Anyone would expect that after not getting a price rise and their customers not paying them for material supplied (about Rs 20,000 crore), cane growers would be shifting to other crops. They are instead growing more cane. There are a number of reasons why. For one, the realisations for a number of other crops have declined rapidly. Also, although farmers are faced with staggering arrears for cane already delivered, crushed, sold and consumed, there are farmers who have been paid a large part of what they have been owed. Some who have been paid in full and there are a large number who have been promised that they will indeed be paid, a bigger incentive than the hope being sent out by other crops.
Then, there is a fertiliser-cum-agrochemical impact. Traditionally, India has been an under-consumer in soil additives. In recent years, this under-consumption has begun to correct, translating into higher crop yields and larger cane quantities for farmers to sell. As long as the yield-derived incremental return from a given patch is higher than the cost incurred, the farmer is happy to keep planting more cane.
So, we have a curious reality. Traditionally, India's sugar industry had a self-correcting industry mechanism. Each time the cane price was raised, there would be surplus cane in the next couple of years, a consequent decline in sugar realisations, arrears on account of cane purchased by mills, consequent lower cane planting, lower sugar output, disproportionate increase in sugar prices. And, a growth in the bottomlines of sugar manufacturers and there would be a consequent increase in their ability to pay more for cane the following season. The typical classical bust-boom-bust sequence: Each time this happened, there would be an expectation that this too would pass. The good would become bad, the bad would become better. Which is what is not happening this time, resulting in the most prolonged downtrend in the country's sugar industry in living memory. Farmers are making a profit on cane; manufacturers are reporting a loss on sugar manufacture. Select millers are recouping losses in sugar manufacture with surpluses in byproducts manufacture (ethanol and energy co-generation); the majority of sugar manufacturers have not invested in related diversification. Sugar realisations (ex-factory) are down to Rs 23 per kg, under-performing inflation in virtually every other cash crop. Banks that have lent extensively to the sugar sector have no alternative but to find ways that can keep manufacturers going. Solution? Just one. Link sugar realisations to cane prices. If sugar realisations increase, farmers make more money - and vice versa. Farmers will evolve from vendors to partners. During bad years, they will grow less; in good years more. This self-correcting mechanism will generate a win-win-win proposition for farmers, millers and consumers. Wonder why no government wants to implement it. The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed