BITTER TRUTHS ABOUT INDIAN SUGAR BUSINESS --FINANCIAL EXPRESS 10TH JULY 2017

http://epaper.financialexpress.com/c/20427643

BITTER TRUTHS OF SUGAR BUSINESS

TEJINDER NARANG

Indian sugar business has four prime stakeholders—farmers, sugar mills, consumers and the government.  Despite deregulation of sugar industry in 2013 Government commands the most dominant force of intervention amongst other three stakeholders. The only policy of sugar is to have “policy of change” triggered by market volatility and pressures exerted by other constituents. The fear of hurting sugarcane farmers remains politically alive.

On pan India basis India has an “installed crushing capacity” of 33 million tons(mts) from  716  mills in private/public and co-operative sector as on 31.01.2016 while actual output this year is 20.3mts. There are only six surplus sugar states in India –namely Haryana, UP, Uttrakhand, Maharashtra, Tamilnadu, and Karnataka—out of total 27 states. Massive movement of the commodity has to take place through length and breadth of the country.

 Sugar Mills nurse a grievance that farmers get preferential treatment from government for cane pricing. Mills claim that they are also exposed to market risk on account of price volatility. The answer is -- All businesses have inherent market risks—of profit and loss. However oddity of this business is whether sugar is sold at Rs40/kg or Rs30/kg—sugarcane price must be increased annually.  

Internationally India is the most “expensive” producer of cane at Rs 3/kg Vs Thailand and Brazil at Rs 2/kg—higher by about 33%. At the same time Government has given umbrella protection to mills with 40% import duty. Refineries are also permitted duty free raw sugar import with export commitment. Surprisingly numbers of sugar factories are growing and sugarcane production is also well sustained except when weather related issues arise. Thus the current business model appears to be viable.

FRP/SAP

Mills complaint that annual increase of FRP (Fair Remunerative Price) of sugarcane by the government is more than the MSP of wheat/ paddy.MSP of wheat/paddy is hiked by 47% in eight years; sugarcane price is raised by 97% in nine years.  Sugar farmers are thus beneficiary of better return of 50-60% than grain growers..

 Comparison of MSP of grain crops with FRP is incoherent because wheat/ paddy are 5-6 months crops-- sown each year one in rabi and kharif seasons, while sugarcane is harvested after 12-18 months and is sown once in three years. FRP is fixed basis recovery of 9.5% sucrose but with special varieties of cane, sucrose recovery is now improved to 11.5% or more. Additionally revenue accrued from disposal of molasses, bagasse, power generation etc. also provides cost compensation to mills against FRP/SAP. However fixation of SAP (State Advisory Price) arbitrarily by states like-- UP, Uttrakhand, Panjab, Haryana and Tamilnadu-- higher than FRP is devoid of any rationale except vote bank politics.

Sugar industry rightly maintains that FRP is not linked to local market prices.  A study of the FRP vs average mills price reveals that from 2009-10 to 2012-13, cost of production was below the market price—thus profitable. During 2013-14 to 2014-15, mills suffered losses due to poor realization from the market. But after 2015-16 onwards, mills have operated profitably due to scarcity of cane in Maharashtra/Karnataka that depressed Indian sugar output to 20.3 mts against demand of 24 mts. Payment of 75% of sugar revenues to farmers and balance 25% to mills is deemed an acceptable mechanism (Rangarajan committee formula) which requires full transparency in accounting systems and procedures. Some states (Maharashtra and Karnataka) have agreed for 75/25 formula—but it needs a central legislation.

Higher cost of sugarcane may in some cases compel mills to understate recoveries and for making short or delayed payments to farmers without interest whatsoever . There are still outstanding payments of more than Rs 12000 crores to farmers though industry has seen substantial profits in last two years. Farmers remain at the mercy of millers and cannot agitate because farmers have to sell cane grown in the reserved area to select mills.

 IMPORTS AND EXPORTS

 Another positive feature-- Government is responsive to pressures of the sugar industry on imports and exports. Import duty is adjusted or waived to fill the supply gap. Duty is hiked if there is surplus to prevent cheaper imports. When the supply exceeds demand –that is excess availability --Government is not averse to subsidizing exports to assist millers and farmers irrespective of WTO obligations.

In sugar season 2008-09/09-10, 6.5 mts of duty free imports were authorised. In April 2017 duty free import of 0.5 mts raw sugar is permitted. That helped refineries to mitigate shortages.  Now a proposal to increase duty from 40% to 60%--the bound rate—is under consideration due to sharp descent in sugar prices overseas to 13c/lb ($300/mt) from 22c/lb ($505/mt), thus threatening cheaper imports with 40% duty, which may pare local prices. This will assist stability in local prices. This decision may be anti-consumer but certainly pro farmer and pro industry though 4 mt of opening balance on 1^st October2017 is a very below  three month norm of annual consumption of 24 mt.   

When sugar production + opening balance escalated in sugar seasons pf 12-13/13-14/14-15/15-16 government “incentivised” sugar export by offering subsidy of Rs 3300 to Rs 4000/mt, pushing exports of 5mt in these four years.  Another example of industry getting ample support from Government!!

Conclusion-- Indian Government has been very dynamic in pursuing policies consistent with the requirements of the sugar market to avoid shocks to the millers and farmers. Industry is also expected to respond in equal measure and with promptness to clear arrears of farmers.