, the prime minister formed a committee to investigate why sugar had suddenly become so expensive. Speculative sales, more commonly known as satta, were one of the possibilities it looked into.
Satta: how it works
Satta is an illegal practice and a menace to control price increases. It is a virtual sale in which no physical quantity of an item is traded. However, players speculate prices, which influence the price in retail markets, causing artificial inflation.
Satta works through ‘forward’ contracts, which are the sale in advance by sugar mills. The deal takes place but the sugar is lifted at some future date specified in the contract.
There are two types of forward contracts.
In the first type, party A (wholesaler, investor, stockist) buys certain quantities of sugar from party B (mill owner) at lower than the current rates. Payment is made in advance but delivery is executed at a future point. In this case, the buyer makes a profit if the rate goes up. This is a normal business practice and justifiable because payment was made in advance for a discount, the committee’s report said. The seller, on the other hand, gets the capital (read money) in advance that he or she can use for their business expenses without delivering the produce.
In the second type of forward contract, the buyer enters an agreement with the seller. This could be written or verbal. Again, the sugar is lifted at a future date but unlike the first type, no payment is made. In this case the rate is normally set at higher than the current rate.
Again, if the price goes up, the buyer makes a profit, “but this type of forward contract lends itself to the possibility of satta” or speculative sale, the committee wrote in its report.
It said that in both the types the buyer has the advantage when the price increases, but participation of both parties and a physical transfer of the sugar at a future date is required.
To understand where the problem may arise, consider this example:
The price of sugar right now is Rs90 per kilo but in a forward contract, the buyer books a virtual sugar delivery with the person selling it at Rs92. No payment is made at this point.
If the price in the overall market goes up to Rs94, then a mechanism kicks in: the seller who was going to take Rs92 now has to pay the buyer Rs2 more per kg to make up for it.
If the price falls to Rs88, the buyer has to make up for it by paying the seller Rs4 (because they had originally settled on Rs92). All of this price movement is speculative as no physical trade is taking place.
The problem is that speculation around prices by some players has the effect of influencing the retail price like a rumour would. Simply put, if market speculation is on the higher side, the prices will go up even though there has been no on-the-ground change in actually demand or supply. It is a form of gambling.
Satta has become a common practice in sugar markets across Pakistan, the committee noted and proposed a detailed forensic audit of all forward contracts.
Crisis not over yet
The crisis isn’t over yet as the price of sugar rose immediately after Sindh imposed a lockdown to combat coronavirus. The essential commodity sold for Rs100 in some areas of Karachi, after a Rs15 increase, SAMAA TV reported. It is now selling at Rs90.
The PM’s inquiry committee found in its report that the total sugar stocks are enough for national consumption, but people are taking deliveries or lifting sugar from mill godowns is slow. This could disrupt the supply chain. The provincial government should ensure sugar is acquired in appropriate quantities to match demand, it said, recommending immediate action against players involved in satta.