Sweet success

SMARTSHARE

In 1992-93, we did an analysis of the sugar industry where we were initially surprised at the number of controls.

Sugar and molasses prices were controlled, inter-state transport of molasses was banned, cane-procurement rates were set by states, mills could only acquire cane from designated cachment areas, complicated formulae dictated which mills could release how much at free-sale rates, alcohol manufacturing licenses were hard to get, etc.

Even by the standards of the license raj, this level of anal-retentiveness was unusual. A look at the map of sugar-growing areas clarified matters.

Sugar is the major industry in some 60-odd Lok Sabha constituencies spread over several states. In many places, it is the only source of employment.

If sugar is freed from controls, too many politicians would face tsunamis in their powerbases. Thus, the cross-party consensus is strongly in favour of control. Sugar hasn't benefited much from liberalisation. It won't, until something major happens downstream such as a significant shift to alcohol-based internal combustion engines or power plants.

The controls cause wild fluctuations. In good years, India becomes the world's largest producer (ahead of Brazil and Cuba) with 20 million-odd tonnes. In bad years, production drops to 12-13 million tonnes and India becomes the world's largest importer. This cycle takes about four seasons from peak to trough.

"Good" years are bad in pricing terms. Sugar is a "necessary, discontinuous good" "" annual demand stays nearly stable (with spikes in the wedding season) regardless of prices. Supply arrives in seasonal bursts. A small supply fluctuation causes big swings in price. Sugar cycles through 35 per cent supply swings; the prices changes are massive.

The Morarjee Desai government decontrolled prices in 1978 in a high-production season. Free sale prices dropped below the rationed rate and there was a hasty reversion to control. God alone knows what the future shape of Indian politics would have been if 1978 had been a lean season!

In high-production years, farmers starve. Open market prices drop and cane isn't picked up since mills can't bargain down the state-set procurement price. Farmers can't sell except to the local mills because of the designated cachment area and the lack of decent road networks (cane must be crushed within 24 hours for optimal yield).

Mills can't value-add easily due to difficulties in procuring alcohol licences and (partial) bans on inter-state molasses transport. So the season after a glut, less cane is planted and prices rise as supply dips.

The government eventually imports at high prices, there are a few scandals and farmers assume that prices will stay high and plant more cane. After two or three seasons, there's another glut and the cycle repeats.

This happens to be a season of low production. So was last season and next season is also likely to be below capacity. Prices are up, mills are paying 10-15 per cent premiums on state-advised cane procurement prices. Since November 2004, sugar prices have risen at 25-30 per cent per month.

There will be bumper profits for sugar companies until the October 2005 crushing season arrives. If the normal cyclicality holds, 2005-06 will also be a good year financially but 2006-07 will be poor. Bajaj Hindustan, Balrampur Chini, Dhampur Sugar, Bannari Aman, Sakthi Sugars "" there are a lot of listed mills. All their stock prices will climb.