A sugar-coated crisis: Cane dues to farmers touch all-time high

Overproduction of sugarcane and crashing retail prices is causing cane dues to farmers touch all-time highs

Sugar factories belonging to the private, cooperative and government sectors have one common objective: that is, to pay farmers for supplies of sugarcane within the government-stipulated two-week period so that they don’t migrate to other crops. Failure to do so creates unrest among farmers in the captive cane zones from where factories are under law required to accept all the cane that is brought to their gate. Factories will always be desperate to avoid a situation that invites a government reprimand as has now happened and crimps the capacity of farmers to settle their liabilities.

Cane arrears of factories in the current sugar season (October to September) have already crossed Rs 180 billion. Supply of sugarcane exceeding forecasts of all agencies by a long margin has kept over 3,000 factories still in production and the industry will now finish crushing in the first week of May. This is raising the grim prospect of the industry’s cane dues soon exceeding the record Rs 210 billion in April 2015. That dubious record resulted from continuous losses factories suffered for four successive seasons from 2012-13 to 2015-16, according to O P Dhanuka, a former president of Indian Sugar Mills Association (ISMA). Now once again, ex-factory prices of sugar will not even cover the cost of cane.

Expectedly, Uttar Pradesh where farmers are guaranteed a highly lucrative state advised price (SAP) of Rs 315 a quintal for the general variety and Rs 325 a quintal for the early variety, which the industry is promoting with much success, has the biggest share at close to Rs 8,560 crore of countrywide cane dues. The state may ordain anything, but the industry’s capacity to settle bills for cane is decided by sugar prices.

According to one industry cost analysis, at an average sugar recovery of 10.65 per cent, the cane cost to make one quintal of sugar in UP is Rs 3,167. Total production cost goes up to Rs 3,837 a quintal when all other expenses on conversion account are added up. What option do the factories have but to sit on piles of unpaid cane bills when, according to ISMA, the average ex-factory realisation from sugar sales is “hovering around Rs 3,000 a quintal”.

In the 2015-16 season when the bleeding industry owed frighteningly big amounts to the growers, leading to countrywide agitation by farmers, the government had to extend soft loans to factories to liquidate cane price arrears. New Delhi also sanctioned a sizeable export quota of 4 million tonnes (mt) to ensure surplus sugar didn’t keep domestic sugar prices down. Exports were, however, stopped at 1.66 mt tonnes as the feared major production fall in 2016-17 season came true at 20.28 mt. The accommodation given by New Delhi to enable the industry to pay off farmers for cane supplies put the industry on an even keel through 2016-17.

But the industry once again slipped into a crisis of a growing mismatch between rises in production cost and falling ex-factory sugar prices from the early stages of the current season. This happened because the first prediction of 2017-18 sugar production at 25.1 mt in July 2017 based on satellite images of young crop on the ground were revised upward more than once, allowing traders to pressure factories to sell the sweetener at prices below production cost. In January, the industry toyed with likely sugar production of 26.1 mt, which was sharply revised to 29.5 mt in March.

Now ISMA director general Abinash Verma says, sugar production during 2017-18 could be “30 mt or more.” That will be a good amount more than the earlier all-time high production of 28.31 mt in 2014-15. Explaining how this bumper production took the industry by surprise, Verma says: “At the season starts, we thought Maharashtra, which last season could make only 4.2 mt due to a severe drought would produce this time 7.4 mt, benefiting from the weather turnaround. Farm experts believed that the good weather would lift the land’s sugarcane productivity from last season’s 60 tonnes a hectare to 80 tonnes at the most. But as it turned out, good rains during the crucial June-July and then again in September in principal cane- growing zones aided the standing crop to mature strongly. The cane productivity this season is a record 103 tonnes a hectare.”

Given that the factories are required to process an unexpectedly bountiful crop, Maharashtra is not only going to claim back its position as the largest sugar-producing state from which it was dethroned by UP last year, but it looks set to finish the season with record production of 10.6 mt. The state made 10.5 mt in 2014-15. If Maharashtra is doing so very well with cane production leading to very high sugar output, then its adjacent state Karnataka, a victim of last year’s drought, should also have a turnaround story for the crop. “In the beginning we thought Karnataka’s recovery in sugar production will be to 2.5 mt from 2.1 mt in 2016-17. But for the same reason that Maharashtra has a bumper production, the contiguous Karnataka will have a sugar output of 3.6 mt,” says Verma.

Interestingly, the mounting cane dues have not proved a deterrent for farmers to bring additional land under sugarcane to be ready for harvesting in the next season to start in October. For example, cane area in Maharashtra is up at least 19 per cent. UP is also putting more land under the crop. Their bills may not be paid in time causing them distress, but farmers take cane as a “safe” crop since at some point they will be paid SAP in some states and fair and remunerative price (FAP) in others. Yet another reason for diversion of land to cane is that quite a few crops, including oilseeds and pulses, are trading below minimum support prices.

In the meantime, the government has directed the industry to export 2 mt of sugar by the end of the current season to shore up domestic prices. As it happens, however, India’s export move in a global surplus situation has brought both white and raw sugars to two and a half year lows. Whatever New Delhi’s stand on subsidies, there is no way sugar can be sold in the world market unless the government will agree to share a portion of the losses involved in export in current global trading conditions. For the industry’s fortunes to revive so that cane bills can be cleared, Verma wants the government to sanction yet another export quota of 5 mt in August, of course supported by a subsidy.