Cane and able: Implementation of experts recommended formula-based pricing would be an equally progressive step

October 21, 2020 4:45 AM

If communicated effectively to farmers, it will be hugely beneficial for industry and farmers alike in the long run.

And, if communicated effectively to farmers, it will be hugely beneficial for industry and farmers alike in the long runAnd, if communicated effectively to farmers, it will be hugely beneficial for industry and farmers alike in the long run

By Priyanka G Morarka

With its primary raw material, sugarcane, being a cash crop, and its end-product, sugar, being a commodity, the sugar industry in India has found itself uncomfortably sandwiched, for decades, between the cries of farmers for an overly lucrative price for their produce and of the end-consumer for access to good quality sugar at low and reasonable rates.

State and central governments alike are keen to walk the fine line between pleasing both the farmer vote-bank as well as the consumers; however, in all of this, the ones who have been consistently working on basic equations beyond conventional economics have been the sugar mills. The bittersweet stories of the sector are not unknown to anyone and, although otherwise diametrically opposite in most ways, the one thing that unites sugar mills across the country is the issue of cane dues to farmers. Having said that, this issue remains a complex one, and to comment on it with a pan-Indian outlook would be oversimplification.

While, in Maharashtra and South India, the weather has played havoc, the issues that plague Uttar Pradesh’s mills are quite different, and perhaps not so much an act of God! In Uttar Pradesh, for example, sugarcane prices are based on the state government’s discretion. With the current state advised price (SAP) in Uttar Pradesh kissing the levels of Rs 315-325 per quintal and sugar prices remaining around Rs 3,200 per quintal, it is no surprise that the industry is staggering payments to farmers, as the realisation from sugar, power and ethanol trickle in.

Another direct impact of high SAP is that sugarcane, which generally gives 1-2 ratoon harvests, is so lucrative for farmers that they are reluctant to grow alternative crops, further pushing up the supply of sugarcane and contributing to the growing glut. One would imagine that cane arrears would leave farmers disillusioned and see them shifting to other crops, but not so in Uttar Pradesh.

The delayed cycle of payments should perhaps be viewed less as capitalistic opportunism and more through the lens of pure economics. In Uttar Pradesh, a single sugarcane crushing season is of a 5-6 month duration in the year and the produced sugar sells over 12 months. Even with the highest efficiencies that one may draw, the cost per bag of sugar in the state is anywhere between Rs 3,500 and Rs 3,600.

It is, therefore, safe to conclude that the sugar business, by itself, is non-remunerative, and if any company has to do justice to all its stakeholders, employees, bank obligations and farmers alike, it would be impossible to carry on with the business if it were not for the additional revenue that is generated by diversification into power co-generation and ethanol production.

This brings us to the ethanol story. In a welcome move, governments, both at the Centre and states, have given a much-needed push to the production of ethanol; this has had a two-fold effect. One, it greatly assists sugar mills’ cash flows, and two, the amount of sugar drawn from the cane is lessened as B-heavy molasses is now diverted for the production of ethanol instead. In layman’s terms, molasses that would have been directed to sugar extraction from it before being used for some secondary purpose is now skipping the step of sugar extraction and directly being consumed for ethanol manufacturing. As is obvious, this directly pulls back on the volume of sugar output, thereby helping decrease the sugar glut, creating a more favourable demand-supply situation and stabilising sugar prices in the long run. After the impetus doled out for increasing ethanol capacities, one will likely see this play out in a more evident manner in the near future.

The measures taken in the last few years have been encouraging, and from time to time, governments have stepped in to help companies tide over their dues. But, the truth is that these short-term solutions of bridge-loans to pay off arrears are only delaying the addressing of the core issue. To reform the industry fundamentally, the high-impact solution is a little more complex and, perhaps, politically sticky too. If the sugarcane price were to be strictly based on the expert-recommended formula, with a fixed component and a variable component allowing farmers to have a share in the final profits of the end-product, it would mitigate, to a large extent, the core destabilising factor for the sector. With the demand-and-supply cycles kicking-in in full force, the supply glut would be brought down greatly and the chances of farmers being handsomely rewarded for their crop would be exponentially high.

Against the backdrop of the new farm laws that give farmers direct access to competitive pricing for various other crops, the implementation of formula-based pricing for sugarcane, recommended by experts, would be an equally progressive step. And, if communicated effectively to farmers, it will be hugely beneficial for industry and farmers alike in the long run. What it would require, though, is immense political will.

An ailing industry never leads to a healthy state, society or country—and least of all an industry that, I dare say, is one of the largest contributors to the development of rural India; one that reaches some of the remotest corners of the country and takes prosperity right to their doorstep! An industry like this can only have the best interest of farmers at heart.

The author is vice-president, Corporate Affairs, Dwarikesh Sugar Industries Ltd

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