Crashing global prices and indecisiveness by the State Government on sugarcane prices have been keeping the sugarcane farmers on the tenterhooks. They are worried over what would happen once the sugarcane crushing season commences. Sugarmill owners are also worried over how much their profit will reduced once government declares price.
Ex-factory prices of sugar are around Rs 27 per kg (Rs 2700 per tonne) in Maharashtra and Rs 28 in UP today, lower than the already low levels of 2013-14. It is a reflection of global prices: On 4th November, the benchmark March raw sugar futures contract at the Intercontinental Exchange in New York closed at 15.68 cents a pound, compared to 18.32 cents a year ago, and the peak of 36.08 cents reached in February 2011.
In 2013-14, India shipped out about 2.2 million tonnes of its 24.3 million tonnes production. But at 15.68 cents a pound — or Rs 21.22 a kg — it is unfeasible to export raw sugar out of Maharashtra, even assuming the Centre restores the Rs 3.30 per kg “incentive” that was given in the 2013-14 season.
The current prices not only rule out exports, but more important politically, they make it impossible for mills to pay farmers even what they got last year. “At last year’s cane prices, the average production cost of sugar works out to Rs 35 per kg in UP and Rs 30 per kg in Maharashtra where the recovery is two percentage points higher. We can pay up to 75 per cent of the average sugar realization, which means a cane price of Rs 200-Rs 210 per quintal,” Abinash Verma, director-general of the Indian Sugar Mills Association, said.
Despite India being the net exporter of the Sugar in the global market as well as largest consumer, neither Sugar mills nor sugar cultivators are happy. The whole manufacturing activity related to sugar and allied products is concomitant upon the availability of sugarcane in the required quantity and quality. Unfortunately, the same has been erratic/ below par whereby many sugar mills in the country have been working below capacity in the years of shortages and have been suffering losses in the years of surpluses. The sugarcane cultivators have been the ultimate sufferers in both situations, it being a matter of livelihood for them. As per experts, government policies have not in sync with this sector, and thus, though it has a major share in GDP, not a single full proof policy has been made for the sector, rather decision were always taken from the political point of view – a major reason of bitterness in Sugar industry.
Sugar Industry in India:
Sugar industry is an important agro-based industry that impacts rural livelihoods of about 50 million sugarcane farmers and around 5 lakh workers directly employed in sugar mills. Employment is also generated in various ancillary activities relating to transport, trade, servicing of machinery and supply of agricultural inputs.
Agriculture being largely rain-fed, monsoons play an important role in the production of sugarcane in the country. Sugarcane is a water intensive crop. Farmers in sub-tropical areas irrigate the crop 4-5 times whereas their counterparts in tropical areas because of geographical conditions irrigate it at least 20 times, even though water is already a scarce commodity. Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, Gujarat, Punjab and Haryana are the leading producers of the sugarcane in the country.
Problems in the Indian Sugar industry:
Infamous Indian Sugar Cycle – Cyclicality in the sugarcane cultivation and sugar production:
The cyclicality of sugarcane production causes large swings in the area under cultivation of sugarcane and hence its availability to the sugar industry. During the years of high production of sugar, prices off sugar in the market are low. As a result sugar mill owners delay payment to farmers for the sugarcane supplied and this leads to accumulation of “cane arrears”. Thus, arrears payable are inevitably higher in the years of higher production. Accumulation of cane arrears prompts sugarcane farmers to shift to cultivation of alternate crops, thereby reducing the area under sugarcane cultivation. In addition, sugarcane farmers may supply to the alternate industry of gur and khandsari where payments are made immediately and in cash. Diversion of sugarcane too gur and khandsari decreases during the years off abundant availability of sugarcane and increases during the years of shortfall in production.
Interestingly, global sugar production does not exhibit the fluctuations that characterise the Indian sugar business.
On one hand Brazilian sugar policy works on Laissez faire principle, that is least government intervention in market, Indian Sugar industry is regulated throughout its supply chain.
As rightly pointed out by the Rangarajan Committee on Decontrolling Sugar, the highly perishable nature of sugarcane, the small land holdings of sugarcane farmers and the need to keep the price of sugar at a reasonably affordable level while also making it available through the Public Distribution System (PDS) have been the drivers for regulation.
Various regulations in the Sugar sector are:
Cane reservation area and bonding — Every designated mill is obligated to purchase from cane farmers within the cane reservation area, and conversely, farmers are bound to sell to the mill. As a consequence of the area requirement (distance criterion), setting up of a new mill requires approvals, notwithstanding delicensing under the Industries Development & Regulation Act.
Minimum distance criterion — The Central Government, under the Sugarcane Control Order, has prescribed a minimum distance of 15 km between any two sugar mills. Enhancement of this distance has also been allowed on the request of some state governments.
Price of sugarcane — While on the one hand, the Centre Government fixes FRP (the Fair and Remunerative Price) as the minimum price, which is also used for arriving at the price of levy sugar. On the other, many States have intervened in sugarcane pricing with State Advised Price (SAP) to strengthen the farmer interests. SAP has typically been higher than FRP.
Regulated release of free-sale (non-levy) sugar — The release of non-levy sugar into the market is regulated by the Central Government through a controlled release mechanism. Earlier, monthly release orders were issued to each mill. Release orders have now become quarterly. The idea seems to be to match supply with anticipated demand based on the data available with the Directorate of Sugar.
Trade policy for sugar – Depending on mill-wise monthly production and stocks, local production levels and world market conditions, quantitative controls on both exports and imports are common in the sector. This is an avoidable source of uncertainty for the industry.
Regulations relating to by-products – There are several regulatory hurdles in respect of the by-products of sugar industry. In respect of molasses, these are at the state level, in terms of state government decisions relating to fixation of quotas for different end uses of molasses, restrictions on movement (particularly across state boundaries), etc. In respect of co-generation from bagasse, there are regulatory and implementation issues relating to freedom to sell power to consumers other than the local power utility, and resort by state governments or their electricity boards to restriction on such open access sale by frequent or routine invocation of statutory provisions meant to deal with emergencies.
Low sugarcane productivity and sugar recovery:
The percentage sugar recovery from the crop has been far below standards achieved by major sugarcane based sugar producers with comparable agro-climate, like Brazil and Australia. The sugar recovery in different states has been hovering around 9.5% to 11.5%, with all India figures of around 10% while the potential is at least 11% in Sub-tropical part and 13% in the Tropical part of the country. This leads to low overall production and results in short supply of sugarcane to sugar mills. This, in turn also increases the production cost, keeping Indian sugar out of global market.
Government of India had setup a working group to study/analyze factors restricting sugarcane productivity/sugar recovery in the country, in each, major sugarcane & sugar producing State under the Secretary, Ministry of Consumer, Food and Public Distribution. The group gave recommendations to make the sugar sector competitive internationally. The increased sugarcane productivity will also improve the overall income generation of the sugarcane cultivators, thus will help eliminate imbalance in the cycle.
Problems in achieving economies of scale:
Indian sugar industries have not achieved economies of scale in producing sugar so far. There are two possible reasons which have not allowed full utilization of the production capacity. There are very few sugar mills, which have achieved economies of scale and thus able to maintain production cost. These industries are able to recover production cost through sugar as well as by-products. Many small sugar mills mainly from states other than major sugar producing states have not been able to utilize by-products efficiently. The industrial capacity is majorly under ownership of private sector units and cooperative sector. While the total number of operational sugar mills in the cooperative sector (286) exceeds the number of operational sugar mills in the private sector (282), the size of the mills is in general bigger in the private sector. Private sector leads with crushing capacity, while cooperative are quite far from achieving same crushing capacity. This also is reason, that private sector sugar mills are in better position than their cooperating counterpart.
Secondly, the short crushing season is the stumbling block in achieving economies of scale, as mills almost remain idle in absence of sugarcane supply. Due to raw material shortage, sugar mills in Subtropical belt (Punjab, Haryana, Uttarakhand, Uttar Pradesh, Bihar) generally work for not more than 100-130 days. The working days in Tropical belt (Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu) have been in the range of 140-180 days except Tamil Nadu where industry is able to get the working days stretched even upto 200-210. The industry, therefore, mostly has been working below capacity, a handicap which adds to the production costs.
Untapped potential of Sugar mills in renewable energy area:
As seen earlier, production cost can also be reduced through proper utilisation of by- products of the industry. Gradually, the sugar industry is emerging as a substantial source for meeting a part of the ever increasing energy needs of the country through the co-generation of electricity and the Ethanol, which are renewable/green sources of energy and these developments hold the potential of converting Sugar mills into huge Energy Complexes with passage of time.
In Brazil, around 50% of the motor fuel requirements are met by ethanol (mainly produced by sugar industry) and vehicles run on flexi-fuels (E20 – E25 / 100% anhydrous alcohol/ 100% petrol), saving the country valuable amount of foreign exchange outgo on import of Petroproducts, whereas we have been grappling with the situation whereby even E5 blending programme is just gaining momentum. Other use of bagasse includes: in manufacturing paper pulp, insulating board, plastic, carbon cortex as well as converting it into edible molasses and cattle feed.
In India, though the contribution of these activities to the turnover of the industry at the moment is only around Rs. 10-12 thousand crore, over long term, the sugar industry has the potential to meet upto 20-25% of the total motor-fuel (Petrol) requirements of the country, and can therefore become a substantial partner in reducing the foreign exchange outgo and attaining energy security, apart from meeting the traditional requirements of potable and alcohol based chemical industry.
Sugar and politics:
Populist governments face the constant temptation to raise support prices, particularly in election years, and state advisory prices for cane are often much higher than even the Central statutory minimum price. Result is, India has some of the world’s highest sugarcane prices. It is an open secret that, in the major sugar-producing states in India, control of sugar mills — set up as cooperatives — allows one to control rural politics. Hence, it is the importance of sugar mills in politics that has been responsible for confused policy.
A case of major Sugar Producing state – Maharashtra:
The development of sugar mills in Maharashtra owes its progress to Cooperative movement. Many sugar mills were setup under cooperative sector, where farmers came together to setup a mill, and decided to share profit. However, it did not end as it was expected. Entry of Politics in the Sugar management board changed things. Too much government protection to these cooperative sugar mills made them to completely ignore management of the industry and soon made it economically unviable. Government had to bail out many mills.
Farmers agitated under the various organizations, Swabhimani Shetkari Sanghatana leading in Maharashtra in protest against sugar cane prices, led by Lok Sabha MP Raju Shetty for high sugarcane prices. Protest by these organizations has many times turned violent. Giving up to the pressure of such protest, sugarcane prices were raised to such high levels, making sugar production uneconomical.
Even government has to bear the subsidy burden, to save economically unviable mills. Now, Maharashtra is slowly retracting subsidies, leading to the gradual acquisition of these mills by private companies. Private sugar mills now produce almost 30 per cent of the sugar in Maharashtra. However, many of these private industries are owned of political figures, underlining the importance of sugar mills in politics. From this, one can understand how sugar industry and politics are deeply linked.
Getting Indian Sugar Industry back on track:
In order to, harness the unexploited potential of the sector, the Government has recently acted on the major recommendations of Dr. C. Rangarajan Committee on sugar sector and has dispensed away with the major regulations related to the regulated release of sugar and imposition of levy on domestic production and these developments are expected to boost the bottom line of the industry in the long run.
The Indian share in global sugar production has risen from 5% to 15% in the last five decades. In the same period India’s share in global sugar consumption has gone up from 5% to 13%. Country is now the second largest sugar producer in the world and despite the largest consumption base in the world is self-sufficient and is also able to generate exportable surpluses.
India has the large potential in sugar export, especially in South and Sout-East Asian market. However, India must work on above mentioned weaknesses to improve its sugar production. Sugar industry provides the best prospect in energy security sector also, however it need positive and clear policy approach towards this. Sugarcane farmer has always been the sufferer in the whole sugar economics cycle, thus Governments needs to change it approach from just increasing sugarcane price to providing input help for farmers such as improved breed of seeds, fertilizers and education of advance mechanism etc. This will make sugarcane production viable for them, and they will not demand irrational high prices for their produce.
Making Sugar industry sustainable from environment point of view:
As we know, Sugar cane is a water-intensive crop and grows well in areas with a good irrigation facility. However, it has been seen, farmers from rain-fed areas, or where irrigation facilities are not available are growing this crop, and thus threatening ground water resources. Government can take up a survey of such areas and educate farmers towards diversifying crops.