India’s 50m sugarcane growers are angry that at one point of the current season that started in October 2012, factories owed them approximately Rs125bn ($2.5bn) for their supplies of cane. Mounting unpaid cane bills have remained a recurring phenomenon in the Indian sugar economy depending on market prices of the sweetener. Such unpaid bills now stand liquidated to a good extent. But the development for which factories cannot be held responsible once again underpins the need for further reforms in the industry, particularly by way of returns to farmers for their cane supplies brought in alignment with prices that sugar fetches in the market. The system is working well in Thailand and several other countries. There is no reason why such price linkages between cane and sugar and other by- products like bagasse burnt electricity and ethanol should not put the Indian sugar industry on an even keel,” says Om Prakash Dhanuka, a former president of Indian Sugar Mills Association (ISMA).
The agonizing wait by farmers for cane payments was because sugar prices have stayed well below production cost of the sweetener on supply glut. India, the world’s second-largest sugar producer after Brazil but its leading consumer, is having three consecutive years of bumper sugar production, including at least 24.6mt (million tonnes) in 2012/13, leaving factories with huge inventories at all times. Consulting firm Kingsman SA has forecast production in India next season falling to 22.2mt mainly on account of a likely 10% to 15% deficit in cane output in Maharashtra, the country’s largest sugar milling state. The global sugar production in the 12 months starting October 2013, according to Kingsman, will be 177.9mt compared to an earlier estimate of 178.5mt and an expected 182.2mt in the current season. Sugar output in Brazil, Russia and the European Union in 2013/14 season will also be smaller than forecast earlier. But any reduction in sugar surplus resulting from production contraction next season will be more than compensated by 11.8mt of global production in excess of demand in 2012/13.
Many other Indian industry officials join Dhanuka in a chorus of protest that large imports facilitated by “low customs of 10% when the challenge is to cope with surplus resulting from high local production three years in a row” have created an
“unprecedented cash flow crisis for millers” making it impossible for them to discharge their cane bills settlement obligation in time. Barring a few factories in Maharashtra and Karnataka where cane prices determination have got something to do with returns from sugar and where rate of recovery of sugar from cane is a few percentage points higher than Indian average, the industry is going deeper and deeper in losses. Lending banks are treating sugar accounts with suspicion and they are no longer available to finance cash losses of sugar factories. Sugar companies have ceased to find favour with rating agencies and investors have no appetite for their shares. According to Dhanuka, since the 2012/13 season beginning, nearly 2.5mt of sugar of foreign origin raw sugar and also some white sugar from across the border Pakistan have been received at different Indian ports.
As the local industry is bleeding profusely, director general of ISMA Abinash Verma says, “our stocks are ample and with the monsoon progressing well, Indian sugar production in 2013/14 is expected to be good as well. So a prohibitive import duty needs to be imposed.” ICE raw sugar futures are doing a shade below 17 cents a pound. Refineries close to ports in India found it highly profitable to import raws and process them into white and sell it in the local market. But all this is to the detriment of local millers and farmers. With their back to the wall, factories belonging to the private, government and cooperative sectors went on pressuring New Delhi to raise customs duty to a level that would make imports unviable. Under pressure from cane- growing states also, the government raised import duty on sugar to 15% from 10%. A government official says the higher duty coupled with major value depreciation of Indian currency will be discouraging of imports. The National Federation of Cooperative Sugar Factories, which was pitching for customs duty of at least 30% has reasons to remain unhappy. So also has Dhanuka who says,“the government has not only acted late but has done too little.” Prime minister Manmohan Singh wants the sugar industry to break voodoo spells of high and low production cyclicality. Large imports in bumper production times are certainly not going to help the cause of the industry.