Sugar producers, both globally and in India, are mired in a sticky situation. Recently, co-operative sugar mills in Maharashtra demanded a bailout package of ₹3,800 crore from the State to pay up their cane dues, while the Uttar Pradesh government is reported to be filing FIRs against sugar mills to get them to cough up their dues to farmers.
Sugar mills from India’s two largest sugar producing States express helplessness when asked to pay dues of over ₹15,000 crore to farmers for cane purchases made over the past year. With the market prices for sugar slumping to ₹19-22 a kg recently, while the cost of production remains at over ₹30 per kg, a majority of sugar mills have seen their bottomlines sink into the red, impairing their cash-flows and ability to service debt.
What free market?
But what has led to such a dire situation? In India, Central and State government policies governing the industry have played a sizeable role. Historically, the Indian sugar industry, like many other commodity sectors, was subject to four-year cycles. Three-four years of good cane output would inevitably see supply overshooting demand, a build-up of inventories and thus a fall in the market prices of sugar. This would prompt farmers to switch to more lucrative crops. As sugar prices re-adjusted to lower supplies, realisations would look up and prompt farmers to plant more cane.
However, this self-corrective mechanism has been in abeyance for the last five years, with India set to reap its sixth consecutive bumper sugarcane harvest this season (October 2015 to September 2016). The single biggest factor distorting market forces in the sector is the fixation of cane purchase prices by the Government.
Unlike other agri-commodities, where the farmer reaps lower or higher prices for his produce, depending on prevailing market conditions, the prices that sugar mills need to pay farmers are ‘fixed’ by the government.
Every year, the Centre announces a ‘fair and remunerative’ price for cane that functions as a minimum purchase price for the mills. Over and above this, select Indian States announce ‘State Advised Prices,’ which offer farmers a premium over the Central prices. A subsequent game of one-upmanship and populism among the States has led to the purchase prices for sugarcane, at least on paper, heading steadily north, even as the prices of the end-product, sugar, have slumped.
With farmers repeatedly incentivised to plant cane, sugar production has consistently overshot domestic demand, with the current season seeing an excess stock of over 40 lakh tonnes. With costs consistently overshooting realisations, it is hardly any surprise that domestic sugar mills aren’t reporting profits.
By-product tangle
Yes, the sugar industry has the potential to produce a multitude of by-products from cane that could add to their realisations. Cane crushing produces molasses, which either be used as raw material for alcohol production or ethanol, which can be blended into petrol, and used as vehicle fuel. The crushing process also yields baggase (cane residue), which can be fired up in boilers to produce environment-friendly power.
However, archaic laws stand in the way of such utilisation of cane. Many States restrict or even ban the movement of molasses from their State to others. A few impose a tax on such sales. Others, such as Uttar Pradesh, have laws that ‘reserve’ a part of molasses production for supply to desi alcohol manufacturers!
While the Centre has enacted policies that require oil marketing companies to mandatorily blend ethanol with vehicle fuel, the deals have some unstuck on price negotiations between the oil companies and sugar mills. Producing power from bagasse has not proved easy either, with different State governments notifying ultra-low tariffs for such power.
Cane fix
In recent years, the Centre has tried to liberalise this tangled web of controls governing the sugar industry by doing away with some controls. The compulsory levy quota, under which all sugar mills were required to supply 30 per cent of their output to the PDS, has been done away with. So has the release mechanism, under which the Government would decree how much sugar may be sold in the markets every month.
But the proposal to do away with the artificial ‘fixation’ of cane prices, and to link the farmer’s realisations to the prices of sugar and by-products, continues to hang fire. It is this piece of reform which may hold the key to resolving the sugar sector’s woes.
Global trouble
If the Indian sugar industry is caught up in bitter wrangling, the global sugar situation is no sweeter. The prices for the benchmark raw sugar contract recently slumped below 11 cents a pound, a six-year low. Globally too, there’s a sugar glut on, with record sugar prices of over 36 cents in 2011 triggering high plantings in the subsequent years.
Global sugar consumption has been growing at a sluggish pace too, with developed markets even seeing some activism against the sweetener and its effect on health and obesity. Until last year, soaring crude oil prices prompted the diversion of some cane into ethanol, reducing supplies, but the oil price slump has undermined that trend.
There’s some hope for the year ahead, though. Recently, the International Sugar Organisation predicted that global sugar demand in 2015-16 would outstrip production by 2.5 million tonnes, helping to slightly reduce massive global inventories. Markets are also hoping that a bad monsoon and the El Nino effect will trim the cane crop in Thailand and India, two of the world’s largest producers.
Well, if that happens, both Indian sugar mills and global ones will have some reason to cheer, as this could reverse the sugar price slump. It will be the rare case where a bad monsoon actually does farmers some good.