Cogencis, Wednesday, Jul 4 By Ashna Mishra and Stuti Chawla NEW DELHI - The sugar industry has been knocking on government doors for months now to help it stem the free fall in prices and clear cane arrears. Sugar prices, however, have refused to nudge higher despite several attempts by the government, as output is seen at a record high of 32.1 mln tn in 2017-18 (Oct-Sep). With a bigger glut likely next season, the government may be running out of ammunition to prop up sugar prices. In a situation like this, the Indian Sugar Mills Association has recommended increasing the minimum sale price of sugar to 35 rupees a kg in northern India, and 33 rupees in western and southern India from the flat government-mandated 29 rupees now to help mills recover their cost of production. The association has also recommended mandatory export of about 6 mln tn sugar next season to flush out the surplus, its Director General Abinash Verma told Cogencis in an interview. "All these problems of cess, WTO (World Trade Organization) will be resolved if you do this," Vermasaid. The government's earlier efforts to indirectly give a subsidy on export of sugar have drawn flak from other exporting countries which have alleged that the subsidy flouts WTO norms. The food ministry's plan to impose cess on sugar to fund the subsidy too has so far failed to pass muster with the Goods and Services Tax Council. With all else failing, the government last week approved a new policy for ethanol aimed at encouraging mills to divert cane juice directly to manufacture ethanol and reduce sugar production. While this policy is a step in the right direction, it is unlikely to prompt diversion of cane to ethanol "at least for the next 12 months", due to capacity constraints and ample supply of molasses already available with mills at throwaway prices, Verma said. The following are the edited excerpts of Verma's interview: Q. Is the differential pricing for ethanol from B-heavy molasses announced by the government enough to entice mills to set up new distilleries? A. At the current sugar price, this is reasonably attractive. One kilo of sugar is roughly equal to 0.6 ltr of ethanol. If I reverse calculate 47.49 rupees a ltr announced for B-heavy molasses from sugarcane juice, it works out around 28.50 rupees for sugar. At this price, it makes sense for mills to divert cane juice to ethanol. But tomorrow, if sugar prices move up, mills will have to take a call on whether they still want to produce B-heavy molasses. Mills would have been excited about the price had it been set at 52 rupees a ltr, linked to the average sugar production cost of 35 rupees a kg. Q. At the current price, will mills set up distillation capacities? What is the investment required? A. Out of about 530 sugar mills in the country, currently only 140 have distillation capacity to make ethanol. That means there is a massive potential to put up capacities. For a sugar mill that crushes about 5,000 tn of cane a day, setting up ethanol production capacity of about 60 kl per day would cost around 900 mln rupees. The main cost of setting up a distillery today is effluent treatment. Norms are stricter now, and the cost of effluent treatment is about 50% of the total project cost. Q. How much cane do you think will be diverted to ethanol next season? A. I do not see any substantial diversion of cane juice to make ethanol in the next 12 months, as the current capacity is utilised to the fullest, and in north India, there is a lot of surplus of C-heavy molasses that is selling at throwaway prices. Mills would first want to use that to make ethanol, which fetches 43.70 rupees a ltr. Q. For this year and next, cane supplies are likely to be enough for diversion to ethanol. What happens the year after? A. There is absolutely no reason to believe that sugarcane production will go down. If you look at the return the farmer is getting from sugarcane, it is far higher than other crops. The government is talking of 50% return to farmers over the A2+fl (input cost plus family labour) cost. We did our own analysis using data from the Commission on Agricultural Costs and Prices and found out that in UttarPradesh and Maharashtra, the return on cane farming is 100% of the production cost, while in Karnatakait is 126%. For farmers in Maharashtra, the average profit from sugarcane is estimated at 166,000 rupees per ha this year, while in Uttar Pradesh, it is about 122,000 rupees per ha. Because of the high return, there is no reason for the farmer to leave sugarcane for the next 4-5 years, unless there's a weather issue. Q. What is your estimate for next year's sugar output? Do you agree with the industry's view that it could top 35 mln tn? A. I cannot give you a number today without sharing it with the board. We obtained the satellite images of the crop in June, but that would give us an idea only about the acreage. Last year, we were surprised to see that rainfall in Jul-Sep played a very important role in increasing the yield in the western and southern part of the country. Therefore, whatever we announce in July can change quite significantly if there's a major change in the rainfall in that period. Field reports suggest that the acreage under sugarcane is equal to or higher than this year. Whether it will translate to higher sugar production, will depend on productivity, rate of recovery and also rainfall. Q. Even if sugar production next year remains around this year's level, it would be tough to manage. The government is already running out of options on how to help the sugar industry. What do you think will happen next year? A. Yes, you are right that there will be very, very high supply of sugar. We are looking at about 10 mln tn of closing balance this year. Assuming that next year's production will be similar to this year, we will actually add another 6-7 mln tn to that closing balance. We have never tested 16-17 mln tn in closing balance. It is equivalent to almost about 7-8 months of consumption, which is massive. We don't have that kind of storage capacity and will have to find a way to dispose it off. Q. What are you recommending for tackling the glut next year? A. This year, the financial assistance announced by the government to tackle surplus sugar has not been 100% successful. Many mills did not export sugar as there were many conditions. Moreover, mills would incur losses on exports now, adding to their cash flow problems, and would be reimbursed only after 8-9 months. Recently, for the first time, the government has taken up a very bold step of fixing a minimum sale price of sugar at 29 rupees a kg. We feel the government has moved only half way, as the price does not cover the production cost. We have recommended that for mills in Maharashtra and southern India, the minimum price of sugar should be increased to 33 rupees a kg, linked to the fair and remunerative price of sugarcane. For mills in Uttar Pradesh and other states in northern India, it should be fixed at 35 rupees, as most states here pay the state advised price. And, we have said don't give any subsidy on anything, but fix a mandatory export quota for each mill. If mills fail to export, their sugar should be seized by the government and exported through state agencies. This way, mills will get the necessary cash flow, get a marginal profit on exports, and the surplus sugar would be pushed out. Q. If the government accedes to your demand, how much sugar will India export next year? A. We have requested the government to give us a target to export around 6 mln tn sugar during next season. Q. Will the global market be able to absorb Indian surplus next season? A. Globally, next year's sugar surplus will be slightly smaller than this year's. Brazil is already diverting a lot of sugar to ethanol. From a peak of about 36 mln tn this year, Brazil's sugar production is expected to fall to 29-30 mln tn next season. If Brazil reduces production by about 6 mln tn, obviously there is space available for India to export. Thailand's sugar output also may be slightly lower. We expect India to export sugar in Oct-Jan, when both Brazil and Thailand are not in the market. Q. India will have to export raw sugar if large quantities are to be exported. Are mills gearing up to produce raw sugar next season? A. We will have to export raw sugar because all our neighbouring countries--Bangladesh, China, Malaysia--import raw sugar. Very importantly, we have refineries in Kandla and Kakinada that can buy raw sugar. The message is loud and clear. We are talking to mills, and have also requested the government to announce next year's plan by early August so that mills can start signing contracts for raw sugar exports. End Edited by Rashmi Sanyal