Bhupesh Bhandari: Bitter-sweet times

Sugar barons ought to be a happy lot. Sugar prices have risen steadily to over Rs 30 a kg as demand threatens to outstrip supply by a huge margin. It is more or less certain that the shortage will persist for at least one more year. Most of them have mills in Uttar Pradesh where there are no arrears of past payments to sugarcane farmers. Consequently, share prices of sugar companies have shot up in the last six months. Most promoters have seen their wealth climb 50 to 60 per cent.

Still, if you talk to any of them, you will find undercurrents of anxiety and fear. Here’s why: Mills in Uttar Pradesh will begin to crush sugarcane in a month or two. The Centre announces a minimum support price for sugarcane. While this is what sugarcane farmers get in most states (including Maharashtra, the largest producer of sugar in the country), Uttar Pradesh announces a price which has always been way above this. Since sugar prices are high, there are apprehensions that the state may increase it sharply this time — from Rs 140, many companies expect it could shoot up to as much as Rs 180 per quintal.

 

At current sugar prices, perhaps the mills can afford to pay this price. As the crop in the state is expected to be around 20 per cent less than last year, there could be a scramble for sugarcane between the mills and the gur and khandsari makers. The mills could therefore actually end up paying more than that. Some of them have even petitioned the state government to instruct the gur and khandsari units to delay production. The problem is what will happen next year?

Farmers planted less sugarcane and more wheat last season because the terms of trade had moved against sugarcane. If the state advised price is fixed at Rs 180 a quintal, you can be certain that the next sugarcane crop will be huge in size. To pay for the extra sugarcane at Rs 180 a quintal — it could be more — will prove to be a costly affair. Uttar Pradesh has never lowered the state administered price. This will bleed the mills. And this is what makes them nervous.

Mills, on their part, have for many years lobbied against the cyclical rise in the state administered price. But the state has not given in to their demand. The reason is not far to seek. There are over 7 million sugarcane farmers in the state. Together, they make a sizeable vote bank. It is a constituency no party in power can afford to ignore. The farmers support Mulayam Singh Yadav’s Samajwadi Party, according to one set of experts; they are behind Mayawati’s Bahujan Samaj Party as one body, if the other set of experts is to be believed.

There’s more. When Yadav was in power, he had announced an incentive for new investments in the sector. Over a threshold, all investments would get some cash back along with sizeable tax breaks. Companies put up a score of mills across the state. But Mayawati’s government scrapped that scheme. The matter is in the courts. None of the companies shows the money due to them in its annual profit and loss statement. Purists will argue that such incentives distort the natural flow of market forces. The withdrawal of the incentives has only made matters worse. It becomes very difficult to develop a medium- to long-term strategy for the business.

Then there is the Centre which regulates the flow of sugar to the market through monthly release orders. At the moment, it is bothered by the high price of the commodity. The festival season is upon us, when sugar consumption shoots up across the country, and the aam aadmi’s government cannot let prices rise any further. It has, therefore, raised the releases to the market. So, while the Uttar Pradesh government is likely to raise the cost of the principal raw material for the mills, the Centre wants to keep the price of the final product under check.

The Centre also wants to increase the quota for levy sugar, which is used to feed the public distribution system for poor households, from 10 per cent to 20 per cent. Since sugar through this network is sold at low prices, the mills currently get a lower price than that prevailing in the market. Naturally, they are resisting the move which threatens to eat into their profits.

Should the government be so fixated on retail prices? Industrial buyers — cola companies, confectioners and others — buy almost three-fourths of the sugar produced in the country. Retail buyers, the aam aadmi, consume just a fourth. Average monthly sugar consumption of an Indian household, the industry argues, is 4 kg. Even if prices touch Rs 40, the additional expenditure will only add up to Rs 40 a month. The rise in the prices of other commodities like wheat and pulses has been far steeper, it adds.

Massive import of sugar at the moment looks a distinct possibility. The current stock with mills is around 4 million tonnes, and production in the coming season is projected at around 15 million tonnes. As our annual consumption is about 23 million tonnes, there could be import of at least 4 million tonnes, some of which has already been contracted. This, mind you, will leave no buffer stock in a year’s time. It so happens, sugar prices globally are on fire. Brazil has had unseasonal heavy rains which have impacted production. The choices are few.