Crisis coming up

The cyclical ups and downs in sugarcane and sugar production have now caused a major problem for the sugar industry, and will inevitably cause one for millions of sugarcane growers""especially in Uttar Pradesh, where the state-administered cane prices are too high to make cane crushing anything other than a financial disaster. UP also happens to be the state that has seen the maximum increase in crushing capacity over the past three years, and the state now accounts for about a third of national sugar production. Even without the additional problems caused by the UP government's pricing aberrations, there has been an unusual combination of forces at work. There is the melt-down in international sugar prices, the crash of prices at home following a record sugar year in which production beat all forecasts, the consequent build-up of excessive inventories domestically, and mounting losses which have exhausted the working capital of most sugar mills, pushing them to the verge of closure. Exports were an option, but with falling international prices, the hoped for numbers have not materialised. Now another good sugarcane crop is in the offing.

It is an irony that, at this time last year, sugar prices were 50 per cent higher than they are today and the shares of sugar companies were being quoted at record levels. If that was a political crisis because sugar prices were too high (prompting a shortsighted government to ban sugar imports for seven crucial months), today's crisis will have its focus on sugarcane growers in Uttar Pradesh""for whom there can be no easy way out. Either the sugar mills will take their cane and not pay because they have no cash, or the mills will refuse to crush the cane because they cannot continue to sustain their present level of losses. Already, the unpaid cane price arrears are said to have mounted to nearly Rs 2,600 crore, almost a third of the total cane purchases of about Rs 11,000 crore in just this one state. The government has tried to help by arranging for cash pay-ins on various counts (building a buffer stock, paying for an export subsidy, and so on), but these have clearly not been enough.

At the heart of the problem is the state-administered price of sugarcane in Uttar Pradesh, which is much higher than the statutory minimum price (SMP) fixed by the Centre on the advice of the Commission on Agricultural Costs and Prices (CACP). Cane prices the world over are linked to the realisation of sugar prices. But this linkage is wholly missing in India. Besides, the chemicals and other products made from molasses and other wastes have yet to turn so lucrative as to make sugar a virtual by-product. If the government does not reduce cane prices, the industry may find that the only option to closing shop might be to initiate legal action; the argument would be that if the Centre is fixing a minimum price for cane, there is no role for states to prescribe higher prices. The other step could be to get rid of the deal pricing of sugar and abolish the levy sugar programme; when open market prices are low, this is politically feasible and will improve the industry's net take.