High global production leading to supply being ahead of demand for five years in a row and the inevitable price collapse has scathed the sugar industry in Brazil no less hard than in India. In retrospect, it appears that sugarcane crushing factories in the world's largest producer and exporter of the commodity Brazil as also in India would have suffered less pain had the policy response of Brasilia and New Delhi to the deepening crisis been timely and appropriate. For example, under the United Progressive Alliance (UPA) regime here, export-import trade in sugar was repeatedly botched up when the industry was in desperation to reduce its inventory burden. Did some redemption for the industry come last sugar season (October to September) when the National Democratic Alliance (NDA) government allowed incentive-enabled export of 1.4 million tonnes (mt) of raw sugar in end February 2015? Certainly not. The late announcement of the scheme restricted raws export to 500,000 tonnes. Overflowing warehouses forced some factories to sell around 600,000 tonnes mostly whites outside the scheme suffering losses in the process. For a change, the government finding that the industry began the current season with stocks nearly 4 mt more than the normal at 9.1 mt and ex-factory realisation remaining Rs 500 to Rs 700 a quintal below production cost depending on the region was quick off the blocks in the current 2015-16 season in distributing export quotas totalling 3.2 mt among producing units.
Compulsion to export is so strong that the government has wisely allowed for the first time the sale of all types of sugar - raws, refined and whites - in the world market. Obviously wary of scrutiny by the World Trade Organisation, New Delhi has refrained from offering any subsidy ignoring what is on offer in Pakistan. What it has done instead is to pay Rs 4.50 of the Rs 10 a quintal of the 'fair and remunerative price' for cane raised for the current season directly to farmers supplying the feedstock to factories that execute exports according to quotas. But factories far removed from ports in states such as Uttar Pradesh and Punjab are unlikely to be able to export without the government subventing the cost of transfer of cargoes from mill gate to port. The point is why farmers should be penalised for any lapse on the part of factories. Even though shortcomings or oversights like this remain, New Delhi has finally started acting to give relief to the industry. Ideally all government action has to be in the context of the industry's debt burden rising more than three times to around Rs 50,000 crore and more and more factories moving into the sick bay. Moreover, factories still need to clear over Rs 7,000 crore cane dues.
But what about Brazil? Patrick Knight writes from Brazil for the UK based Dry Cargo International that low prices lasting much longer than usual and a "complete lack of support from an unsympathetic government" headed by a left leaning president Dilma Rouseff have proved "calamitous" for the sugar industry. Uneconomic working resulting from the end of commodities supercycle has led to closure of "80 of the country's 300 or so mills" and "all but the most powerful sugar companies have been pushed deep into debt." No different a situation than in India. Knight says under the weight of losses many promoters have already exited sugar business while many others, including some global giants are ready to quit. The problem, however, is those still keen to exit are not finding suitors for "mills they bought a decade ago, even for less than half what they paid for them." The Brazilian currency's fall in value by over 30 per cent against US dollar has made it difficult for many sugar mills to service foreign debts.
Brazil, which earlier used to have more than half the share of 45 mt global trade in sugar now finds it down to about 45 per cent. Contraction of the Brazilian farm sector by 2.4 per cent in the third quarter of 2015 shows other agricultural commodities relevant to the country too have met the fate of sugar. Fears of a cruel recession gripping Latin America's largest country have put Brazil's first woman president in a bind forcing her to rescind some of the retrograde steps she took earlier. Like Brasilia has reintroduced the tax on fossil fuels, much to the relief of sugar factories in the country's centre south. This to some extent should improve ethanol prices. In 2015-16, about 60 per cent of the 600 mt cane crop will be allocated for ethanol production.