States should not set high cane prices

After the partial decontrol of the sugar industry in April 2013, the time has come for State governments to reckon with sugarcane prices.

India’s sugar industry, second only to Brazil, is rightly concerned about the methodology of determining input costs in the 2013-14 season (September-October). Will the decision be driven by politics or the market, given that it’s an election year?

Generally, moving from control to decontrol should “add” value to growers and the industry. Despite the abolition of levies and the freedom to sell without being bound by the monthly release mechanism, there is more regression than progress in the sugar sector. Unless raw material price is fixed rationally, the freedom to sell in the open market will not be remunerative.

In 2012-13, the Uttar Pradesh-based mills suffered the greatest damage due to an irrational State Advisory Price (SAP) fixed by the State government. It was fixed at Rs 280/quintal; in comparison, it was Rs 210-250 in Maharashtra, with the all-India average “cost” being Rs 180 and FRP (fair remunerative price) of Rs 210 calculated by the Commission for Agricultural Costs and Prices.

If such a mismatch in is not set right, the entire process of reform and change may be negated. Mills cannot afford the luxury of a “sugar security bill” where the sale price continues to be less than the inherent cost of production.

They have no means of extended deficit-financing, year after year, akin to what is proposed for the Food Security Bill.

pricing principle

The cost of each commodity generally equals input expenses (seeds, labour, fertilisers, energyplus imputed rental value of land, less income from other collaterals (molasses, bagasse, press mud) and reasonable profit. For sugarcane, this principle is followed in the breach. In the liberalised scenario, State governments are expected to determine the SAP of sugarcane rationally, instead of prioritising vote-bank politics.

Agriculture Minister Sharad Pawar has indicated sugar production of about 25 million tonnes (mt) in 2013-14, against the industry’s estimates of 23.7 mt. India will have “carry in” (inventory) of about 9 mts in October 2013 .

Against a total availability of 34 mt, local consumption is 22-23 mt, indicating a surplus of about 11-12 mt. An ample monsoon presages well for 2014-15.

The NCDEX futures are flat for the next six months. Worldwide supply exceeds demand by about 10 mt. The market price of sugar in 2013-14 and even in 2014-15 is projected to be bearish, both domestically and internationally.

Exports are feasible if Indian sugarcane prices are rationally determined, so that sugar is not priced out of the export market. Indian exports are unviable even after an 18 per cent depreciation of the rupee in the last three months. (Incidentally, the Brazilian currency is also down by about 20 per cent). This shows a massive divergence in domestic and overseas values and, as a result, farmers’ arrears are bound to build up. By an act passed on May 10, 2013, Karnataka became the first State to set up a pricing and supplies board — the Karnataka Sugarcane Pricing and Supplies Board. It consists of about 15 members, comprising five representatives each of farmers, industry and the Government to balance the interests of all stakeholders.

The Minister of Sugar/Agriculture is chairman. Two major responsibilities of this board are to decide the price of sugarcane and ensure payments by mills to farmers within 14 days of delivery. Will this Board be free from political influences?

Revenue sharing

Maharashtra is also deliberating upon a similar model with a provision for revenue-sharing between farmers and the industry. Two types of revenue-sharing models are under consideration: the first with a 70:30 ratio (suggested by the Rangarajan Committee) where only sugar is produced, and the second with a 75:25 ratio where sugar, ethanol, molasses, bagasse, press mud, ethanol, and cogeneration are also involved. The sharing of revenue is consistent with accepted international practice.

Taking Maharashtra’s average sugarcane price of Rs 230/quintal in 2012-13 under the proposed configuration, upfront payment — 75 per cent — to farmers will be Rs173/quintal . The balance 25 per cent will be paid after the annual profitability of the mill is determined.

India needs to export at least 3-4 mt to halt depression in the domestic market. Internationally, 100-150 ICUMSA (International Commission for Uniform Methods of Sugar Analysis) is at $470 which is equivalent to Rs 200/quintal of cane. There is no case for pricing above Rs 210-220/quintal for sugarcane with 9.5-10 per cent recovery rate.

If UP fails to undertake course correction in sync with other States, and keeps itself locked at SAP of Rs 280 or effects upward revision for 2013-14 while domestic values remain range-bound at Rs 30-33/kg, then we may have to write the financial obituary of many mills in that state.

(Tejinder Narang is a freelance commodity analyst.)

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