Sugar And Spice And All Thats Nice

Next to caste, its a commodity which influences Indian politics most. Sugar, to be precise. Some 30 seats in UP, 20 seats in Maharashtra and another 30 in Tamil Nadu and Karnataka combined, are in various sugar-belts. The vote in those seats swings in tandem with the industry. When times are good, they vote for incumbents, when times are bad, they switch MPs.

This disproportionate political weightage is why sugar is the most controlled of commodities. Changes are potential political dynamite. The controls make it easier to predict the sugar industrys future though it doesnt make life any easier for farmers.

Agricultural products are cyclical commodities for obvious reasons. There will be seasons of plenty and seasons of shortfall. But sugar goes beyond normal cyclicality because of the controls. And thats precisely why we can sip our morning cuppas and still make money out of the spoonfuls that caters to our collective sweet tooth.

Think of the basic cane cycle. The sooner cane is crushed after cutting, the higher the sugar-yield. So, mills source locally. Among the byproducts of sugar are molasses and bagasse. Molasses is used in the production of khandsari, as well as alcohol, glycol and other industrial chemicals. Bagasse is used to make paper and often used as fuel in sugar-mills.

Now, add the controls. A mill only buys cane at a procurement price fixed by the state government. It can only buy in a designated catchment area. It must sell a quota at a controlled price to the government. This levy-quota varies from zero for a new unit with a quota honeymoon to 40 per cent of production for an older unit. The quota-differential means older mills want full decontrol, but new mills prefer to keep their advantages.

A mill is only allowed to release a certain amount per month the rest piles up as inventory. In addition, molasses is regulated in many states it cannot be moved out of state, it must be sold at fixed prices etc. Much ingenuity is expended on increasing and decreasing these controls.

This process is further complicated by economies of scale. India is the biggest producer of sugar in the world in glut seasons and number two (after Brazil) in lean years. So import and export prices are affected not only by ministerial cupidity and control but also by market size. Exports fetch low prices, shortfalls drive import prices up.

Indian sugar production varies from 98 lakh tonnes per annum to 160 lakh tonnes per annum. Demand is around 130 lakh tonnes. Production swings up after a lean season sees cane-procurement prices soaring. Next season, farmers put more area under cane. Production rises prices drop or mills default on prices. Then, farmers move away from cane-cultivation. Production drops and prices rise again. Two lean years are followed by two years of increasing glut. This has occurred like clockwork for many seasons. The price of sugar hit a historic low in 1978 when the Janata government decontrolled for a short while. Since then, it has oscillated inversely with production.

The last sugar production low was in 1993-94 and 1994-95. Prices soared, an import scandal occurred with Kalpnath Rai holding centre-stage, stockmarket operators made a killing. The next two years saw successive levels of record production. There were lots of defaults while inventory buffers built up. The industry went into a tailspin. Shortfalls are projected this season until the spring of 1999. Next time you curse the rising price of sugar, check out the rising pricelines of listed sugar companies. A Balrampur Chini or a Thiru Arooran or Bajaj Hindustan could sweeten your portfolio.