Sugar is one industry and sugarcane one crop which should ideally be beneficial to both farmers and sugar mills. Sugarcane is a cash crop which is very durable, requires low upkeep and relatively less prone to the vagaries of weather. In case of sugar mills it is a business where the risk of what they are buying is low, by-products are profitable and ongoing investment requirements are low. However continuous political interference in the way the industry operates has bought it to a situation where it is on the verge of financial collapse, especially in the state of Uttar Pradesh.
Typically farm support is given to several crops in India in the form of Minimum Support Prices (MSP) i.e. the price at which government agencies would buy the produce from the farmer if he is unable to sell at a higher price in the market. The calculation of MSP derives itself from the Cost of Products determined by the Commission on Agricultural Costs and Prices (CACP) which determines the MSP from their analysis of various input costs and a minimum profit for the farmer. This has worked well in commodities like Wheat, Rice, Cotton, Pulses etc. The MSP is determined by the Central Government. The government agencies will normally buy part of the produce at the MSP and the rest of the produce is sold in the market at market prices.
Sugarcane is one agricultural commodity where the government agencies do not procure anything i.e. the government does not put any of its own money on it. However the government comes out with a Statutory Minimum Price (SMP) or Fair and Remunerative Price (FRP). Given below is the movement in the same over the last few years
|Sugar Season||SMP (` per quintal)||Basic Recovery Level|
As is clearly visible politics has entered into the FRP calculations from 2009-10 and the FRP has gone up at a CAGR of 21% over the last 5 years. Only in the current year the increase is just to Rs 220.Even if we assume a cost increase of 10% every year this is way higher than what pure economics would determine. In the meantime global sugar prices have fallen 60% since 2011.
On top of this the State Governments came up with their farmer appeasement measure called State Advised Price (SAP) which has been 20-40% higher than FRP.
In the initial phase of the introduction of FRP and SAP the sugar mills adapted as their by-products like ethanol and power were profitable and the lower profits from sugar were compensated. However as sugar prices crashed over the last two years this has not been possible and compromised the financial viability of the entire industry. It is absurd for State Governments to ask private mills to pay a price higher than what is viable for a final product where the pricing is market determined and there is no Support Price. Private enterprises are being made to subsidise the vote bank politics of State Governments.
- The solution to the problem has been well documented as per the report of the Rangarajan Committee which proposed linking sugarcane pricing to the final product price and also some benefits from the by-products. Pure politics has prevented its implementation.
- The direct conversion of sugarcane juice to alcohol is still not allowed in a majority of states. This should have been implemented, this way in surplus sugar years more of alcohol would be produced and vice versa and take care of the demand supply balance. Forcing sugar mills to make alcohol only out of the by-product Molasses is hurting the industry.
- The Ethanol Blending program has been a still born one. Despite law mandating a 5% blending only around 0.6% has been implemented till date. Oil companies should be made to comply with the law by the book or pay a fine for non compliance.
- If a state government advises a SAP then it should also be willing to buy sugar from the mills at cost or production plus a base profit.
These are the durable solutions. Others like increasing import duties, giving export subsidy; buffer stocks etc can only be stop gap measures which do not resolve the structural issues.
Farmer arrears have already reached Rs 19000 crores and due to the artificially high SAP’s farmers have moved more and more towards sugarcane which has led to excess a record production of nearly 27 million tonnes this year. This has further pressured sugar prices at a time when global sugar prices are at multi year lows. Most sugar companies are making huge losses and are unable to repay their bank loans. It’s a vicious circle which needs to be broken at the earliest.