There is a huge opportunity this year for the sugar industry to sustain a high output. But meaningless controls will only convert the opportunities to threats and create hurdles for stake-holders, including cane farmers at the end of the line.
The industry estimates the production to be around 25 million tonnes during the current sugar year (October to September) and the government's forecast is 24.5 million tonnes. More importantly it is for the first time in recent memory that global prices today are offering substantial premium even though India, the largest consumer and second largest producer, has a surplus.
The world is looking at exports from India and waiting breathlessly for the government to allow unrestricted exports. An important decision was taken mid-December when it was announced that 500,000 tonnes of sugar would be allowed to be exported. Some 500 sugar mills were to benefit from the announcement - a democratic way to ensure the benefits are reaped by all. As sugar prices then moved up in the latter part of December, the government was quick to respond with two important decisions.
First, it announced a significantly higher quota of non-levy sugar - the quantum of the commodity which mills are free to retail in the open market, as opposed to selling it to the government for distribution through fair price shops. For January, the non-levy sugar was fixed at 1.7 million tonnes, compared to 1.45 million tonnes during the like months of the previous three years.
Second, it decided to extend the stock-holding limit of 200 tonnes for traders beyond the Dec 31 deadline to March 31 this year. This was another step which the government used to control demand and suppy. As expected, prices started moving down. It also put pressure on sugar mills to sell more in January.
What surprised industry even more was the decision to constitute an empowered group of ministers to decide whether or not to allow exports under open general licence. Despite passage of one month, no step has been taken to even approach the ministerial group.
Meanwhile, sugar prices have slowly but certainly fallen over the past one month. From an ex-factory price of about Rs.3,000 per quintal, prices have dropped by Rs.200 rupees to around Rs.2,800 per quintal. Sugar prices in Maharashtra have fallen to Rs.2,600 per quintal.
The flip side of all this is: Sugar prices are again moving to levels that are unviable for the mills. Experts also say any further fall in prices will put the finances of the sugar mills under greater stress, especially when they are paying very high prices of around Rs.210 per quintal of sugarcane.
In the case of mills in the north, where the sugar recovery is about 9.5 percent, the production cost works to around Rs.2,900 per quintal. This figure is arrived at after considering the returns from the sale of by-products and the loss on account of levy sugar sold to government at Rs.1,850 per quintal. If this present trend persists, it is feared mills can no longer sustain the cane price of Rs.210 per quintal and arrears of farmers could mount.
This is also the time cane sowing season is under progress. Farmers will decide whether or not to continue growing sugarcane, depending on timely payments for their crop. Delayed payments may result in a shift out of cane cultivation sooner than expected and the country may witness a repeat of what it saw during the past two seasons. The country may also have to become a net importer from a net exporter.
The government did not have much choice in 2006-07 and 2007-08 when international sugar prices were lower than domestic prices in India and subsidies were needed to export sugar. That is not the case now. There is a viable global sugar market waiting to welcome exports from India. Revival of the 500,000 tonnes of export under open licence will help the sentiments to improve, ensure better cash flow to the sugar industry and avoid any unnecessary distress sale of sugar. It is in the interest of farmers as well.
Falling sugar prices can also be controlled and made to remain reasonable and viable by improving domestic demand, which can come about by removing the restriction of stock-holding limits of 200 tones on traders and allowing exports of surplus sugar.
On the consumption side, the government was estimating domestic demand at 23 million tonnes. But seeing the releases so far, consumption may not exceed 220 million tonnes by the end of the remaining seven months of this sugar year. With a rather healthy opening balance of 5 million tonnes this year and exports of about 1.2 million tonnes, there is still a surplus of over 1 million tonnes, even if we go by the government's production estimate of 24.5 million tonnes.
The domestic market is probably aware of this significant surplus of 1 million tonnes and that is the reason why sugar prices are behaving the way they are during the past one month, since the time the government decided to postpone a decision on exports.
It is important for the government to act immediately to ensure cane farmers do not suffer on account of mounting arrears. The decision should guarantee timely payments to them and keep them interested cane cultivation so that India not only continues to be self-reliant in this important commodity but also looks at the international market. We should be exporting and not importing sugar.