Partial sugar decontrol not an answer

Prices falling, arrears to farmers and mills' losses on the rise; linking cane price to sugar prices seen as inevitable in addition to active govt help

Two years earlier, in April 2013, the then Union government had decided to lift some controls on the sugar industry, in place for decades. The obligation to sell 10 per cent of a mill’s output to the Public Distribution System at prices below the cost of production was scrapped. So was the government's power to control the supply of sugar to the open market.

Two years later, the industry says it is worse off. Banks have stayed away from providing money and investors have deserted sugar shares in a booming market. The industry is not able to pay the price of sugarcane to farmers, nor able to sell its sugar stocks.

The reason is that the price of raw material, sugarcane, is still fixed by state governments. Maharashtra and Karnataka recently announced a formula which gives weight to the price of sugar before fixing the cane price that industry has to pay to farmers but it will take time to deliver fruit. (SUGAR ECONOMY)

This season, prices of sugar are down and mills have huge payment dues. Countrywide dues to farmers for cane payment were Rs 19,000 crore by the end of 2014-15.

If, year after year, sugar prices keep falling and arrears keep rising, why do farmers sow more cane? The reason is no other crop gives such high and assured returns. For example, in 2011-12, the Fair and Remunerative Price proposed by the central government for cane was Rs 145 a quintal; it was Rs 220 in 2014-15. No other crop has given that much return; cane is also considered a sturdy crop, less affected by abnormal weather.

Abinash Verma, Director General, Indian Sugar Mills’ Association (Isma), says as cane prices are determined by states, without considering final product prices, including that of sugar, “farmers get no signal of any imbalance”. Hence, for some years, sowing has been static or risen, despite a falling sugar price.

Hence, says Bharat Mehta, chief executive officer of Dalmia Bharat Sugar and Industries, “Reform specially linking the cane price with that of final products is necessary.” Or, full decontrol of sugar, taking states on board.

Sugar prices are down 20 per cent in the open market since partial decontrol, at a five-year low. Isma says the all-India average cost of producing sugar is Rs 28.64 a kg; in the open market, prices are 10-15 per cent lower than the cost of production in most places. It is worst in Uttar Pradesh, second largest producer state, which also has the highest price set for cane.

Mehta said, “The government should build a strategic sugar reserve, incentivise more ethanol production for higher blending with petrol and get banks to restructure short-term loans and increase liquidity for mills.”

Investors had better keep away from sugar stocks till more clarity emerges. In the past two years, the Business Standard index of sugar companies’ share prices has grossly under-performed the benchmark indices. Taking 100 as the base of two years earlier, the BSE Sensex has risen to 151; sugar companies’ index fell to 91.

Satish Mishra of HDFC Securities said, “We see no structural change in the sector dynamics unless the cane price is linked to sugar prices. The industry’s outlook will remain grim till complete decontrol.” HDFC Securities is neutral on sugar stocks.

Exports this season are not expected to be higher than two million tonnes in an optimistic scenario. This, says Verma, would leave nine million tonnes of surplus when the sugar year ends in September. He said, “sugar mills will be incurring cash losses of Rs 12,000 crore by the end of the sugar year.”

The only good sign he sees is that this is the first year for the in Karnataka and Maharashtra where the cane price is fixed after taking into account finished products’ prices. “Next sugar year, mills in these two states should perform relatively better.”