Sugar is No Sweet - Bitter Harvest, Cost of Production Increased with FRP & SAP

Chander Mohan
Chander Mohan

Fifty million sugarcane farmers, 5,00,000 mill workers and many others involved in ancillary activities are affected by Sugar industry’s ever-fluctuating fortunes.

With each bumper harvest, the stock of sugar grows far in excess of domestic consumption. This is what has happened over the last sugar season (2016-17) and the current one (2017-18); the situation is expected to worsen in the next (2018-19).

With international prices also plummeting, the farmers ended up facing an all-time high of Rs 220 billion in unpaid arrears from the millers. The government has introduced a buffer stock of 3 million tonnes but even then, next season’s opening stock is likely to be almost double of this year’s.

The key problem is that there is no link between the market prices of the final product (sugar and its by-products) and the administered minimum prices for the input (sugarcane). Both, the Fair and Remunerative Price(FRP), announced by the Central Government, and the State Advised Price(SAP), are far in excess of what market would dictate. The government has set new minimum procurement price for farmers at Rs 29 a kg. But even this is higher than the market price for sugar. As such, the mismatch continues. Lastly, the government has raised the target for ethanol blending from 5 percent to 10. But, the actual blending achieved in 2016-17 was just 4.3 percent.

According to Shri T Nanda Kumar, Visiting fellow of  ICRIER. Both the Indian Sugar Mills Association and the Nation Federation of Cooperative Sugar Factories were way off the mark in their early estimates. The Government agencies were no better. The big difference has come from Maharashtra, whose initial estimate of production was 6-7 million tons. Production now looks set to clock 10+ million tons. Neighbouring Karnataka also has an ‘impressive’ performance, of 3.5 million tons. Add another 10.5 million tons from UP and the story is more or less complete.

In terms of percentage, Maharashtra shows an increase of 140 per cent over last year, Karnataka 65 percent and UP 20 per cent. The big question is how did we get the estimates so wrong? With all the technology at our disposal and with each sugar mill having a defined command area, how can the production figures have gone so wrong? Such inaccurate estimation is bad for the government and the industry and is disastrous for the farmers. Isn’t it time we revisited the process of estimation of sugar production and made it more reliable?.

Given the fact that the production of sugar will be about 30 million tons, the balance sheet for sugar could look like as shown in the accompanying graphic. The estimated surplus has already pushed down prices to the range of Rs 3,100 -3,200 per quintal ex-factory. Though the Fair and Remunerative Price (FRP) for sugar for this season is Rs 255 per quintal, most states have announced a State Advised Price (SAP) in the range of Rs 300-325. With the current level of sugar prices, mills are not able to cover even their costs. Sugar mills are not in a position to pay both the farmers and meet other costs including wages. The export market is not an option, with international prices at 12.5 cents/pound of raw sugar and $346/ton of white sugar. Given the huge price differential between domestic and international prices, the export market is not accessible unless we come up with innovative WTO-compliant subsidies.

In the current scenario of plenty, there is no option but to evacuate some sugar to external markets, but there are only very limited options even with financial support. The government has announced a Minimum Indicative Export Quota (MIEQ)of 2 million tons under Duty-Free Import Authorisation (DFIA)with no subsidy, production or otherwise. Given the current differential between domestic and international prices and surplus situation expected next year, it is doubtful whether this will get any traction. Every lakh ton of export means a loss of Rs 100 crore. Which mill has the liquidity to hold? At some point, a buffer may have to be thought of. But, how big and at whose cost? The earlier practice of sugar mills holding the buffer with an interest subsidy paid for by the government may not work this time primarily due to liquidity issues. The mills are already under severe financial stress, for working capital and margin money. This means that the government will have to buy the buffer and hold it on its account. Can the government pay for and keep a buffer of say 2-3 million tons?

The requirement of additional working capital to the mills is a critical issue. Will the banks, in the current environment, bail out sugar mills? Doubtful. The mills are losing money on every ton of cane crushed. Sugar stocks being valued at current market prices will give them just about enough financial accommodation to pay the farmers, but not enough to run the mill. Unless there is some intervention from the Government, it is highly unlikely that the bankers will bail out the sugar mills. The unpaid arrears of the farmers were reported at about Rs 20,000 crore; most of it is in UP. The national farm-level sugar economy is worth Rs 80,000-85,000 crore (considering a crushing of 270 million tons of cane at an average price of Rs 300 per quintal and ignoring other uses). The arrears could easily mount to about Rs 30,000 crore by the end of the season.

The problem in the sugar sector this year is unprecedented, and it is real. Admittedly, there is no ‘one step’ or ‘quick fix’ solution. It has to be a well-thought-out combination of interventions taken together and timed well, which will ease the pain. The real worry, however, is the next year’s big crop. In a business as usual scenario, or in a denial mode, there exists the real danger of distress in yet another farm sector, the sugarcane fields of UP and Maharashtra. There is also the danger of some of the sugar companies queueing up before the NCLT, which could make retrieval all the more difficult! The cooperatives, as is their habit, will expect the government to bail them out. Is this the right time to ponder over the missed opportunities on ethanol and the recommendations of the Rangarajan Committee?

Like this article?

Hey! I am Chander Mohan. Did you liked this article and have suggestions to improve this article? Mail me your suggestions and feedback.

Share your comments

Subscribe to our Newsletter. You choose the topics of your interest and we'll send you handpicked news and latest updates based on your choice.

Subscribe Newsletters