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Export outlook for sugar industry – diversification needed for positive development

Following the recommendations of Rangarajan Committee, Karnataka took the lead in setting up Sugar Control Board to fix cane price based on prices realised for sugar and allied products. But the process for fixing sugarcane prices has not been smooth so far

For the 12 months ending in September, India's sugar production amounted to 25.14 million tonnes (mt), whereas it was 26.34 mt during the preceding year. This shows a decline of 4.5%, resulting in a drop in crushing and recovery, due to less rainfall both in Maharashtra and Tamil Nadu. According to the Indian Sugar Mills Association (ISMA), 526 sugar mills crushed 250 million tonnes of sugar cane recovering about 10.03% sugar. It was slightly better last year at 10.25%.

 

Uttar Pradesh produces 7.5 mt of sugar and the average cost of sugar production in UP is estimated at Rs35 per kg during 2012-13 and during the year in the domestic market sugar fetched Rs29 per kg. Part of the loss was recovered by selling ethanol, molasses, pressmud and power generated from baggasse.

 

According to the industry and cane growers, profit from molasses is higher than sugar and so the private industry resorts to paying advances upfront to farmers to ensure supply of cane rather than follow the state advised price (SAP)!

 

For example, the SAP fixed by the UP government in the 2012-13 season was Rs280 per quintal (or Rs2,800 per tonnes). Millers have claimed that this rate is very uneconomical considering other cost factors such as the purchase tax, commission to cooperative societies that procure the sugar cane, transport cost to factory as this amounts to Rs295 per quintal. What about the other expenses incurred by the mills in terms of wages, chemicals, packing materials, and maintenance costs of machinery, spare replacement, marketing and interest costs on borrowed funds?

 

Even assuming the base cost of Rs280 per quintal, when the above factors are added on, the actual cost exceeds Rs34 per kg, depending on the mill.

 

Sugar consumption in India during 2012-13 rose slightly higher than the previous year by a mere 3.6% to reach 22.8 mt. With a brought over balance the opening stock this year is 8.85 mt and India can easily afford to export 2 mt of raw sugar. Already, the industry has made export commitments for over 300,000 tonnes and more are expected in the next couple of months.

 

One problem that has caused heartburn in the industry refers to the import policy that permits sugar imports on a 15% duty. There is enough surplus sugar in the country and it is in our interest to export rather than import, and if at all some sugar in specialized forms (or types) are allowed to be imported, the duty structure should be revised upwards to say 40%, according to Abinash Varma, director general of ISMA. Rightly so.

 

In the meantime, trouble is brewing over the price of sugar cane, as cane growers have been demanding higher price as the cost of cultivation has gone up, but the millers are unwilling to pay higher than Rs2,400 per tonne, which was the rate available during the last crushing season. In fact, growers in Karnataka are demanding Rs300 per quintal as against Rs280 per quintal last year. Maharashtra farmers are seeking Rs320 (against last year’s Rs260), while Haryana has fixed Rs301 per quintal. As we can see the rates are not uniform and the farmers/ growers are demanding higher prices. This is because diesel and fertiliser prices too have gone up!

 

Based on the recommendations made by the Rangarajan Committee, Karnataka took the lead in setting up Sugar Control Board to fix cane price based on prices realised for sugar and allied products. But the process for fixing the sugarcane prices has not been smooth so far. As the festive season approaches, sugar prices in the retail market have come down to Rs31-32 per kg level.

 

The major problem faced by the mills in UP, which is India's largest sugar producer, is that the farmers are demanding more for their cane, and seeking prompt payment, whereas the law provides that settlement may be made within 14 days of delivery of the cane. Except for a few mills, most depend upon borrowed funds in settling dues to farmers, who claim that they have arrear payments due to them from mills for the last season!

 

If a detailed study is made of the Rangarajan committee's recommendation, it will be found that they had recommended that farmers be entitled to 75% of the ex-mill value of sugar. But the recovery factor is about 10% (it varies from 9.5% to 9.8%). This will actually work to be around Rs225 per quintal, as against the Rs280 they got earlier. Therefore, establishing a rate for sugar cane is not an easy task, even state-wise, let alone making anything like this applicable on an industry-wise or uniform basis for the whole country. This would be impractical and will not be acceptable.

 

The other issue that needs to be tackled at the same time is the question of

oil marketing companies (OMCs) increasing their purchase of ethanol from mills to blend with petrol. Five percent blending has been made mandatory from January this year, but if based on the last six months experience, it can be increased to 10% blend, our savings on imports will reach an estimated $700 million. This will give mills the extra boost to cover up their loss. So far, OMCs have called for tenders to supply 1,332 million litres of ethanol and the government may direct them to increase this to help import substitution.

 

In the meantime, the government must encourage the industry to export upto

3 million tonnes of sugar; instruct OMCs to increase their offtake of ethanol by making it mandatory for them to use 10% blend instead of 5% as at present, and leave it to State sugar control boards to fix reasonable rates for cane so that both growers and millers are happy.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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