Saving UPs sugar mills

Written by Ashok Gulati | Ashok Gulati | Updated: Nov 19 2013, 09:20am hrs
The major stakeholders in sugar sector, sugarcane farmers and sugar mill owners, are heading towards a crisis on the pricing of cane this year. This is happening in varying degrees across all sugarcane growing states, but most prominently in Uttar Pradesh (UP). Farmers are asking for a significant increase in cane prices as their costs of production are rising, while the mill owners are saying that they cannot afford to give even the existing prices of cane, as sugar prices are significantly lower than last year's. Both are right in their statements. But instead of an amicable solution being arrived at, the situation seems to be getting worse by the day. While the cane in the fields awaits harvesting, several mills are refusing to begin crushing unless the pricing issue is settled. The courts are coming down hard on the mill managers to clear past arrears, and making the situation even grimmer.

We need to find an appropriate answer to this problem lest the sugar sector slips into a three-year downturn, harming the farmers, mill owners, and lakhs of employees. What are the options that can be considered for a mutually agreeable settlement It may be useful to keep a few facts in mind before exploring these options.

First, the Commission for Agricultural Costs and Prices (CACP) report on the pricing of sugarcane for the season 2013-14 had recommended a fair and remunerative price (FRP) of R210/qtl at 9.5% recovery. For a recovery of 11.3%, as in Maharashtra, this would work out to R250/qtl. CACPs recommendations take into account the projected costs of growing cane as well as the demand-supply balance of sugar, and the likely market prices of sugar and its by-products. But in most of the states, farmers are already getting State Advised Prices (SAP) of cane which are significantly higher than this recommended FRP. In UP, for example, SAP is already at R280/qtl, and Haryana has gone ahead and recommended R300/qtl as the SAP for 2013-14. This has put an additional challenge on the UP government. In Maharashtra too, most of the mills have been paying a price for cane marginally above R250/qtl.

Second, the CACP Report has also suggested switching over to Revenue Sharing Formula with a minimum FRP. The Revenue Sharing Formula is the same as that recommended by the C Rangarajan Committee. As per that formula, the cane price should be 70% of the value of sugar and its first-stage by-products produced from a quintal of sugarcane. If the value of by-products is loaded on to the value of sugar, this comes to roughly 75% of the value of sugar produced from a quintal of sugarcane. The scientific rationale of this formula lies in the fact that the value generated in the sugar value-chain should be divided between the farmers and mill owners in the same ratio as is their cost in producing and processing of cane, which is 70:30. This formula would give a better price to farmers than even the FRP pricing recommended by the CACP currently. While Karnataka and Maharashtra are favourably inclined to consider this Revenue Sharing Formula, UP had expressed its reservations on this from the very beginning. And now, UP is stuck with a price (of R280/qtl), which the mills simply cannot afford. With an ex-factory price of sugar between R30-32/kg, the revenue sharing formula for UP would suggest the cane price to be between R225-240/qtl. So, what are the options now, especially for UP

* Option 1: If the state government insists on a price of R280/qtl or raises it further, it is surely going to make a large part of the industry financially sick, and a typical three-year downturn will start, harming the farmers, millers, and investors in the following years. Not a very wise choice.

* Option 2: A better option could be to free up the molasses market completely. Currently, about 20% of the molasses in UP is reserved for the potable liquor industry and is given at a price that is typically one-third to one-fourth the market price. This is indeed a perverse case of sugarcane farmer/miller subsidising the liquor industry. The freeing up of molasses market will raise the value of by-products, which will enable the sugar mills to pay a little higher price than R225-240/qtl range.

* Option 3: Still another option could be to ensure that the mandatory order of blending 5% ethanol in petrol is strictly and immediately implemented, and the price of ethanol is fixed at 70% of petrol price (ex-refinery, without taxes) as ethanol has 70% calorific value of petrol, plus 10% as environmental premium for being a less polluting material than petrol. This would work out to anywhere between R35-40/litre depending upon the price of petrol. This would surely provide some extra revenue to sugar industry enabling it to pay a little higher price for cane. But this will have to be done by the Centre, and UP, on its own, cannot do much on this front.

* Option 4: The UP government can buy power generated from bagasse at a marginal cost of coal plants with a premium of 10-15% added for environmentally benign power or, even better, equivalent to the cost of solar power. This would help the integrated plants to produce power and improve their viability, finally enabling them to pay a better price for cane.

* Option 5: The Centre could create a buffer stock of say 2 million tonnes of sugar as a price stabilisation instrument. This would reduce the excess supply situation and may improve the domestic prices of sugar, helping the industry to pay a better price for cane.

* Option 6: The above options may still not be sufficient for UP mills if they are to pay R280/qtl or more. The CACP's back of the envelop calculation shows that if sugar prices dont improve, options 2-5 can, hopefully, stretch the flexibility to pay up to R250/qtl in UP and about R275/qtl in Maharashtra. So the gap, say between R250/qtl and the existing price of R280/qtl or whatever is announced by UP as SAP, will have to be borne by the state as an one-time bonus, with a hope that next year the sugar prices may improve. Although it is not the best solution, there have been instances where some states have announced extra bonus on the main crop of their states. Chhattisgarh has given a bonus of 22% on paddy and Madhya Pradesh 11% on wheat last season. For UP and Maharashtra, the sugarcane crop is critical and so is the sugar industry, and both have to work together smooth functioning of the sector. But this bonus should be only a one-time payment and not a permanent feature, else it will worsen the situation further.

In the medium- to the long-run, the stakeholders have to realise that it would be in their best interest to go for the Revenue Sharing Formula, which will be transparent and stable. Else, every other year, they will face difficulty in fixing cane prices, increasing uncertainty and stunting the potential growth of this important sector.

The author is the chairman of the Commission for Agricultural Costs and Prices. Views are personal