Sugar problem: Resolve cane price-sugar realisations mismatch

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Published: January 23, 2018 4:49:25 AM

revenue-sharing is a better way to pay cane-farmers right while ensuring mills are not under ruinous arrear-Burdens than Price fixing by the Government

Sugar, sugarcane price, Indian farmers, fair and remunerative price, Indian cane prices, india, Indian sugar industry, CACP, india, sugar producing countries, sugar exportFalling sugar prices are directly linked to market conditions, and not much can actually be done by the government therein, especially when there is surplus sugar. (Reuters)

Around 5 crore Indian farmers and their family members grow sugarcane for 12-18 months on around 50 lakh hectares of land. A ratoon of 1-2 years, when farmers don’t have to put fresh seed, means once the farmers plant sugarcane, they are committed to grow sugarcane for 2-3 years. It also means that when the farmers commit themselves to sugarcane, they don’t know what the sugar price would be after a year or more. The government does well to protect farmers by deciding the price of sugarcane, called the fair and remunerative price (FRP). But on the other hand, sugar prices are determined by market sentiments and market forces, and the government can’t have much direct control over it. Everything remains good until the high FRP of sugarcane results in over-production of cane and sugar. If that in turn causes sugar prices to fall below cost levels, the mills incur losses, leading to delays/defaults in payments of farmers. The commitment made by the prime minister during the UP elections, to ensure timely payment to cane farmers, will then remain unfulfilled and would invite criticism.

Falling sugar prices are directly linked to market conditions, and not much can actually be done by the government therein, especially when there is surplus sugar. Exporting the surplus from India is not easy because of the burden of very high cost of sugarcane, pushing up the costs of sugar. For a comparison, Indian cane prices are 70-80% higher than that in Brazil. With India becoming self-sufficient—and sometimes, surplus—in sugar, cane-pricing policies need immediate rationalisation and brought in tune with global practices, for Indian sugar industry to export the surplus successfully. Indian cane-farmers are mostly small and marginal, and therefore, the government’s attempt to protect them with a remunerative cane price and assured buyer cannot be questioned. However, what is disturbing the balance and adversely hitting the sugar mills and farmers is the mismatch between the sugar price and sugarcane price. Sugarcane contributes for 70-75% of the cost of producing sugar. Therefore, if cane-price is high and sugar prices low, sugar production becomes unviable, resulting in unpaid cane-price for farmers. Cane-price arrears of farmers had unfortunately crossed Rs 18,000-20,000 crore continuously for a few years some time back. It meant that either every third farmer did not get his payment on time or a farmer got only of two-thirds of the amount due to him. Both situations are surely alarming and chaotic.

In the past few years, drought caused a drastic fall in sugar production, which kept sugar prices high. Farmers got over 99% of their payments. However, with normalcy returning and higher production expected soon, cane-price payments might come under stress again. The role of the governments (including states) cannot remain restricted to simply fixing cane-price and then forcing millers to cough up the price to the farmers. As in the past, the government will have to help by giving interest-free loans, subsidies and incentives, etc, worth a few hundred or thousands of crores of rupees. Special efforts would be needed to dispose off the surplus sugar, to keep sugar prices at adequate levels and ensure cane-price payments on time. However, with more aggressive players globally, some of the past measures may not be easy to roll out again.  If one examines the problem of cane-price arrears carefully, one would realise that the root cause of the problem is the mismatch between cane-price and sugar price. Too high a price for cane makes Indian sugar uncompetitive globally. Therefore, there comes up the need for government subsidies, or the surplus sugar gets stuck in India, burdening the mills, pushing down sugar prices and thereafter causing all kinds of related problems, including cane price arrears. So, what is the solution, especially considering that cane-price will continue to be fixed by the government, and surplus sugar production can be expected in the future years?

The solution already suggested by the Comission for Agricultural Costs and Prices (CACP)—continuously for the last four years— is as follows:

a) Farmers should be guaranteed a minimum cane price at the level of FRP,

b) Liability of sugar mills will be restricted as per a revenue sharing formula (RSF), such that 75% of revenue realised from sugar (including weightage of 5% for other primary by-products) will be the cane price payable by mills.

c) If the cane-price, as per RSF, is more than FRP, the farmers get a second instalment over and above the FRP.

d) If the price as per RSF works out to below FRP (which will happen when sugar prices are depressed), the gap would be paid from a fund created by the government, directly to the farmers.

It means that sugar mills will pay as per their revenue realisation, i.e., as per their paying capacity. Therefore, farmers will get paid on time. It will also keep cost of production reasonable, ensuring Indian sugar is competitive globally to allow exporting the surplus. On the other hand, farmers get cane price at least at the level of FRP, or more when sugar prices are better, an improvement over the current system of giving farmers only FRP. Such a linkage formula between cane-price and revenue realisation from sugar is universal, given it is followed in almost all sugar-producing countries, and will put Indian industry on a par with other global players. The CACP’s suggestion of a fund is in fact an improvement, particularly for the Indian farmers, where they are guaranteed a minimum FRP, even when sugar prices are down, and would get more if sugar prices are good. The question that remains to be answered is how to create this fund that will work for the welfare of cane farmers on a sustainable basis, and what will be the source of funds for it. An attempt will be made to answer this important question in the concluding part of this article.

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