FOR the Indian sugar industry, these are indeed bitter times. Sugar production in the country has soared, but in the bargain prices have crashed. The glut in supplies has driven domestic prices to three-year lows, but costs are soaring.
The politically well-connected industry has been lobbying with the government, seeking a major hike in the buffer stock. And the federal government is likely to concede this request. Agriculture Minister Sharad Pawar, whose Nationalist Congress Party (NCP) is dominated by sugarcane growers and sugar barons, said last week that the government was planning to raise the buffer stock to five million tonnes from the existing two million tonnes.
The world’s second-largest producer of sugar – after Brazil – India’s output is expected to cross a record 27 million tonnes for the year ending September. According to Shanti Lal Jain, director-general, Indian Sugar Mills Association (ISMA), production next year (October 2007 to September 2008) is expected to exceed 28 million tonnes.
Domestic consumption is less than 20 million tonnes, leaving a huge stock of unsold sugar. Last October, the industry began with an excess inventory of about four million tonnes; the addition of about seven million tonnes would result in a huge build-up in stocks of 11 million tonnes.
Many mills are being crippled financially with such huge stocks. Interest rates in India are rising, and so too are raw material costs. Farmers are demanding higher prices, but many factories in Maharashtra and other sates have not been able to clear their dues.
Internationally, sugar prices have fallen to around $320 a tonne, significantly lower than last year’s levels of $500 a tonne, thanks to a worldwide glut, the first time in four years that supplies have outstripped demand. According to the International Sugar Organisation (ISO), there is a global excess supply of nearly 10 million tonnes. In the international market, Indian sugar fetches just around $275 a tonne, as it is considered slightly inferior.
Domestic sugar prices in India have tumbled to below $300 a tonne, declining by about 25 per cent over the past six months. Sugar prices in Maharashtra have dipped to Rs1,150 a quintal (100 kg), while in Uttar Pradesh it is ruling at Rs1,350. The average price in the domestic market is Rs1,250.
The sugar industry complains that the prevailing price is Rs400 below the average cost of production, resulting in massive losses.
Citigroup Research has warned that sugar prices will continue to remain low in the new season beginning October. Sugar inventories in India will pile up, adding up to over 60 per cent of consumption, and shattering nearly three-decade old records.
Worried over the ballooning crisis, the Indian sugar industry has decided to export raw sugar to countries in the region and to the Gulf. Demand for raw sugar is growing internationally.
Last week, Dubai-based Al Khaleej Sugar, a leading producer of refined sugar, disclosed that it is acquiring about 200,000 tonnes of bulk raw sugar from India. This is the first bulk purchase of Indian raw sugar by the Dubai-based refiner, which in the past used to buy raw sugar from Brazil. The main advantage of buying raw sugar from India was the low freight costs.
Raw sugar futures tumbled in the US markets after the Dubai company revealed it was buying raw Indian sugar instead of sweeteners from Brazil. The markets were worried that Indian companies would step up exports, selling up to a million tonnes over the next one year.
India’s exports of refined white sugar have fallen sharply in recent years as many countries in the Gulf and even in south Asia have set up their own refineries. The Indian government provides export subsidies for white sugar – it ranges from Rs1,350 a tonne in coastal areas to Rs1,450 a tonne in the north.
Similarly, state governments – like those in Maharashtra – are also offering a slew of incentives to exporters. Sugar mills in Uttar Pradesh are also demanding an additional export subsidy of Rs1,000 a tonne from the state government.
But the strengthening Indian rupee, which has gained sharply against the US dollar – reaching a nine-year high – is also adding to the woes of exporters. Sugar exporters bemoan that margins are being hurt by the strengthening rupee.
Worse, India’s reputation as a reliable exporter is also under question. Last year, the government imposed a ban on exports after domestic prices breached record levels. Many of the exporters could not keep up their commitments.
Other measures are also being considered to bail out the sugar industry. The ISMA, for instance, has suggested the setting up of a special purpose vehicle, an independent stock company, that could buy and sell sugar, and even export and import both white and raw sugar, all based on the demand-supply situation.
The new entity would prevent the wild fluctuation in sugar prices and also help the industry to weather the ups and downs. When sugar prices head northwards, the government introduces drastic measures like imposing a ban on exports. And when there’s a glut, as is happening now, sugar mills sustain huge losses and are unable to pay farmers.
The sugar industry is also lobbying for a hike in the ratio of ethanol, which is used to blend petrol. At present, there is five per cent ethanol doping with petrol in some states, but the industry is demanding this be raised to 10 per cent. About 400 million litres of ethanol have been bought by oil marketing companies after the five per cent blending rule came into effect.
Sugar is a highly-politicised commodity. While many politicians in India own sugar mills, cane farmers also wield significant clout in the country. Changes in regime naturally impact the industry.
When Mayawati of the Bahujan Samaj Party (BSP) came to power in Uttar Pradesh recently, she went about reversing major decisions of her predecessor, Mulayam Singh Yadav of the Samajwadi Party.
About three years ago, Yadav had introduced a new policy to promote the sugar industry in the state, offering a host of incentives to sugar producers. Nearly 30 new sugar mills came up in UP, with total investments of around Rs50 billion, taking advantage of the five- to 10-year tax breaks.
Last week, the Mayawati government decided to scrap the Sugar Industry Promotion Policy, upsetting the plans of several top sugar producers. UP, traditionally the largest sugar producing state has just been overtaken by Maharashtra.
But even in Maharashtra, the sugar industry is facing a lot of problems. Farmers’ organisations like the Shetkari Sanghatana are demanding higher price for cane, and clearing of their past arrears. Farmers claim that the mills are not honouring their commitment to pay a minimum price of Rs1,280 a tonne for cane.
There are also fears that the nearly two million tonnes of uncrushed cane will be destroyed following the onset of the monsoons. Last year saw another good harvest and farmers have not been able to handle the crushing, which has extended into the rainy season.
The area under sugarcane cultivation is increasing rapidly in Maharashtra, despite the glut in supplies. Environmentalists have been worrying over this trend, as sugarcane requires a lot of water, and farmers have been drilling wells, depleting the underground water table.
Thanks to the heavy subsidies – on irrigation and power supplies – an increasing number of farmers are taking to sugarcane cultivation. But this is distorting the agriculture sector, and also leading to growing rift between producers and sugar mills. The sugarcane farmers of western Maharashtra are pampered by political parties and the governments, while cotton growers in the central and eastern parts of the state are ignored, leading to a growing number of suicides.