NEW DELHI – Saddled with surplus production and huge carryover stock, the sugar sector may need more government assistance than it has got so far. However, the government is faced with a huge challenge of putting the economy hit by the novel coronavirus and the subsequent lockdown back on track and is unlikely to give the same attention to the sector it gave earlier.
Sugar mills face a twin task of disposing of the surplus production and huge carryover stock, and also paying cane farmers their dues. And this is where the government's intervention would be needed.
In The Last Two Seasons, The Government Has Used Almost Every Tool To Help Sugar Mills.
The Uttar Pradesh government's recent proposal to allow sugar mills to pay farmers a certain quantity of sugar for three months for cash drew a lot of flak, but one cannot rule out the possibility of something similar playing out on a much larger scale next season.
The government, on its part, would be too hard-pressed to bail out the sugar sector as it would have much more on its plate to revive the economy.
On Tuesday, Prime Minister Narendra Modi announced a special economic package of 20 trln rupees to fight the economic fallout of COVID-19 but it is unclear how much of it will be given to the agriculture sector, and on top of it, what will come to sugar sector's kitty is highly uncertain.
After a lower production this season, India's sugar output is likely to soar in 2020-21 (Oct-Sep), as the weather has turned favourable. Good monsoon rains last season led to an increase in acreage in most states.
Industry estimates peg sugar production next season at 30-31 mln tn, up from this year's 26.5 mln tn. Supplies are seen even higher, as there would be a large carryover stock from this season.
Initially pegged at 9-10 mln tn, industry officials now see the carryover stock at 12-13 mln tn, as the nationwide lockdown is expected to reduce overall sugar demand this season by at least 2 mln tn.
With so much sugar to be carried forward from this season, the total sugar supply in 2020-21 is estimated at 42-44 mln tn--the second highest on record. This is much higher than consumption, which is usually pegged at around 25 mln tn.
This excess sugar is likely to keep prices low and below the cost of production for the third season in a row. For the last couple of seasons, both state and central governments have been stepping in to ensure mills get enough money to pay the 50 mln plus cane farmers in the country.
In the last two seasons, the government has used almost every tool to help sugar mills. It gave sugar mills subsidised loans for working capital as well as for setting up ethanol units. It set an unusually high price for ethanol made by the mills to ensure they get better revenues. It re-started fixing mills' sugar sales quotas and set a minimum sale price for the sweetener.
To take some sugar out of the system, the government also created a buffer and gave large subsidies on exports. In 2018-19, it approved subsidies on export of 5 mln tn sugar, while this season, it has agreed to subsidise export of 6 mln tn sugar.
All this came at a huge cost. Since 2018-19, the government has given subsidies of more than 200 bln rupees to help the industry and make sure it makes timely payments to cane farmers.
For the next season, the subsidy requirement would be quite high, partly because the surplus is seen higher, and partly because the world market has changed, making exports even tougher.
Brazil--the world's largest producer--is back in action. With crude prices falling to record lows due to the pandemic, Brazilian mills have switched back to producing sugar after a gap of two years. The country is likely to produce 34-37 mln tn sugar in 2020-21 (Apr-Mar), up from 26.7 mln tn in last year. And with production rising, the country is already clawing its way back into the world sugar market.
Brazil is the not only the world's largest exporter of sugar, but also the cheapest. To compete with cheaper supply from Brazil, Indian mills would need a larger subsidy on exports.
The government is subsidising export of sugar by as much as 10.50 rupees a kg this season. With world sugar prices remaining in the range of 11-14 cents this season, this subsidy has been attractive for sugar mills, and they may be able to export as much as 5 mln tn sugar this season. This subsidy amount needed next season may be higher, as global sugar prices have fallen to around 10 cents a pound with Brazil switching back to prioritising sugar over ethanol.
Industry experts say prices could fall to 9 cents a pound in the next few months, as the world market is seen posting a surplus of 4.3 mln tn sugar in 2020-21, compared with a deficit of 7.2 mln tn in 2019-20.
If the slide in global sugar prices continues, the Indian government will have a hard time deciding on export subsidies for the next season.
It is certain that the sugar industry would need government help even next season, be it in the form of extra working capital requirement from banks, export subsidy or buffer stock subsidy.
At a time when the entire economy is facing crisis and fear of global recession is looming large, how much the government will be able to support the sugar industry is just a waiting game.