The government agencies were no better. The big difference has come from Maharashtra, whose initial estimate of production was 6-7 million tons.
Sugar production this year (2017-18) is expected to touch 30 million tons, an all-time high. With such a record production, comes a host of problems—the most important one being non-payment of “cane dues” to farmers. The government can ill afford to ignore this crisis of plenty. This sugar season started with conservative estimates of 23-24 million tons of production, triggering a debate on whether imports of sugar may be required. Things changed dramatically in the January-March 2018 period with periodic revision of production estimates. Both the Indian Sugar Mills Association and the Nation Federation of Cooperative Sugar Factories were way off the mark in their early estimates. The government agencies were no better. The big difference has come from Maharashtra, whose initial estimate of production was 6-7 million tons. Production now looks set to clock 10+ million tons. Neighbouring Karnataka also has an ‘impressive’ performance, of 3.5 million tons. Add another 10.5 million tons from UP and the story is more or less complete.
In terms of percentage, Maharashtra shows an increase of 140% over last year, Karnataka 65% and UP 20%. The big question is how did we get the estimates so wrong? With all the technology at our disposal and with each sugar mill having a defined command area, how can the production figures have gone so wrong? Such inaccurate estimation is bad for the government and the industry, and is disastrous for the farmers. Isn’t it time we revisited the process of estimation of sugar production and made it more reliable? Interestingly, Maharashtra has reported a significant increase in area under cane as well, largely attributed to the failure of the government machinery/market mechanism in purchasing pulses at MSP. This is an ominous portent for the agriculture economy. We neglect a crop like tur or chana, and we end up producing more quantities of a water-guzzling crop in a water-scarce area.
Given the fact that the production of sugar will be about 30 million tons, the balance sheet for sugar could look like as shown in the accompanying graphic. The estimated surplus has already pushed down prices to the range of Rs 3,100 -3,200 per quintal ex-factory. Though the Fair and Remunerative Price (FRP) for sugar for this season is Rs 255 per quintal, most states have announced a State Advised Price (SAP) in the range of Rs 300-325. With the current level of sugar prices, mills are not be able to cover even their costs. Sugar mills are not in a position to pay both the farmers and meet other costs including wages. The export market is not an option, with international prices at 12.5 cents/pound of raw sugar and $346/ton of white sugar. Given the huge price differential between domestic and international prices, the export market is not accessible unless we come up with innovative WTO-compliant subsidies.
In the current scenario of plenty, there is no option but to evacuate some sugar to external markets, but there are only very limited options even with financial support. The government has announced a Minimum Indicative Export Quota (MIEQ)of 2 million tons under Duty Free Import Authorisation (DFIA)with no subsidy, production or otherwise. Given the current differential between domestic and international prices and surplus situation expected next year, it is doubtful whether this will get any traction. Every lakh ton of export means a loss of Rs 100 crore. Which mill has the liquidity to hold? At some point, a buffer may have to be thought of. But, how big and at whose cost? The earlier practice of sugar mills holding the buffer with an interest subsidy paid for by the government may not work this time primarily due to liquidity issues. The mills are already under severe financial stress, for working capital and margin money. This means that the government will have to buy the buffer and hold it on its account. Can the government pay for and keep a buffer of say 2-3 million tons?
The requirement of additional working capital to the mills is a critical issue. Will the banks, in the current environment, bail out sugar mills? Doubtful. The mills are losing money on every ton of cane crushed. Sugar stocks being valued at current market prices will give them just about enough financial accommodation to pay the farmers, but not enough to run the mill. Unless there is some intervention from the government, it is highly unlikely that the bankers will bail out the sugar mills. The unpaid arrears of the farmers were reported at about Rs 20,000 crore; most of it is in UP. The national farm level sugar economy is worth Rs 80,000-85,000 crore (considering a crushing of 270 million tons of cane at an average price of Rs 300 per quintal and ignoring other uses). The arrears could easily mount to about Rs 30,000 crore by the end of the season.
The problem in the sugar sector this year is unprecedented, and it is real. Admittedly, there is no ‘one step’ or ‘quick fix’ solution. It has to be a well-thought-out combination of interventions taken together and timed well, which will ease the pain. The real worry however is the next year’s big crop. In a business as usual scenario, or in a denial mode, there exists the real danger of distress in yet another farm sector, the sugarcane fields of UP and Maharashtra. There is also the danger of some of the sugar companies queueing up before the NCLT, which could make retrieval all the more difficult! The cooperatives, as is their habit, will expect the government to bail them out. Is this the right time to ponder over the missed opportunities on ethanol and the recommendations of the Rangarajan committee? May be, this crisis will lead to some pragmatic and bold decisions!
By: T Nanda Kumar
Visiting Fellow, ICRIER
Former Union Secretary (agriculture & food)