The only way to resolve the industry-farmer faceoff is to raise retail prices.
The sugar industry in India has undergone a paradigm shift which is not yet fully understood. This is partly because sugarcane producers are exercising their economic option to switch to other crops and because the Integrated Sugar Complex (ISC) system first mooted in the late 1980’s, is now coming to fruition. However, there are many structural problems within the overall sugarcane economy which continue to bedevil the business.
Earlier seen as only the sugar industry, the emerging reality is that remarkable sugarcane can yield sugar/electric power/automotive fuels/other products while being comprehensively carbon neutral and not impinging at all on foodgrain.
The three great drivers of profitability in this business are the cost of sugarcane, the price of sugar and other products and the efficiency of logistics and production. The cost of cane and the price of sugar are controlled/managed by either the state governments or the central government and the management of these is oriented towards different considerations rather than the sound development of the sugarcane industry, with the healthy involvement of both the farmer and the miller.
The country being large, there are differing interests of sugar millers in the north, south and west and these are not reconciled.
SMP/SAP — COST OF CANE
The Uttar Pradesh (UP) sugarcane laws pre-date the central government laws. As a result the central government can not impose the Statutory Minimum Price (SMP) all over the country. Thus, for the foreseeable future, UP, where 40 per cent of capacity is located, has to operate within the structure of the State Advised Price (SAP) which has become a highly contentious and litigious issue between the millers and the government. There is now a coordinated movement of the UP farmers as the poorly-communicated cane price structure is unacceptable to the farmers. The industry argues between SMP and SAP but no third option is ever on the table; the millers and farmers talk together only through government intermediation. There is no effective transparent mechanism of passing on the benefits of high sugar prices early to the farmers. Hence the farmers are more interested in a high base price for sugarcane which hurts the millers in a downturn.
The SMP is woefully below real sugarcane prices needed to encourage farmers to grow cane. At the SMP, no farmer can hope to survive. This unreality leads to many distortions in the sugar economy and the SMP serves only to set the levy sugar price which is 30 per cent lower than the market price. The government needs to either eliminate levy or have a realistic SMP enabling higher levy prices; it should not be anybody’s case that the farmers or the industry should subsidise sugar to other sections of society.
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RELEASE MECHANISM/MARKET PRICES
The cold fact is that neither the government nor the sugar association knows the levels of inventory in the country owing to a lack of proper reporting/collation. Different levels of inventory are mooted and the government reacts accordingly. Accordingly, in 2007, the government banned exports for sugar when international prices exceeded domestic prices. Subsequently it was discovered that there were ample stocks in the country. Now, with the production expected to be lower than the previous year, the government is considering allowing import of raw sugar to ostensibly offset shortages. This will be a poor decision in the context of farmers already switching to other crops in competition with sugarcane. It is suggested that if the retail sugar prices are allowed to move up to around Rs 25 per kg it will enable the millers to pay the farmers adequately to keep producing sugarcane. Importing sugar benefits farmers and millers from the source countries. Import of sugar, whether raw or white, is not at all the answer; higher retail prices will balance the sugarcane economy well. India’s retail prices are the lowest in the world while sugarcane prices are the highest. While all other food items have gone up significantly, the sugar price compound annual growth rate (CAGR) has stayed flat while sugarcane prices have risen about 40 per cent.
STRUCTURAL WEAKNESSES
These structural weaknesses are compounded by decade-old laws which are unsuited to the needs of today. Lack of a longer term strategy for this industry jeopardises the prospect of approximately 30 million farmers across the country.
In those countries where the cost of sugarcane is low, the millers own and control the sugarcane fields and the factories. This is not and will not be, the condition in India. The farmers need high sugarcane prices and these can only be supported by higher sugar/other product prices. Distillery prices get linked, willy-nilly, to world oil prices and these are expected to be low for the next 12-24 months. In the absence of a practical ethanol policy as a motor fuel, adequate revenues from this source are likely to be sporadic. Furthermore, power produced by sugar mills is mainly sold to the respective state grids at very low unadjusted prices. Thus increased revenue to the farmers can come mainly from increased sugar prices.
A great threat and an opportunity for this industry is the domestic demand growth at 3-4 per cent per annum. In about 3-4 years, India will need about 25 million tonnes of sugar for internal consumption. If there is a crop failure, India may suddenly have to import vast quantities of sugar. This prospect is not being recognised by either the industry or the government. If proper planning is done, the pricing of sugarcane can be appropriately set, linked with a rising price of sugar in the open market so that adequate sugarcane is available without resorting to unplanned sugar imports. World sugar prices shoot up the moment India becomes a buyer.
LABOUR SHORTAGES/ FRAGMENTATION OF LAND/ INEFFICIENT AGRICULTURAL PRACTICES
Despite a very large population, labour shortages are developing in agriculture. Already in the south there is increased mechanisation. Furthermore, owing to the significant fragmentation of land over generations, mills deal with many farmers whose land holdings are so small that it renders them inefficient and marginal. It is time that some form of cooperatisation which enables handsome earnings for the farmer, without the farmer losing lien on his land, is created. This will lead to legal agglomeration of land holdings, proper development of such land for sugarcane growth and multi-cropping, improved agricultural practices, improved logistics and consequently significantly increased recovery of sugar.
Taking all of the above into account, a cogent policy needs to be evolved through a national debate involving the concerned political parties/state governments/ farmers/energy ministries (power and petroleum) and, of course, the sugar millers. Such a policy will surely create new winners and losers in this vital economic area but that will be the consequence of the determination, finally, of a long-term policy; such a policy must not be left hostage to existing vested interests.