Indian Sugar Industry Dilemma

Posted: 2009/04/20 in Economy, Free Markets, Free trade, Geopolitics
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One of our subsidiaries, MJS Commodities specializes in various cash commodities such as sugar. Our current Indian partners within the sugar and basmati rice categories have been struggling with too many fluctuating governmental regulations that the Indian leaders impose. It has been quite difficult to get any business done. Let me shed a little light of what has been going on. According to ISO reports, world sugar production is at 161.527 mln tonnes. The report shows three major supply features of 2008/09: Significant production shortfall in India, a further contraction of production in the EU and a continuing expansion of sugar output in Brazil. The combined effect of output reductions in the EU and India is expected to shave off a massive 7.084 mln tonnes from world sugar supply, despite record high growth in sugar output in Brazil. So far, a lowering in forecasted production in India (from 23.9 mln tonnes projected in August to the current projection of 19.55 mln tonnes) has been neatly matched by a practically identical increase in Brazil (from 33.22 mln tonnes to 37.54 mln tones). Meanwhile, global consumption is forecasted to grow at the rate of 2.19% to 165.801 mln tonnes, raw value. World production is now expected to be 4.274 mln tonnes lower than world consumption as against 3.626 mln tonnes projected in November. Consequently, the statistical outlook for the market till the end of the season in September 2009 remains constructive and supportive to world market values. The ISO puts world export availability for 2008/09 at 49.608 mln tonnes, raw value, as against 46.25 mln tonnes in the previous crop cycle. Smaller output in importing countries and in India, in particular, is expected to trigger additional import demand which is estimated to reach 49.621 mln tonnes, up 3.673 mln tonnes. Indian Sugar output in the current sugar year 2008-09 is likely to plummet substantially as compared with the output in the previous few years. Current year’s estimate is now placed at around 15.5 million tonnes, 42% below the output achieved in the previous year 2007-08 at 26.3 million tonnes. Such a sharp decline in sugar production by 11 million tonnes in one single year, is unprecedented. This has happened mainly because the farmers seem to have lost interest in sugarcane planting in recent past due to lack of orderly disposal thereof. Indian sugar industry suffers from too many interventions by the authorities. Such interventions, lead to wide variations in sugar production. Wide fluctuations in sugarcane and sugar production in Indian condition have become a normal feature, mainly due to man made action. For, as opposed to this, if one looks around, the trends in other sugar producing countries, year to year variations are much too small – say in the range of around 5%, mainly influenced by weather condition. Clearly, Government policies relating to sugarcane, sugar and other competing crops have led to such large variations in India, thereby undermining larger interest of all concerned with the sugar sector – sugarcane farmers, industry as well as the consumers. The most vital factors are those of sugarcane and sugar prices. The Government of India announces the support prices of various crops including sugarcane. On the other hand, policies are framed by the Government to ensure as low a price for sugar as possible, based on very rigid parameters of costing. A look at the compendium of publications brought out by the Indian Sugar Mills Association, would reflect that too many regulations have been created by the authorities to regulate the sugarcane and sugar prices. Clearly, the policies adopted by the Government have failed to ensure a reasonable balance in sugar situation. The most important facet is that of sugarcane pricing. Like other crops, the Government of India notifies the minimum price payable for sugarcane. Fixation of such Statutory Minimum Price for sugarcane is done by the Government of India, many a times overlooking the recommendations of the Commission for Agricultural Costs and Prices, commonly known as CACP. The CACP makes exhaustive study of different crops while making its recommendation to the Government for various crops including sugarcane. While in the past, Government has been generally following the recommendation of the CACP, in recent past this trend has changed. For the year 2008-09, the CACP revised its recommendation for Statutory Minimum Price of sugarcane to Rs. 125/- per qtl. linked to the basic recovery of 9%. The Government, however, rejected this recommendation. For the year 2009-10, the CACP yet again recommended the same price of Rs. 125 per qtl. linked to basic recovery of 9%. No doubt, the increase suggested in the statutory minimum cane price in one go is rather sharp. However, the most important point is that the Government has not yet taken any decision on this important matter. On the other hand, Government have substantially increased the minimum prices for wheat, rice and other food crops. Naturally, in the absence of an appropriate revision of Statutory Minimum Price, a large gap persists with alternate crops. Already, as stated, Indian sugar output has suffered tremendously; so much so that the carry forward stocks from the previous season will be almost fully exhausted during the current year itself, to meet the consumption demand which is commonly assessed at the previous year’s level of say 22/22.5 milllion tonnes. To reverse the negative trends, it is imperative that the Government of India without any further delay notify the Statutory Minimum Price for sugarcane. Closely connected with this issue is the Government’s recent decision to impose stock limit on the sugar trade, though temporarily for a period of four months. Such restrictions lead to artificial decline in sugar prices. We fear that if the inconsistent policies continue, India may have to depend on import invariably, whereas the Government’s declared objective has always been to promote exports. The Government needs to give a fresh look to the sugarcane and sugar sector without delay. If growing demand for sugar in India has to be met, a proper sugar policy has to be implemented. The first and foremost requirement appears to be the withdrawal of the obligation placed by the Government on the sugar industry to supply 10% of its output as levy sugar at prices far below the actual cost of production and the open market prices. The levy sugar is distributed through the Public Distribution System channel to the B.P.L. population. Thus, while the sugar industry is forced to supply levy sugar, there is hardly any realization among the public that the subsidy on levy sugar is funded by the industry and not by the Government, as it happens in all other cases. Sugar is the only exception. If the current policy continues, India may turn into a regular large scale importer of sugar in the long run notwithstanding the sugar industry’s capability to meet adequately the country’s requirement of sugar and generate surpluses for exports.

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