Sugar: the truth about the industry is bitter

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Sugar Mills has a grievance that farmers are getting preferential treatment from the government for the price of cane. Factories say they are also exposed to market risk due to price volatility.

The Indian sugar sector has four main stakeholders: farmers, sugar factories, consumers and government. Despite the deregulation of the sugar industry in 2013, the government commands the most dominant intervention force among the three other stakeholders. The only policy of sugar is to have a “policy of change” triggered by market volatility and pressure from other constituents. Politically, the fear of hurting sugar cane producers remains strong.

On a pan-Indian basis, we have an ‘installed crushing capacity’ of 33 million tonnes (mt) from 716 factories in the private / public and cooperative sectors as of January 31, 2016, while the actual production this year is 20 , 3 mt. There are only six sugar surplus states in India namely Haryana, UP, Uttarakhand, Maharashtra, Tamil Nadu and Karnataka, out of a total of 27 states. The massive movement of goods must take place across the country.

Sugar Mills has a grievance that farmers are getting preferential treatment from the government for the price of cane. Factories say they are also exposed to market risk due to price volatility. The answer is – all businesses have inherent risks in the market – profit and loss. However, the quirk of this business is whether the sugar is sold at Rs 40 per kg or Rs 30 per kg – the price of sugar cane has to be increased every year.

Internationally, India is the most “expensive” cane producer at Rs 3 per kg. Thailand and Brazil produce it at Rs 2 per kg. At the same time, the government granted umbrella protection to factories with 40% import tariffs. Refineries are also allowed to import raw sugar duty-free with an export commitment. Surprisingly, the number of sugar factories is increasing and sugar cane production is also well supported, except when weather related issues arise. Thus, the current economic model seems viable.

PRF / SAP

The mills complain that the government’s annual increase in the Fair Remunerative Price (FRP) for sugarcane is greater than the minimum support price (MSP) for wheat / paddy. The wheat / paddy MSP has increased by 47% in eight years; the price of sugar cane has increased 97% in nine years. Sugar producers thus benefit from a 50 to 60% better yield than cereal producers.

Comparison of MSP of cereal crops with FRP is inconsistent as wheat / paddy is a 5-6 month crop – sown annually in both rabi and kharif seasons, while sugarcane is harvested after 12 at 18 months and sown once every three years. FRP is a fixed base recovery of 9.5% sucrose, but with special varieties of cane, the sucrose recovery has now improved to 11.5% or more. In addition, the revenue generated from the phase-out of molasses, bagasse, power generation, etc., also provides cost compensation to factories against FRP / SAP. However, the arbitrary setting of the SAP (State Advisory Price) by the States – UP, Uttrakhand, Panjab, Haryana and Tamil Nadu – higher than the FRP is devoid of any justification, with the exception of the banking voting policy.

The sugar industry rightly argues that the FRP is unrelated to local market prices. A study of the price of PRF compared to the average price of factories reveals that from 2009-2010 to 2012-2013, the production cost was lower than the market price, therefore profitable. From 2013-2014 to 2014-2015, factories suffered losses due to poor market achievement. But after 2015-16, the factories operated profitably due to the scarcity of cane in Maharashtra / Karnataka which caused Indian sugar production to drop to 20.3 t against a demand of 24 t. The payment of 75% of the income from sugar to farmers and the balance of 25% to mills is considered an acceptable mechanism (Rangarajan committee formula) which requires full transparency of accounting systems and procedures. Some states (Maharashtra and Karnataka) have agreed on a 75/25 formula, but it needs central legislation.

The higher cost of cane can in some cases force factories to underestimate collections and make short or deferred payments to farmers without any interest. This is clear from the overdue payments of over Rs 12,000 crore to farmers, even though the industry has made substantial profits over the past two years. The farmers remain at the mercy of the millers and cannot be agitated as the farmers have to sell the cane grown in the area reserved for selected mills.

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Imports and Exports

Another positive feature is that the government is responsive to pressures from the sugar industry on imports and exports. Import duties are adjusted or removed to fill the supply gap. Duties are increased if there is a surplus to prevent cheaper imports. When supply exceeds demand (there is excess availability), the government does not hesitate to subsidize exports to help millers and farmers, regardless of WTO obligations.

During the 2008-09 and 2009-10 sugar seasons, 6.5 tonnes of duty-free imports were authorized. In April 2017, the duty-free import of 0.5 t of raw sugar is authorized. This has helped refineries alleviate shortages. Now a proposal to increase tariffs from 40% to 60% – the bound rate – is under consideration due to the sharp drop in overseas sugar prices to 13c / lb ($ 300 / mt) from 22c / lb (505 / mt), thus threatening cheaper imports with a 40% duty, which may lower local prices. This will help stabilize local prices. This move may be anti-consumer, but is certainly pro-farmer and pro-industry. The opening balance of 4 mt as of October 1, 2017 is well below the annual consumption standard of 24 mt over three months.

When sugar production and the opening balance increased during the 2012-13, 2013-14, 2014-15 and 2015-16 sugar seasons, the government ‘incentivized’ the export of sugar by offering a subsidy. from Rs 3,300 to Rs 4,000 per metric ton, pushing exports by 5mt in those four years. Another example of an industry with broad government support.

The Indian government has been very aggressive in pursuing policies consistent with the demands of the sugar market to avoid shocks to millers and farmers. Industry is also expected to respond to the same extent and expeditiously to settle the arrears of farmers.

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