Price spiral: A tale of two commodities

By: | Updated: May 12, 2016 10:16 AM

A buffer stock for sugar could have been useful today, as it has proved for wheat.

Sugar News, Sugar News India, Sugar Latest NewsThe coming months could see the Centre do to sugar what it has done for pulses and onions in the last one year. Stock-holding limits on traders might be just the start. (Reuters)

On September 18, the Centre fixed “minimum indicative quotas” for export of sugar by mills during the new 2015-16 season starting October. Each mill was given a target, with the total exportable quantity of four million tonnes (mt) allocated based on their three-year average production. A subsequent notification dated December 2 further extended a “production subsidy” of Rs 4.50 per quintal on the cane that mills purchased, subject to fulfilment of their export obligation.

But barely five months on, the tide has turned. From forcing/incentivising mills to export with a view to get rid of surplus sugar stocks and improving domestic price sentiment, the Narendra Modi government is today singing a completely different tune.

On April 29, the Department of Food and Public Distribution issued an order imposing stock limits on sugar. No trader can now hold more than 500 tonnes at any given time, except in the deficit Kolkata region where the limit is 1,000 tonnes. Moreover, any stock of sugar has to be compulsorily sold within 30 days of its receipt. There is also talk of the mandatory export quotas for mills being withdrawn, even as about 1.5 mt of sugar has already been shipped out of the country.

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This about-turn has been attributed primarily to drought in Maharashtra and Karnataka. India’s sugar production is expected to fall to 25.2 mt this season from 28.46 mt in 2014-15 mainly because of huge drops in the two states — from 10.52 mt to 8.4 mt for the former and from 4.99 mt to 4.1 mt for the latter. Given carry-over stocks of 8.88 mt with mills, estimated domestic consumption of 25.6 mt and exports of 1.5 mt, there would be some 7 mt of sugar when the next 2016-17 season begins in October.

The real problem, though, will be in 2016-17. Sugarcane being a 12-month crop, the effects of lower plantings in Maharashtra and Karnataka will be felt more in the coming season. With its projected cane area contracting to around 6.3 lakh hectares (lh), from 9.3 lh and 10.5 lh in the preceding two seasons, Maharashtra’s sugar output may further dip to 5.5-6 mt. Low reservoir water levels in the northern districts of Gulbarga, Bijapur, Bagalkot and Belgaum are, likewise, slated to pull down Karnataka’s production to 3-3.1 mt.

Even assuming Uttar Pradesh (UP), Tamil Nadu and other states to produce an extra 1.5 mt, it isn’t going to take the country’s total output in 2016-17 beyond 22-23 mt. That, with opening stocks of 7 mt, internal consumption of 26 mt and zero exports, will leave just 3-4 mt of sugar in September 2017. This wouldn’t suffice for even two months’ consumption, as against a normative requirement of three months.

The question to ask, however, is: Wasn’t the fact of a drought in Maharashtra and Karnataka known? This newspaper had in early-December — just when the production subsidy linked to exports was announced — warned about the possibility of Maharashtra’s sugar production plunging to even below 5 mt in 2016-17 . Why this sudden dawning of wisdom on the Centre’s part?

Now, it can be argued that the Centre’s big push for exports was prompted by low ex-factory realisations for sugar. These averaged Rs 23.74 per kg in Maharashtra and Rs 25.64/kg in UP during the 2014-15 season, touching lows of Rs 20.14 and Rs 22.54/kg respectively in July.

But couldn’t the objective of propping up prices to enable mills pay cane growers have been better achieved by creating a buffer stock of sugar on government account? Such stocks amounting to 5 mt had, after all, been created in 2007-08 in response to a similar glut situation. The annual subsidy burden on a 2-mt buffer — the Centre paying the interest, storage and insurance charges on the sequestered sugar that remains in the godowns of mills — would have been in the region of Rs 1,250 crore.

That cost, in hindsight, may have been well worth bearing. Apart from helping improve prices and clearing cane dues of farmers, the sequestered sugar would have been most useful today. Instead, the Centre chose to force mills to export at Rs 3-3.5 per kg below what they would have realised by selling in the domestic market. From its standpoint, the Rs 700 crore or so towards production subsidy on export of 2 mt would have cost less than maintaining a buffer stock for the same quantity. But these calculations clearly underestimated the extent of drought and its impact on domestic sugar availability.

It is useful to draw a contrast here with another commodity — wheat. A short winter, courtesy El Nino, has probably resulted in a lower crop this time. Even if not reflected in the agriculture ministry’s production estimate of 94.04 mt, the fact is that official procurement of wheat is set to fall sharply to about 24 mt. But thanks to stocks built up from the past, there will still be 33 mt-odd of wheat in government warehouses on July 1 — more than the 27.58 mt minimum buffer required for this date. And the credit for that goes to Punjab’s farmers, who have delivered 10.5 mt of the 22.3 mt procured so far in the current marketing season.

The coming months could see the Centre do to sugar what it has done for pulses and onions in the last one year. Stock-holding limits on traders might be just the start. This could next be extended to the mills themselves — by bringing back “release” of a minimum quantity of sugar every month into the market. And, of course, there can also be resort to large-scale imports, though Assembly elections next year in UP — where the votes of sugarcane growers matter — may not make this an easy proposition.

All this could have been avoided if only there was a buffer stock in sugar as in wheat.

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