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There is a huge opportunity this
year for the sugar industry to sustain a high output. But
meaningless controls will only convert the opportunities to
threats and create hurdles for stake-holders, including cane
farmers at the end of the line.
The industry estimates the production to be around 25 million
tonnes during the current sugar year (October to September) and
the government's forecast is 24.5 million tonnes. More importantly
it is for the first time in recent memory that global prices today
are offering substantial premium even though India, the largest
consumer and second largest producer, has a surplus.
The world is looking at exports from India and waiting
breathlessly for the government to allow unrestricted exports. An
important decision was taken mid-December when it was announced
that 500,000 tonnes of sugar would be allowed to be exported. Some
500 sugar mills were to benefit from the announcement -- a
democratic way to ensure the benefits are reaped by all. As sugar
prices then moved up in the latter part of December, the
government was quick to respond with two important decisions.
First, it announced a significantly higher quota of non-levy sugar
-- the quantum of the commodity which mills are free to retail in
the open market, as opposed to selling it to the government for
distribution through fair price shops. For January, the non-levy
sugar was fixed at 1.7 million tonnes, compared to 1.45 million
tonnes during the like months of the previous three years.
Second, it decided to extend the stock-holding limit of 200 tonnes
for traders beyond the Dec 31 deadline to March 31 this year. This
was another step which the government used to control demand and
suppy. As expected, prices started moving down. It also put
pressure on sugar mills to sell more in January.
What surprised industry even more was the decision to constitute
an empowered group of ministers to decide whether or not to allow
exports under open general licence. Despite passage of one month,
no step has been taken to even approach the ministerial group.
Meanwhile, sugar prices have slowly but certainly fallen over the
past one month. From an ex-factory price of about Rs.3,000 per
quintal, prices have dropped by Rs.200 rupees to around Rs.2,800
per quintal. Sugar prices in Maharashtra have fallen to Rs.2,600
per quintal.
The flip side of all this is: Sugar prices are again moving to
levels that are unviable for the mills. Experts also say any
further fall in prices will put the finances of the sugar mills
under greater stress, especially when they are paying very high
prices of around Rs.210 per quintal of sugarcane.
In the case of mills in the north, where the sugar recovery is
about 9.5 percent, the production cost works to around Rs.2,900
per quintal. This figure is arrived at after considering the
returns from the sale of by-products and the loss on account of
levy sugar sold to government at Rs.1,850 per quintal. If this
present trend persists, it is feared mills can no longer sustain
the cane price of Rs.210 per quintal and arrears of farmers could
mount.
This is also the time cane sowing season is under progress.
Farmers will decide whether or not to continue growing sugarcane,
depending on timely payments for their crop. Delayed payments may
result in a shift out of cane cultivation sooner than expected and
the country may witness a repeat of what it saw during the past
two seasons. The country may also have to become a net importer
from a net exporter.
The government did not have much choice in 2006-07 and 2007-08
when international sugar prices were lower than domestic prices in
India and subsidies were needed to export sugar. That is not the
case now. There is a viable global sugar market waiting to welcome
exports from India. Revival of the 500,000 tonnes of export under
open licence will help the sentiments to improve, ensure better
cash flow to the sugar industry and avoid any unnecessary distress
sale of sugar. It is in the interest of farmers as well.
Falling sugar prices can also be controlled and made to remain
reasonable and viable by improving domestic demand, which can come
about by removing the restriction of stock-holding limits of 200
tones on traders and allowing exports of surplus sugar.
On the consumption side, the government was estimating domestic
demand at 23 million tonnes. But seeing the releases so far,
consumption may not exceed 220 million tonnes by the end of the
remaining seven months of this sugar year. With a rather healthy
opening balance of 5 million tonnes this year and exports of about
1.2 million tonnes, there is still a surplus of over 1 million
tonnes, even if we go by the government's production estimate of
24.5 million tonnes.
The domestic market is probably aware of this significant surplus
of 1 million tonnes and that is the reason why sugar prices are
behaving the way they are during the past one month, since the
time the government decided to postpone a decision on exports.
It is important for the government to act immediately to ensure
cane farmers do not suffer on account of mounting arrears. The
decision should guarantee timely payments to them and keep them
interested cane cultivation so that India not only continues to be
self-reliant in this important commodity but also looks at the
international market. We should be exporting and not importing
sugar.
(Abinash Verma is director general of the Indian Sugar
Mills Association. He can be reached at dgisma@indiansugar.com)
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