Cyclicality in sugar is a global phenomenon. Sugar is a dominant commodity in the world seaborne trade. As a result of cyclicality, the fortunes of the industry in all producing countries from Brazil to India, the world’s two leading producers of sugar, fluctuate from year to year depending largely upon global surplus or deficit of sugar and built up inventory at any point of time. The last sugar season ended September in a major break from the established cycle routine saw bumper global sugar supply five years in a row. No wonder then, the sweetener prices moved in a range that went on pushing sugar cane crushing factories deeper and deeper in the red. Under the weight of sustained high production, raw sugar futures in New York sank to a seven- year low of 10.13 cents a pound on 24 August 2015. In some good rallies since, prices rose to 15.20 cents, triggered by sugar deficit forecasts by more than one research and consulting firm for the current season that began in October 2015.

The deficit is to occur for the first time in five years. Sugar prices posted an annual drop in each of the five years ended 2015, a record slump at a stretch, some improvements in the few weeks preceding last December excepted. Om Prakash Dhanuka, a former president of Indian Sugar Mills Association (ISMA) says “we learn from various sources that unusually low prices over a long period has taken a major toll of the Brazilian sugar industry by way of shutdown of nearly 30% of the country’s 300 cane crushing factories forcing many owners to consider the option of disposal. If anything, the industry in India finds itself in a situation much worse than its Brazilian counterpart. For one, irrespective of crushing capacity, downstream facilities up to power generation and ethanol and operational efficiency, every single factory in India continues to lose heavily. At the last count, the debt burden of the industry here is around Rs500bn ($7.528bn). In about five years, our debt burden is up three times.”

According to the immediate past president of ISMA
A Vellayan, “hit by the worst financial crisis ever... a lot of sugar mills have become sick and several others have become NPA (non-performing assets)” for banks. In the past couple of months, sugar prices in India have perked up from about Rs2,000 

a quintal to close to Rs2,700 a quintal. Even then, the factory realization falls short of production cost by Rs500 to Rs700 a quintal. In a situation like this the inevitable result will be more and more factories will find themselves in the sick bay making the banks wary of giving any further loans to the sugar industry. Besides banks, the industry owes a good amount of money to the government which earlier extended loans to factories to clear their dues to farmers on account of supplies of cane.

The new 2015/16 season production has begun in full swing and the law requires of factories to pay growers within two weeks of receiving cane supplies. But the factories find themselves on the horns of a dilemma: if they are to service loans and start paying back the borrowed capital when sugar prices fail to cover production costs by a long margin, then they are not able to clear cane bills. Mountains of cane dues in all growing centres seen in regular frequency create undesirable animus between the industry and farming community for no fault of loss making factories. But the local and federal governments are not spared the impact of the crisis emanating from unpaid cane bills either. Denied payments in time by factories and with debts on their heads, growers in some hundreds committed suicides in the past two years exposing all that is wrong with the Indian sugar economy. This smeared the reputation of the government.

Dhanuka says the agro-based industry is the source of sustenance for “50m farmers and jobs for up to 2m people in factories and tertiary areas.” Cane growers and the large number of people making a living out of various points in the value chain of sugar and its distribution make an important constituency for all political parties. Therefore, every time unpaid cane bills are to become a major political issue in rural centres, the federal government will extend loans to factories to settle dues of farmers. These are, however, only temporary palliatives. What the industry needs, says Vellayan, is for it to be put in a “sustainable growth platform.” For this, there has to be a “sugar vision” spanning five years and to be addressed through a series of short and long-term measures. The all-important long-term step should concern enabling factories to pay ‘fair and remunerative price (FRP)’ to farmers at all times irrespective of behaviour of sugar prices.

The government has dispensed with many controls on the industry such as regulated releases of sugar and appropriation of 10% of sugar output at significantly below production cost for distribution through ration shops. But it will not as yet risk cane price to be decided by forces of demand and supply and invite the wrath of millions of growers in times like the past few years. Therefore, the Commission for Agricultural Cost and Prices will recommend ahead of every sugar season FRP for cane taking into consideration input cost rises and fair return to growers. Nothing wrong in that except that the finished product in this case sugar prices are subject to market forces. The FRP is up about 70% in the past five years and as a consequence, says Vellayan,“cane price as a percentage of sugar price in India is over 90% while it is 60% to 65% in Brazil, Australia and Thailand.” This is no longer a tenable situation. At the same time, protecting the interest of farmers is of paramount importance.

“Thanks to FRP, sugarcane has emerged among the most profitable crops fetching better returns for farmers than wheat, cotton and soybean. But in order to ensure timely payments for cane supplies in the present condition of the industry, a price stabilization fund (PSF) along with a revenue sharing formula (RSF) in the ratio of 75:25 of total collection from sugar and its by-products sale between growers and factories has to be in

place,” says Dhanuka. Release of funds from PSF will be automatic whenever revenues from sugar and its by-products sink to a level which will not allow factories to pay FRP. RSF is not going to be something unique to India. In more than one sugarcane producing nation, government help to farmers in bad times for sugar is automatic. Here too, a high powered committee headed by former governor of Reserve Bank of India C Rangarajan said the only way to underline long-term viability of the industry and create condition of its growth was to activate RSF.

With harvesting in the current season now in full swing, factories want the government to “restructure all their outstanding loans from banks, financial institutions, government administered Sugar Development Fund, etcetera for payment in the next 12 years, including a moratorium of up to three years.” Moreover, a portion of working capital loans to factories should ideally be converted into medium-term loans with immediate effect to regularize their accounts. India’s leading research organization ICRA has said in a report, the crying need of the hour is “restructuring and rehabilitation” of sugar and steel industries which have an important bearing on the economy and “affect the lives of millions of people.” Citing the case of a single steel group which managed to secure “flexible repayment schedule” of 25 years for its loans liability of Rs240bn, Dhanuka says the “sugar industry has no less a compelling case for getting a favourable dispensation from banks.”


The country’s sugar inventory rose for five years on the trot because of high production. Between 2010–11 and last season, Indian sugar output was up from 24.4mt (million tonnes) to 28.3mt. The opening stock for the current season is 9.1mt compared with 7.5mt in 2014/15. The only way to spare the industry the pain of financing such a big inventory is to export between 3mt and 4mt of sugar. Being a now-on, now-off exporter of sugar, India — unlike Brazil and Thailand — does not have established global outlets for the commodity. Moreover, high sugar production cost solely on cane account makes export a loss making proposition at current prices without government subvention.

Last year, New Delhi sanctioned export of 1.4mt of raws with the government agreeing to compensate factories for the loss to some extent. B ut since the announcement was made quite late in the season on February 27, raws exports during 2014/15 season were restricted to 500,000 tonnes. This year, however, realizing that the situation was getting out of hand, New Delhi was quick to allot export quotas among factories totalling 3.2mt. In a break with the established practice, the government is letting exports of sugar of all types — raws, whites and refined. Maybe in order not to invite scrutiny by WTO, New Delhi is not giving any subsidy to factories to fulfil export quota. What it is on offer instead is the government directly to pay farmers Rs4.50 a quintal of cane in captive areas of factories, which execute export as per quota. Dhanuka says the condition will be difficult for mills far away from ports like in Uttar Pradesh, Bihar and Punjab to fulfil because of cost involved in transferring cargoes from factory gate to ships. “What I fail to understand is why should farmers be penalized for non-port based factories not able to export. Moreover, when our neighbour Pakistan is giving a fairly large subsidy for export, New Delhi can certainly find ways to make export a viable proposition for all mills irrespective of their location without violating WTO norms,” says Dhanuka.