Agri Business

Sugar export subsidy: Only a band-aid measure

Rajalakshmi Nirmal | Updated on August 30, 2019

File photo   -  The Hindu

Given the low global sugar prices, despite the subsidy, exports will still be at a loss. But if global prices recover by October, it can actually make exports attractive

From time to time the Centre keeps coming with measures for the ailing sugarcane industry. Given that many lakh cane farmers are dependent on the mills for their livelihood especially in Maharashtra and UP where they make a large portion of the vote bank, the issue can’t be taken lightly by the government. But having said that will the recent sop for sugar exports to the tune of Rs 6,268 crore help?

Will this sop from the Centre be enough to end woes of the mills and the distressed cane farmers?

Sugarcane has been witnessing one year after other of bumper production.

Sugar output hit a record 325 lakh tonnes in the SS (October –September) 2017-18 and in 2018-19 scaled a new peak of 329.5 lakh tonnes. With consumption remaining stagnant, inventory in the channel increased. The 2019-20 SS is set to open with a stock of 142 lakh tonnes of sugar, which is over half of country’s annual demand.

In the 2019-20 SS, ISMA expects sugar production to come down to about 282 lakh tonnes due to drop in acreage in key states including Maharashtra and Karnataka following lower rainfall. However, there will still be a large surplus, says Abinash Verma DG, ISMA. After domestic consumption of 260 lakh tonnes, the country would have about 164 lakh tonnes of surplus sugar that the industry can export and also use for conversion into ethanol and hold some as stocks for next year.

Export subsidy

On Wednesday, the Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi, gave nod to sugar export subsidy of about Rs 6,268 crore to liquidate surplus domestic stock. This subsidy which will be towards 60 lakh tonnes of sugar would be directly credited into farmers’ account on behalf of mills against cane price dues and subsequent balance, if any, would be credited to mill’s account which can be used to meet expenses on marketing costs including handling, upgrading and other processing costs, costs of international and internal transport and freight charges on export. A back-of-the envelope calculation shows that the export sop works out to Rs 10,446 per tonne of sugar or Rs 10.44 per kg of sugar. Currently, in the export market sugar prices are hovering at around Rs 20/kg and domestic market MSP is Rs 31/kg. The average cost of production for the industry is Rs 36/kg. Thus, taking in to account the subsidy, the cost for mills will come down to Rs 26/kg, but still since the export market price is only Rs 20/kg, mills will be exporting at a loss.

So, does it not help?

Aside to the export sop, the Centre has done several things for the cane industry in recent times. The key among them is - creation of buffer stock of 40 lakh tonnes of sugar for one year from 1st August, 2019. This will absorb some supply from market for one year and support prices.

When this supply comes back to the market on 1 August 2020, the export sops will be available.

Abinash Verma DG, ISMA, says, “There would have been an opening stock of 160 lakh tonnes with the industry for 2020-21 SS, but with the announcement of export subsidy for 60 lakh tonnes, the opening stock for 2020-21 SS reduces to 100 lakh tonne, which is welcome…” If we take into account the cane that will go into ethanol manufacture, the opening stock for 2020-21 SS will come down by another 15 lakh tonne.

Sugar mills may be keen to export as they would want to dispose the excess stock. It will reduces their inventory carrying cost. If the stock is emptied, market prices will also remain stable around the current levels of Rs 3250/quintal or even see a small increase and help margins for mills.

However, one can’t be sure if all the mills will take up exports given that the price dynamics is still not favourable to the industry.

One thing that can change dynamics is global prices. As exports of 6 million tonnes will start only from October, and by then if global prices can improve from current levels, exports can actually become attractive.

Published on August 30, 2019

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