Common man pays for government flip-flop on sugar policy

Sugar companies and their shareholders have never had it so good for them in nearly a decade. Nine sugar stocks have given a 100% return in the first six months of the current calendar year. But the gvernment has decided to stop the party by imposing an export duty to check domestic prices.

With rising food inflation at the back of their mind, the government decided to put a brake on rising sugar prices. Sugar prices have had a free run since August-September 2015 when it was ruling around Rs 23 a kg to the current rate of nearly Rs 37 a kg. It was only after inflation bucked the trend and started rising that the government has decided to step in.

The rise in sugar prices was on account of deficient rains and government incentive to the sector. The bottom in sugar prices not only coincided with poor monsoon but also the government’s ambitious plan to export a record 4 million tonnes of white sugar. Sugar mill owners were obviously excited over government’s initiative, especially since they were being incentivised to export.

Ironically, the government set the export target in the month of September 2015, when the picture of a poor monsoon was more or less clear. By late August 2015 it was clear that Marathwada would be facing a severe drought situation. This report dated September 1, 2015, says that the Maharashtra government was contemplating banning sugar farming in drought zone. The Marathwada region is one of the prominent sugarcane growing areas in the country. If the government knew that output for the season would be affected, there was no reason to allow exports and see inventory deplete.

Over the past decade sugar companies had been in trouble with pilling inventory and low sugar prices. Sugar prices have fallen not only in India but also globally. From a peak of around 33 cents per pound in 2011 sugar prices have fallen to a low of 10.3 cents per pound in mid-August 2015. This restricted the ability of sugar mills to export their produce and was also the reason for a build-up in inventory.

Normally when an industry is witnessing a slowdown, its effect percolates down to its raw material suppliers as well. However, in the case of sugar, it was the other way around. The years of low sugar prices also coincided with that of other agriculture products. Farmers were looking for better yielding crop and sugarcane because of the strong political protection was the obvious choice.

Sugar and sugarcane are politically sensitive crops, or more correctly they have been pampered and bred to be politically sensitive. The price at which a mill purchases sugarcanes from the farmer is decided by the government. Farmer lobby and political interests align together to keep procurement price high, irrespective of the price of sugar. With safety of higher prices and protection from vagaries of market more farmers started planting sugarcane crop.

Data from Indian Sugar Mills Association (ISMA) shows that during the last six years cane acreage have increased from 4,175,000 hectares to 5,307,000 hectares. Sugarcane production during this period has increased from 2,923 lakh tonne to 3,668 lakh tonne. So while sugar prices were low, input prices and volume of sugarcane produced kept on increasing. This compounded the problem of sugar industry.

However, since September 2015, the industry has stopped complaining. Poor monsoon and depleting inventory ensured higher prices in the domestic market. Additional thrust was given from rising global prices as crops in other countries also failed. Experts say that for the first time in six years sugar is likely to see a deficit of 8 million tonnes. Sugar rally in India could however see some correction on account of the export duty and also because Brazilian harvest will start hitting the market.

In the entire bear and subsequent bull cycle of sugar what has come out clearly is the ad-hoc approach of the government in handling the situation.

Within a year of setting an ambitious export target government has now made a U-turn by restricting their exports by imposing exports duty. Rather than making the consumer pay for the political adventurism by allowing prices to fluctuate wildly government can incentivise the mills to earn their revenues from the by-products like molasses or subsidising them to produce bio-fuel. It is only the common man who ends up paying for government’s flip flops.