Sugar mills made to swallow a bitter pill

February 26, 2021 6:00 AM

If the FRP/SAP mechanism of sugarcane pricing can’t be done away with, govt must at least increase the MSP of sugar

sugarMills have contracted to export 33.38 lakh tonne of sugar so far as against the 60 lakh tonne quota assigned by the food ministry

By Kunal Bose

Union food and public distribution minister Piyush Goyal caught the sugar mill industry by surprise when he recently dismissed outright the long-discussed prescription of sharing of revenue realised from sale of sugar and any other downstream products between farmers and sugarcane crushing units. The industry was left bewildered as the 2012 Rangarajan committee recommendation entitling sugarcane growers to 75% of the industry’s total revenue had received endorsement from the Commission for Agricultural Costs and Prices, which recommends yearly the fair and remunerative price (FRP) for sugarcane. What is more, the NITI Aayog says the twin objectives of preventing occurrences of cane price arrears inconveniencing growers and keeping the industry in “sound financial health” undepin the need for an alignment between price of sugarcane and sugar.

Endorsing the Rangarajan revenue sharing formula (RSF), which prescribes a much fairer deal to growers here than what their counterparts in Brazil, Thailand and Australia get, NITI Aayog says, “RSF needs to be introduced along with a price stabilisation fund (PSF) to protect farmers from receiving prices below the FRP.” No doubt, the fear of adverse farmer reaction has stopped New Delhi from giving effect to the universally practised RSF. The underlying principle is the value created by sugar and all its by-products is to be equitably apportioned between growers and cane-crushing factories on the basis of relative costs incurred by the two parties.

In his own words, Goyal does not believe in “beating around the bush.” Therefore, he tells mill-owners: “Let’s be practical about it. You also know, I also know, we cannot reduce the farmer’s FRP. It’s now an institutionalised mechanism.” But then, what are the new agri-reforms for? Why should an industry, the source of livelihood for over 50 million farm families and another more than 500,000 workers, remain bound by a system causing privation to growers as sugar-producing companies run out of funds to clear cane-bills long after these become due? Moreover, mills’ failure to recover the cost of sugarcane, let alone cost of conversion to sugar, from ex-factory price has pushed large swathes of the industry into the red. In, Uttar Pradesh, the industry’s cane dues so far in the current sugar season are close to Rs 8,000 crore, against just over Rs 6,000 crore in the corresponding period of 2019-20 sugar year.

Even while UP, to the relief of the industry, has been exercising restraint in fixing the state advised price (SAP) since 2016-17, the mills this time are inconvenienced by production cost going up because of the fall in juice recovery rate. Low sucrose accumulation in sugarcane is likely to have been caused by early start of cold weather and low difference of day and night temperatures. Or, is this also happening because most of the 120 operating factories were legally obliged to give themselves more days of crushing during 2019-20 than is normally the case and in the process did not allow ratoon—a fresh shoot springing from plant root—enough time to mature?

No wonder a good number of UP mills are citing low recovery as the reason for their failure to start making payments for sugarcane received from captive zones. But, whatever the pain originating from recovery-fall, groups such as Balrampur Chini, Dwarikesh Sugar and DSCL, all multi-location units with a large downstream product profile have remained nearly up-to-date in settling cane bills. What is seen in UP also obtains in other sugar-growing states—a small group of profitable sugar companies discharging obligations to stakeholders, specially growers, and the rest seeking government help all the time to stay in business. It is because of this that Goyal wants Indian Sugar Mills Association to do a gap analysis of underperforming mills to see if these could be brought to health. Ahead of such an exercise, it is clear that companies with single factories and not much value addition in downstream are beyond redemption. The BJP is in power both at the Centre and in UP. What then stops New Delhi from speaking with the Yogi Adityanath government on the distortions that SAP continues to cause the sugar economy. NITI Aayog maintains that the states recommending SAP should give up the practice unless of course they are ready to bear the additional cost—the difference between SAP and FRP—instead of forcing it upon mills.

Whatever the industry’s problems, farmers must be adequately rewarded for the efforts they make to grow sugarcane. The principal reason why sugar has ceased to be a cyclical industry and India is making the commodity every season well in excess of domestic requirements is sugarcane growers are getting 100% more than the A2+FL cost against 50-60% premium available over A2+FL cost for paddy, oilseeds, cotton, etc. No wonder, the extraordinary high premium plus the obligation on mills to buy the crop to the last stick in captive zones will explain the strong preference for growing sugarcane. In order not to court displeasure of farmers, New Delhi will not tinker with FRP. But, it should surely align the MSP of sugar—introduced in June 2018 and revised only once since February 2019 (at Rs 31/kg)—with the factory production cost.

From NITI Aayog to several sugar-making states, many have asked for the sugar-MSPto be raised to Rs 36/kg, in order to strengthen industry finances and enable them to settle cane bills. Cane-price arrears climbed to Rs 28,389 crore in 2018-19, causing untold distress to growers. In the following year too, the industry piled up cane dues of Rs 22,000 crore. A government that cares for the welfare of farmers should have no qualms about revising sugar MSP in line with the additional burden of FRP on factories. In the context of the share of sugar in wholesale price index (WPI) being down from 3.6% a decade ago to 1.06% now, MSP revision will not anyway be a consumer unfriendly step.

A former FT correspondent, the author is now India correspondent for Euro Money publication, Metal Market Magazine

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Data drive: The FY21 tax suprise
2America Inc’s opposition to “discriminatory legislation” has sparked a debate on whether MNCs should remain bipartisan
3AI for judiciary will help reduce pendency of cases