Sugar is a sector of significant importance to the national economy, an important agro - based industry that impacts rural livelihoods of about 50 million sugarcane farmer and around 5 lakh workers directly employed in sugar mills. The industry is highly fragmented with organized and unorganized players. The sugar industry also supports diversified ancillary activities and skills that support the local economy. The country is the largest consumer of sugar and usually consumes all sugar produced domestically. About 62-65% of sugar is consumed directly by bulk users. While consumption has been growing historically, the production has been cyclical. Sugarcane is primarily grown in nine states of India: Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Maharashtra, Punjab, Uttar Pradesh and Tamil Nadu.
India stood as the second largest producer of sugar in the world after Brazil in 2014-15 with 17 percent share in world production. Of the total 704 mills in India, on the basis of ownership structure, 336 units are Private Limited Companies, 325 Co-operative Societies while 43 are Public Limited Companies. After a string of bumper harvests created an Indian sugar glut, drought could cut supply in the marketing year starting in October and there is a risk production will drop below consumption for the first time in seven years in the following 2016/17 season. Surplus production over domestic consumption in the last few sugar seasons and low exports due to subdued international sugar prices have led to building up of sugar stocks with the mills and low realization from sale of sugar. This has adversely affected the financial health of the mills and resulted in accumulation of cane price arrears. The mills across India, mainly in Uttar Pradesh and Maharashtra, owe cane farmers close to Rs 12,000 crore as dues. The government has given additional days to banks for disbursing Rs 1,900 crore soft loans to sugar mills to help them clear cane arrears to farmers that total over Rs 12,000 crore. Out of the Rs 6,000 crore soft loan approved by government to bail out the sugar industry, mills applied to avail loans for only Rs 2,700 crore. The banks have been able to disburse only Rs 800 crore till the September 30 deadline and the rest Rs 1,900 crore is still to be given. The banks have been given time till mid October to disburse the rest Rs 1,900 crore loan to mills keeping the interest of farmers in mind.
Sugar Cane acreage & Sugar Production
The total cane acreage for 2015-16 sugar season period is estimated at 52.84 lakh hectares, which is just 0.4% less than 2014-15 Sugar Season (SS). The total estimated cane acreage in Maharashtra is about 10.50 lakh hectares, which is almost at the same level as that of last year. Due to less rainfall in July and August, which are said to be important months in the growth of the cane crop, it is estimated that the yield per hectare may go down. However, it is also important to note that with better rainfall in September, there may be some revival in the situation. The area under sugarcane in Uttar Pradesh is estimated to be about 23.02 lakh hectares, about similar to that in 2014-15 SS when it was 23.07 lakh hectares, while the sugarcane acreage in Karnataka is likely to have increased marginally. The country’s sugar output would be higher than the domestic demand for the sixth year in a row despite downward revision of production estimates.
Due to poor rainfall during SW monsoon in July and also during August in Maharashtra and Karnataka, the estimated sugar production in 2015-16 SS has been revised to around 270 lakh tons. The estimated sugar production in Maharashtra for 2015-16 SS has been revised from 97 lakh tons to 90 lakh tons. This will be 14.3% less than actual sugar production in Maharashtra of 105.05 lakh tons in 2014-15 SS. With the improvement of cane variety in the Uttar Pradesh state and large areas under better varieties, the cane yields and sugar recoveries are better. Therefore, even with same cane acreage, estimated sugar production in Uttar Pradesh is being revised from 73.51 lakh tons to 75 lakh tons in 2015-16 SS which was 71.01 lakh tons during 2014-15 SS. Keeping in view the erratic monsoon in some parts of North Karnataka, yield is expected to be lower in 2015-16 SS. About 46 lakh tons of sugar will be produced by the mills in Karnataka, i.e., 4 lakh tons lower than the sugar production in 2014-15 SS.
Cane Price fixed by Government of India as SMP / FRP for the last five years
There has been a gradual effort to align FRP more closely to the value of sugar and its byproducts from one quintal of cane since the concept of Statutory Minimum Price (SMP) was replaced by Fair and Remunerative Price (FRP) with effect from 2009-10 sugar season. But the prices that are actually received by cane farmers are State Advised Prices (SAP as in states like Uttar Pradesh), or some sort of final ‘negotiated price’ based on ‘surplus sharing’ mechanism. The prices announced by some State Governments do not reflect any rational linkage either with the cost of production of sugarcane or the value of sugar and its by-products recovered from a quintal of cane.
The lack of alignment between the cost of main raw material (sugarcane) and recovered price of the processed product (sugar) has led to record cane arrears in 2012-13. The cane price arrears for 2012-13 sugar season touched a record Rs 11,990 crore by April 15, 2013 amounting to 21.2 percent of the total cane dues. Similar situation was earlier witnessed in 2007-08 when these cane arrears were even higher at 22.9 percent of price payable. The mills across India, mainly in Uttar Pradesh and Maharashtra, in the current sugar season owe cane farmers close to Rs 12,000 crore as dues. Though farmers consider SMP/FRP to be on the lower side, the SAP in Uttar Pradesh seems on the higher side compared to what the sugar factories can afford, given the prices of sugar.
Monthly Average Retail Prices of Sugar
Sugarcane growers are facing unprecedented uncertainty because of mounting cane arrears due to sugar mills. The payment to sugarcane farmers by sugar mills though statutorily supported by various statues and enforced by the State Government get affected by the dynamics of domestic market price as well as international situation related to export possibilities. The government changed the policy and control on sugar sales was withdrawn in April, 2013. Factories have full freedom to sell as per need and market conditions. The Sugar sales and sugar prices are therefore, market determined.
With the global market already oversupplied, the bumper harvest in Brazil, the world’s largest sugar producer and exporter will only further strain global prices. Worse, between January and July 2015 the Brazilian real depreciated by 25% against the greenback giving Brazilian producers an incentive to sell in the global market - essentially forcing them to export sugar the market does not want. Additionally, between 2010 and 2015, India, the world’s second-largest sugar producer - consistently produced more than 24 million tonnes of sugar annually.
Export of Sugar
India was the sixth largest exporter of sugar in 2014-15 having a share of 2.76% in total global exports. Brazil was the largest exporter of sugar followed by Thailand and Australia in 2014-15. The major export destinations for India in 2014-15 were Sudan, Somalia, UAE and Sri Lanka. The highest decline in India’s sugar export was for Iran in 2014-15 compared to previous year. The market was expecting that government is working on a new subsidy scheme to be implemented in the current 2015-16 season. It has however been cleared that the raw sugar export subsidies will not be renewed before Bihar state elections finishes. The government has been pushing mills to sell sugar on the international market and use the proceeds to clear huge debts they owe farmers for sugarcane. The raw sugar market has been on tenterhooks for any sign India might renew export subsidies, which expired on September 30, as this would potentially boost global supplies.
Import of Sugar
Substantial part of India’s sugar imports (around 99.6%) came from Brazil in 2014-15. India’s import of sugar during the same year from Italy, USA, Germany and China was negligible. On the domestic front regarding import of sugar, there was protest by farmers of Karnataka last month against the sugar policies of the Union government. The protestors urged the Centre to ensure that farmers get remunerative prices for sugarcane based on the formula suggested by the M.S. Swaminathan Committee. They demanded that the government should also levy an import duty of 45%. Their other demands included waiver of loans, hiking crop loss compensation to Rs 1 lakh per acre, giving jobs to dependents of farmers who committed suicide, minimum 10 hours of quality power to irrigation pump-sets, nationalization of factories that refuse to pay the fair and remunerative (FAR) price to farmers and announcement of FAR price before start of crushing operations.
Latest Developments
The government is working on a new subsidy scheme which is to be implemented in the current 2015-16 marketing year starting this month in order to boost export of surplus sugar and help mills clear dues of over Rs 12,000 crore to farmers. The new scheme is being worked out as the domestic glut situation is expected to continue in view of sugar stocks of 10.20 million tonnes at the end of 2014-15 season and the industry projecting a surplus for the sixth straight year in 2015-16. The previous scheme, failed to boost shipments amid a global glut and the new scheme will be made more attractive. The Food Ministry has decided not to extend the scheme further for the current 2015-16 season. Instead, it is working on a new sugar export subsidy scheme.
The sugarcane arrears, which stood at Rs 21,000 crore in April this year, have come down to Rs 12,248 crore at the end of the 2014-15 season on account of a number of government measures such as the soft loan, hike in import duty and raising ethanol blending with petrol to 10 percent so as to infuse liquidity into the sugar sector. In a major relief to sugar mills, the Centre has exempted ethanol produced from molasses from central value added tax (Cenvat). This will raise sugar mills’ realization by Rs 5 a litre to Rs 47-48 a litre. This is the second major decision in favour of sugar mills after the government allowed four million tonnes of sugar exports on September 18. Meanwhile sugar mills facing surplus stocks and escalation of cane arrears have given a cautious welcome to the central government’s decision to promote export of 40 lakh tonne sugar for the 2015-16 season. Fixing a quota for export before start of crushing season has been a demand of sugar mills.
The Indian Sugar Mills Association has urged the Centre to link sugarcane price to sugar prices. The association has recommended that the centre should collect a cess on sugar from consumers and use the fund to pay the difference between price paid by mills and FRP to farmers for sugarcane. The association has made the representation as sugar mills find it unviable to pay farmers the FRP for 2015-16 (October-September) sugar season.
Corporate development in Sugar industry
Shree Renuka Sugars, India’s largest sugar producer, has declared its Brazilian unit bankrupt and has filed for protection in the country. The company has in 2010 bought 59.4% stake in Renuka do Brasil SA from Grupo Equipav for Rs 1,312.60 crore and 100% stake in Renuka Vale do Ivai for Rs 452.5 crore. Shree Renuka Sugars had borrowed from local and global lenders to fund the acquisitions and expand capacity.
Outlook
The outlook for the sugar industry remains grim since the industry is facing a tough time as cane arrears still seem to be mounting with higher sugarcane prices and lower price of produce. The cost of production of sugar in India is high making sugar uncompetitive and exports unviable. Low recovery of sugar from sugarcane poses a problem for sugar industry. It has become difficult for sugar companies to pay cane price of farmers and service the debt under current circumstances. Indian sugar mills do not have sugar plantations of their own and hence do not have control over quantity and quality of sugarcane supplied by various cane growers. Another problem of sugar industry is that the by-products of sugar mills like molasses and bagasse are not fully utilized. The government has been taking steps from time to time to bring things under control. The de-regulation of the sugar sector was to improve the financial health of the sugar mills, increase the cash flow, reduce their inventory cost and also result in timely and better payment of cane price to sugarcane farmers in the country.
In order to make Indian sugar industry competitive, the government should rationalize cane pricing policy, at par with norms across the world. The government should develop sustainable mechanism to dispose-off the surplus sugar. In addition, it should encourage ethanol blending programme to balance surplus sugar. A revenue sharing formula should be evolved between the sugar mills and the cane farmers in the ratio of their relative cost as per the recommendation of the Rangarajan Committee.