The Hindu Business Line : KPMG report calls for creation of strategic sugar stock

The existing monthly release mechanism governing sugar sales should be done away with and be replaced by the creation of a ‘strategic stock’ to maintain prices in a sustainable band, a KPMG report “The Indian Sugar Industry Sector Roadmap 2017” has said.

According to the report, commissioned by the Indian Sugar Exim Corporation (ISEC) and released here on Monday, the strategic stock would involve the Government or an independent body intervening as a market participant in order to maintain sugar prices within a defined band.

This band would, in turn, be notified along with the announcement of the cane price so that mills get adequate returns after accounting for cane costs, taxes and conversion charges.

Self-sustaining

“If the sugar price falls below the band, the strategic stock intervention would get initiated through sugar purchase, thus increasing the prices.

If the sugar price rises above the band, the strategic stock intervention would lead to sugar release in the market, thus decreasing the prices”, the report has suggested. Since the strategic stock would be augmented when sugar prices are low and be depleted when prices are high, it would be a self-sustaining mechanism to containing excess volatility.

The strategic stock mechanism, the report has argued, is superior to the existing monthly release system, wherein the Government decides the quantity of sugar that each factory can sell in any given month.

While the release system enables the Government to influence prices in the domestic market by regulating supply, it does not, however, give mills the leeway to freely sell depending on their view of current and future prices and the cost of holding inventory.

The strategic stock could be funded through a special purpose vehicle, with the sustainable price band being defined by the Government and the day-to-day operations of procurement and release of stocks being vested with an independent body, KPMG has said.

“An average increase in sugar prices by Rs 2.2 per kg over the average procurement price would be adequate to recover the estimated cost of managing the strategic stock”, the report has stated.