Judicial intervention can resolve UP cane pricing row

Uttar Pradesh farmers are exposed to ₹5,000 crore sugarcane arrears on account of dichotomous policy of the State Government of overpricing the cane unrelated to market realisation of sugar. Citing lack of profitability, millers have ignored dictates of the State Government for short payments.

The Allahabad High Court on August 13 directed that 15 per cent of the three million tonnes (mt) of sugar inventory of UP mills be sold within three weeks (@5 per cent a week) to clear the dues to farmers. Any coercive action on UP’s sugar mills by the State Government is held in abeyance for time being.

The matter being sub judice, it inter-alia isolates Union Food Ministry, at least for next three weeks, from considering industry’s other demands such as raising import duty on sugar, raw sugar export subsidy and interest-free loans from sugar development fund.

The industry is lobbying for Central assistance to inject bullishness in prices and squaring up short payments. The Food Ministry’s response to the industry is well-articulated and well-crafted: Clearance of cane arrears is a must for anything else.

The court has fixed a minimum selling price of ₹3,100/quintal. Net realisation will be about ₹1,395 crore or about ₹465 crore a week by auctioning 1,50,000 mt a week – a huge tonnage, 35 per cent of weekly national consumption of 4,30,000 mt/week (annual consumption 22.5 mt).

Amount realised, as directed by the court, will be deposited in separate bank accounts of District Magistrates, of which 30 per cent (about ₹418 crore) will go to farmers. The banks have argued that sugar stocks are hypothecated to them by millers against working capital loans. Thus they hold first charge from such accruals.

On August 14, NCDEX spot price was ₹3,300/quintal at Delhi. The spread of ₹200 (₹3,300-3,100) is awfully insufficient for sustenance of wholesale chain for defraying cost of financing , labour, transportation, transit shortages, warehousing, carrying charges, incidentals expenses and profit.

If by chance, first weekly disposal is a success, market price will drop further, thereby stalling next week sale. Possibility of sale to any MNC/industrial users such as Coca-Cola, Pepsi, Cadbury, Britannia, etc. appears bleak as they can avail themselves of credit facility from millers in Karnataka, Maharashtra or Tamil Nadu.

The entire banking system is already under a microscope due to rising bad debts. Currently, they are highly stressed and distressed by the recent case of Syndicate Bank. Therefore, banks may assert their precedence and priority with full force in the Supreme Court, if the High Court fails to provide relief. The matter in courts will get prolonged; UP mill owners may get protracted reprieve, while sugar stocks stay where they are. Recovery of cane arrears appears to be a distant dream.

Sugar prices domestically and internationally are foreseen depressed for another year. Even at such a bearish scenario and factoring monsoon too, Indian output in 2014-15 is forecast to remain unchanged at 24-25 mt with carry in of about 7.5 mt on November 1, 2014 – a surplus of around 10 mt (taking consumption 22.5 mt). Farmers are not downsizing sugarcane production and appear to be content with even partial payments availed by them.

The industry is also on a capacity expansion mode. Does it not lend credence to collective viability of the sugar industry when appraised with other by products? This may perhaps be debateable either way.

Due to prolonged controversy, the UP Government would have realised the mess they have created by pursuing theory of absurdity in fixing irrational State Advisory Prices (SAP) of ₹280 in 2013-14, while in Maharashtra, Karnataka, Tamil Nadu it varies between ₹220 and ₹240/quintal. To set matters right, the UP Government may announce reasonable SAP closer to ₹220 for 2014-15 by appropriately calibrating it with rate of recovery and applying the condition that mills will settle old cane arrears too. This will average out two years cane value to about ₹245.

If this is politically unpalatable or unworkable, then this is a golden opportunity for the industry to file an interlocutory application, if it has not done already, in the Allahabad High Court with documentary evidence of input-output data correlated to market prices.

The Centre and the banks can also be made party to this petition and the court may seek Central endorsement on the faux-pas committed by the UP Government. Rational policy for SAP can then be defined by the judiciary.

The concept of sugar ‘Made in India’ has to be supported by dynamics of market rather than political or bureaucratic ideas. Why not revert to the old rationale of FRP (Fair Remunerative Price) decided by CACP than to have 10 SAPs?

Policies of populism of poverty favour political parties rather than individuals. Framers – big or small – are also land owners, an asset class. Their earnings are exempt from tax. Disparity in income with other sections of society cannot be construed as poverty.

Recent World Bank report suggests sharp decline in Indian poverty in 2011 to 100 million in poor based upon PPP of $1.25 a day. Also, sugarcane remains the most profitable crop compared to other crops as per CACP analysis. This is the time to make the change in SAP’s policy profile.

The writer is a trade analyst

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