Revenue-sharing formula can redeem sugar sector

Nothing could be a bigger sacrilege in the sugar sector than factories not clearing farmers' cane dues within the stipulated time. In the process, sanctity of cane as a cash crop is lost and farmers are subject to much privation, including committing suicides as happened in more than one state last year. But, then, mill owners say when they fail to make payments to farmers for cane supplies, they suffer a cathartic experience.

Crises of the present proportions visit the agro-based industry in a cycle as prices of raw sugar on Intercontinental Exchange in New York since 2010 fluctuated between a high of 30 cents a pound and a low of 10.44 cents, almost entirely on supply-side issues.

India, the world's second largest producer of sugar, had seen the average ex-factory price dip to Rs 2,157 a quintal in July 2015 plunging the whole industry in big losses. In fact, month after month, ex-factory prices fell short of the cost of cane, not to mention the other elements of conversion cost.

No wonder, industry cane dues at one point in the current season rose to Rs 22,000 crore, compelling the government to give an interest-free loan of Rs 6,000 crore to factories in June 2015. But, this amount was disbursed directly to farmers. Factories still owe substantial sums of money to growers.

Such large cane dues have invited the acerbic comment that factories, by not paying in time, are securing supply of the principal raw material on long-term interest-free credit. For every other input, including factory labour cash payment, has to be made.

But, should this be the case when farmers are the reason for the industry being able to raise sugar production to 28.31 million tonnes (mt) in 2014-15 from 12 mt in 1990-91 and build in the downstream exportable cogeneration power capacity of 5,500 Mw and ethanol capacity of 2.24 billion litres? President of Indian Sugar Mills Association (Isma) Tarun Sawhney is doing well to emphasise that the interests of cane growers and factories converge and a "stable and viable sugar industry will create a win-win situation for all constituents, including consumers" of the sweetener.

The market has its own dynamics. Volatility in prices of sugar, a globally traded commodity, is unavoidable. International trade in sugar accounts for about 25 per cent of world demand.

At whatever prices factories sell sugar in a season, growers must have the assurance of getting paid the fair and remunerative price (FRP) announced by the government on the basis of recommendations of the Commission for Agricultural Costs and Prices (CACP).

In making FRP recommendations, CACP considers the cost of growing cane, fair margins for farmers, ex-factory sugar sale price and realisation from the first level of cane by-products such as bagasse, molasses and press mud.

But, what happens when sustained low prices of sugar, as recently experienced by factories, stand in the way of their settling cane bills in time? Sawhney says the interest of Indian sugar economy will be best served by adopting a "hybrid" approach to rewarding farmers through a revenue sharing formula (RSF), uniform application of FRP across all cane-growing regions and building of a "reserve" under Sugar Development Fund by way of a cess on sugar.

The reserve is to be used to bail out growers in difficult times. The hybrid formula is a punch of recommendations of the Rangarajan committee and CACP.

India's sole multinational sugar producer, Narendra Murkumbi, is also a strong advocate of RSF as this is "globally found to be the most effective and robust system". Brazil, Thailand and Australia have their unique RSF and price risk management practices. A single model does not hold good for all cane-growing nations since their farm reality is not identical.

As for India, if the occasion arises when under RSF, the 75 per cent of combined revenues from ex-mill sugar and cane by-products will fall short of FRP, then sugar reserve fund will be accessed to bridge that gap. In good times for the industry, as hopefully will be the case now, the growers are to get more than FRP.

The Rangarajan committee has, therefore, recommended a two-step payment to growers: FRP according to extant mechanism and final payment on the basis of half-yearly ex-mill sugar and cane by-product prices. If cane dues stop visiting them, then, farmers stand to make much more money by growing sugarcane than paddy and wheat. Implementation of RSF backed by a well-funded sugar reserve will rid the sector of its ills.