Breaking cyclicality in sugar production

Kunal Bose / May 08, 2012,
Business Standard
During his recent visit to Delhi, the executive director of the International Sugar Organi-sation, Peter Baron, described India as a ‘wild card’ in the world market because of cyclicality of cane production and therefore, of the sweetener here. The Indian sugar cycle gives three years of good production in a row followed by consecutive years of bad crop. Production in a season, coupled with opening stocks, was what the government would consider to decide how much sugar the country would be either importing or exporting in a given period. Now in a major policy initiative, New Delhi has dispensed with quantitative restrictions on exports, including the release order mechanism.

India is the world’s second-largest producer, behind Brazil. But at an estimated 22 million tonnes (mt), India leads the world in sugar consumption. Sugar here remains a politically sensitive commodity despite its small share in the monthly household budget. Wasn’t the government the target of some strident criticism during the major part of 2009-10, when for weeks retail sugar would cost Rs 45 a kg and more? The powers that be were perforce extra careful while sanctioning exports. In the current season, New Delhi was never in doubt about a bumper cane harvest allowing it to sanction exports in three instalments of one mt each. In the past as the government would prevaricate on sanctioning exports, the local industry would helplessly watch as white sugar at LIFFE and raws at ICE would suffer price falls. Capacity of sugar factories to settle cane dues is compromised if they cannot sell sugar in the world market when prices are attractive.

Many irritants will be out of industry’s way, which depends on 50 million farmers for cane supply, provided production cyclicality is broken. Since the beginning of this decade, the high and low sugar production points were 28.361 mt in 2006-07 and 12.691 mt in 2004-05. Supply fluctuations of this order will largely explain the government’s circumspection in doing away with controls on sugar. That is why before initiating reforms, the government constituted a committee headed by the prime minister’s economic council chairman, C Rangarajan, to make recommendations on decontrol. If the committee keeps to the schedule it has given itself, its report should be available by July-August.

Much ahead of the availability of the report and whatever reforms the government will initiate, food minister K V Thomas announced he would be chasing the goal of breaking “sugar cycle with help of the industry and farmers.” Thomas is arguing that on the back of two years of encouraging production, the country should have “good sugar” output in the season to start in October 2012. “If we are able to continue with that trend in 2013-14, we will be able to break the sugar cycle,” he says. Production being dependent on the size and quality of cane crop, the outlook for 2013-14 at this point is entirely in the realm of speculation. At the same time, we have it from the director general of the Indian Sugar Mills Association (Isma), Abinash Verma, that as of now, cane planting is ahead of last year. This leads him to say, “That we will have surplus sugar next season too is not in doubt. We, therefore, expect the government to allow sugar exports for three years in a row.” In fact, the sugar supply scene for 2012-13 could get better if the deficit in plantation coverage in Maharashtra and Karnataka is made good in the next couple of weeks.

“I’m banking on ‘multi-pronged policy interventions’ that Thomas says the government will be initiating to break the infamous sugar cycle. The fundamental challenge for the government and sugar factories is to sustain the interest of farmers in growing cane and not migrate to competing crops. For this, two conditions will have to be fulfiled. First, farmers must continue to be adequately compensated for their efforts in growing cane and that should include offsetting input cost rises. Second, at all times, the industry should have the capacity to clear cane bills in the stipulated time,” says former Isma President Om Dhanuka. This, however, is not the case now as unpaid cane bills are threatening to touch Rs 10,000 crore. Factory liabilities on cane head keeps on rising as ex-factory prices of free sale sugar fall short of production cost.

To add to industry’s misery, it is obliged to part with 10 per cent of output as levy sugar at 40 per cent below production cost. It is required to provide subsidy of Rs 2,800 crore for sugar sold through ration shops. But why should sugar factories alone be asked to bear the cross when the government is running a food subsidy bill of Rs 100,000 crore? The principle of equity is getting compromised in the process. The industry argues it would be in a position to pare its cane dues in a significant way if the levy obligation goes. So strong are the feelings against the practice that one of the producers has given a call for building a consensus among Isma and cooperative factories for unilaterally discontinuing levy supplies.