If the government artificially depresses sugar prices, this will affect the mills' ability to pay farmers for cane.
Sugarcane prices — both the statutory minimum prices (SMP) fixed by the Centre and the state-advised prices (SAP) decreed by some state governments — are invariably a contentious issue among the farmers as well as the sugar industry. This is partly because the prices are often fixed in an arbitrary manner without taking into account the prevailing sugar prices and the industry’s capacity to pay. The political clout enjoyed by the cane growers, especially the large cane farmers, many of whom are in active politics, is also partly responsible for this.
For some odd and largely misplaced reasons, the sugar industry is often sought to be portrayed as an exploiter of the cane growers. This cannot always be true simply because, like any other industry, the sugar industry, too, needs to keep its raw material suppliers in good humour. If it does not do that, the cane growers are free to switch over to other crops, jeopardising the very survival of the industry.
What is often not fully appreciated is that the key factor that determines the viability of sugar production, as also of cane cultivation, is the ex-mill sugar price and not really the cane price. No sugar mill will mind paying a higher price to the cane grower — and promptly too — if the price realisation from sugar allows it do so.
This was borne out in the 2004-05 sugar season when most sugar factories literally pampered the cane growers by paying them premium prices and gave them other sops like fertilisers, planting material and the like. The average price realisation for sugar that year was around Rs 1,800 a quintal while the cane price was only Rs 105 a quintal (in Uttar Pradesh).
But this is not the situation today. While the present ex-mill sugar prices are almost at the same level as in 2004-05, around Rs 1,800 to Rs 1,900 a quintal, the cane prices the mills in Uttar Pradesh are paying to the growers are far higher than then — between Rs 137.50 and Rs 145 a quintal. “At this cane price, the ex-mill sugar prices should be around Rs 2,100 to Rs 2,200 a quintal”, according to R K Panpalia, corporate affairs president of the Bajaj Hindustan Ltd, the largest sugar producer in this major sugar-producing state.
Most sugar analysts feel that the SMP fixed on the basis of the recommendations made by the Commission for Agricultural Costs and Prices (CACP) are usually good enough to cover the production costs of the majority of the cane growers. They should, thus, be happy and continue to grow sugarcane if they get the SMP.
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However, the problem arises when the cane price payments are not made in time, denying the farmers of the cash they badly need to meet their immediate requirement. The belated payment forces the farmers to look for other means to raise cash, such as offloading the cane at gur and khandsari units at far lower prices, or reducing the area under sugarcane to grow some other crop, or even to borrow money from the moneylenders at exorbitant interest rates.
The real culprit, therefore, is the build-up of arrears and not so much the cane prices. This is also an important factor in perpetuating the unhealthy cycle of ups and downs in cane and sugar production and the consequential wide fluctuations in sugar prices.
Indeed, the ebbing phase of the sugar cycle seems to have set in again. As a result, the sugar output is anticipated to drop significantly in the current sugar season (October 2008 to September 2009). Whether this downward phase would end next year or accentuate further would depend chiefly on the sugar price realisation by the industry and its capacity to make timely payments to the cane growers.
If the ex-mill sugar prices remained subdued for some more months, eroding the cane price payment capacity of the mills, the price arrears may again begin to accumulate by around February. This would, in all probability, lead to further shrinkage of cane acreage as that is the time when the farmers have to take the decision on fresh sugarcane planting. The government should, therefore, desist from taking any policy decision at this time that can artificially depress sugar prices. Such a move will prove counter-productive for not only the sugar industry but also the cane growers.