Cost-benefit of deferred cane outgo and end to area reservation

While Gujarat is the only state to have gone ahead with staggered payments, the issue of area reservation has been resisted by most states, Maharashtra being an exception

A few weeks back, the Central government declared the Fair and Remunerative Price (FRP) for sugarcane for the 2021-22 season starting in October at 290 per quintal based on an average recovery of 10 per cent.

The FRP was raised by a nominal Rs 5 per quintal from the level in sugar season 2020-21.

The Commission for Agriculture Costs and Prices (CACP), which recommended this price among its other recommendations for the year, has made two notable suggestions.

The first is amending the Sugarcane Control Order (SCO), 1966 to allow payment of sugarcane price to farmers in installments.

The Commission’s logic is that the statutory provision on cane price payment as per the SCO, which mandates payment to farmers within 14 days of supply, creates undue pressure on the mills. This is because though sugarcane payment has to be made compulsorily within 14 days, sugar sales are spread throughout the year which forces the mills to borrow and incur interest costs in order to pay the farmer.

CACP feels that if payment for sugarcane is staggered, the mills won’t have to take loans to make compulsory payment within 14 days and the money saved through this could be used, instead, to increase the purchase price for farmers.

The second notable suggestion that the CACP has made, is implementing the C Rangarajan Committee report on doing away with sugarcane area reservation and distance criteria for mills.

None of the recommendations are new and have been debated in detail in the past. But given that sugarcane and the sugar economy have once again come into the centre stage due to mounting dues and ongoing farmers’ agitation coupled with the impact it could have on the all-important UP state elections six months from now, the pieces of advice merit a re-look.

Staggered payment for sugarcane supplies

The model is not new and from time to various committees and panels have recommended it, the latest being the NITI Aayog committee constituted few years back to prepare a roadmap for the sugar sector.

A committee formed by the Central government, comprised of senior officials from various line ministries and state officials, have also recommended and endorsed the model. Some states such as Gujarat are already implementing the system, which is why some experts call the staggered payment model the 'Gujarat model' as well.

How it works. Unlike in the North and several other parts of the country where sugarcane farmers are entitled to get full payment within 14 days of delivery of the cane to the mill gate, in some states such Gujarat, the payment is made to them in tranches.

This, according to votaries of the system, on the one hand ensures that mills aren't pressured into dumping their sugar in into the market during the peak crushing months, in order to generate cash to make the payment within 15 days.

On the other hand, it ensures that there are no carry-forward dues for the farmer and he gets his payment in the same year in which sugarcane is delivered to the mills.

“In Gujarat, most sugar factories are in the cooperative sector and we make 30 per cent of the payment within 15 days of delivery of sugarcane, while the next round of payment is made after the factories close in April and the third and final round of payment is made before Diwali,” Ketanbhai C Patel, vice chairman of Gujarat State Federation of Cooperative Sugar Factories had told Business Standard sometime back.

Patel added that the system has ensured that till date not a single rupee is carried forward as sugarcane arrears in Gujarat and all farmers get their payment within few months of delivery of sugarcane to the mill gate.

“That apart, we are also able to pay a higher sugarcane price to farmers--in excess of Rs 350 per quinta--which is not the case in Uttar Pradesh and Maharashtra,” Patel had said.

He said the staggered payment can work with private mills of UP as well, which has the highest sugarcane dues.

The Indian Sugar Mills Association (ISMA), the apex body of private sugar millers in the country, in a letter sent to the panel to study NITI Aayog’s recommendations for reforming the sugar sector, had favoured such a model of staggered sugarcane payment within 90 days of cane delivery.

The pitfalls. V M Singh, Convener of Rashtriya Kisan Mazdoor Sangathan (RKMS), a prominent body of farmers that has been fighting for the rights of sugarcane farmers for long, had said that the staggered payment system would hurt the interest of sugarcane farmers and create another monster just like the farm laws.

“When the farmer is not able to pay the price of fertilisers and other inputs required to grow sugarcane in installments, how can he be asked to take a return for the same crop in tranches,” Singh had said.

That apart, unless it is guaranteed that mills will clear their dues within the same year in which cane is delivered, the staggered payment model might fail.

Abolishing sugarcane reservation area and distance criteria for mills

The second important recommendation of the Commission is doing away with the cane reservation area and distance criteria for mills.

At present, each mill in the country has been granted an earmarked area of sugarcane farmers within its locality from which it has to purchase its annual requirement of sugarcane mandatorily.

The farmers of that area too have to necessarily sell to the sugar mill itself and even if they get better price for their produce from a neighboring mill, they can’t violate the reservation area. The distance criterion for mills is a statutory order that prohibits setting up of a sugarcane mill within a designated area basically to facilitate the sugarcane reservation.

It varies from state to state, depending on its own needs. Both sugarcane reservation area and distance criteria for mills are inter-linked and are meant to ensure cane farmers at any point of time have a ready market for their produce, while for mills too they don’t have to scout for cane to run their mills and have a ready source of inputs at hand.

Abinash Verma, Director General of ISMA says that philosophy behind the cane area reservation and distance criteria stems from the typical nature of the sugarcane crop.

“Sugarcane as a crop can neiher be stored for long, nor can it be carried over long distances, else it will loose the sucrose content which is so vital for both farmer and miller. Therefore, the concept of sugarcane area reservation and distance criteria for mills emanated which protects the farmers on one hand while on the other hand it gives the mills a certain guaranteed quantity of sugarcane to run their operations,” Verma told Business Standard.

He said practice of sugarcane area reservation and distance criteria has its own advantages and disadvantages for farmers and sugar millers both.

Advantages. Verma said that the system gives a semblance of certainty to the mill to invest in the crop in their captive area. It also build a long-term relationship with the farmer in his area and is beneficial to him. For the farmer, the advantages are that he gets a ready and assured buyer even if production is more in any season, and that too at a preset price which is independent of market dynamics.

Disadvantages. Verma says it binds the farmers to a particular mill and even if he hasn’t been paid for years, he can’t sell his produce at a higher price to anyone else.

For the miller, the disadvantage is that he can’t refuse the cane even if production is surplus and he doesn’t need to crush.

The law says that a mill has to purchase and crush all the sugarcane grown in its reservation area.

Interestingly, the CACP report shows that majority of states on which sugarcane is grown in a big way, have steadfastly opposed any dilution of cane area reservation.

They have suggested some changes in distance criteria for mills, but don't want it struck off altogether. Only Maharashtra is among the bigger sugarcane producers which has favoured doing away with cane area reservation, but it too is in favour of retaining the distance criteria for mills at a minimum of 25 kilometers.