INDIAN SUGAR INDUSTRY- STAKEHOLDERS ENGAGEMENT

INDIAN SUGAR INDUSTRY- STAKEHOLDERS ENGAGEMENT

                             B Guruva Reddy, BE (Agri. Eng), PGDRM(IRMA)

                               grbonthu@gmail.com -9866889246                                                                                               

Introduction:

Sugarcane farmer is sharing the sweetness with everyone, while engulfing the bitterness. What a pity, he cannot enjoy what he produce. It reminds me of famous saying “ALL THAT GLITTERS IS NOT GOLD".

India is the largest consumer & second largest producer of sugar (next to Brazil). It is the second largest agro based Industry, next to cotton. Sugar & politics goes together and contributed political heavy weights to the Nation (The famous saying is that sugarcane contains 10% sugar & 90% politicks) . This year sugar production is 283 Lakh tons as against domestic consumption of 245 Lakh tons. UP, Maharashtra, Karnataka, TN, Gujarat, AP, Telangana in the order are largest cane growing states.

Cane growing looks very easy & protected as it is in organized sector. Mills enter into agreements with farmer, provide extension services,  recovery linked cane price, finance linked to cane supply, cutting orders & delivery. Sugar cane act is in place to ensure protected zone and to ensure cane payment to farmers. In field the focus is on protecting the mill interest & farmer payments become least important . Every year GOI fix fair & remunerative price (FRP) of cane and each state declare State advisory price (SAP) based on socio political factors.

Rangarajan committee recommendations:

In the interest of sugar industry GOI appointed Rangarajan committee in 2012 and the recommendations are

1. No zonal regulation & choice to farmer to choose the mill for supplies

2. Sugar cane pricing based on selling price of sugar (75%) & first stage byproducts (25%)

3. Removal of minimum distance criteria between two mills

4. Free international trade policy

5. Exempt sugar from jute packaging act ,

6. Market determined pricing policy for byproducts ( All the above are to be implemented)

7. Removal 10 % levy sugar ( implemented)

8. Getting away with sugar release mechanism ( implemented).

Government Regulations:

Sugar comes under essential commodities act & its price is being regulated. Till 2012-13, mills had to contribute 10 % sugar produced at pre determined price for supply through PDS & balance to be sold through regulatory release mechanism. In April, 13 this was lifted completely based on Rangarajan committee report and industry felt relieved. Actual industry problems started from then, the prices did not rise as expected due to release of excess sugar into market by cash starved mills, imports etc. To everyone's surprise the industry is again asking for Government controls & release mechanism. 

GOI though accepted the committee recommendations in total, while coming to implementation part, the influences from political parties, trade bodies, vested interest groups are prevailing. To implement pricing formula in 2013 the mills were reluctant,  as it was not advantage to them. In the year 2015,  the mills insisted for implementation of the same and even moved in courts to get the recommendation implemented. Pharma/Chemical industry lobbies are working against increased Ethanol ( Ethanol is produced from Molasses, byproduct of sugar) blending with petrol.

Sugar politics, inefficient financial management systems, gambling with sugar imports & exports, unaccounted draining of resources etc coupled with the major factor i.e., LOWEST SUGAR PRICES, pushed the industry into red corner.

Present scenario in Sugar Industry:

Rs. 21,000 Crores outstanding payments to farmers at the end of Sugar season despite sugar payment act in place, farmers unrest, low industry morale, where is it leading? .  The sugarcane act clearly says that the farmer has to be paid within 14 days and any delay is liable for interest payment. 2014-15 sugar seasons, the payments in the range of 20 to 40% are still due to farmers for a period ranging from 3 to 7 months. State Governments have cane departments to implement the act and ensure timely payment to farmers. In reality most of them act as extension of sugar mills and farmers become last priority.

In 2015 sugar prices are lowest and mills blame it on prices and slow movement of sugar for not having enough cash flows. Like any other supplier with purchase order, farmer also supplied cane to the factory. Irrespective the sales & cash flows, farmer needs to be paid as his livelihood is depending on it. In reality the situation is not that bad for integrated sugar units having distillery, Cogeneration, bio-fertilizers and other value added products. They do not compromise on social functions, purchase of expensive cars at the cost of farmer payments. Historically sugar industry is cyclic in nature and mills have to plan accordingly.

To reap the benefits of globalization , few sugar mill owners started indulging in import of raw sugar, reprocess and export. As the trade is volatile, they made either huge profits or huge losses. In the years of profits instead of  strengthening the balance sheets, most of the profits were concealed or used for expansions. The practice of diverting the working capital to trading activity is continuing. Unfortunately in last two seasons EXIM business resulted in huge losses.  A mill in coastal AP which was deep into EXIM trade could not make last season cane payments also. As result of farmer’s agitation, Government took control and trying to clear payments from sugar sales, which was getting diverted earlier.

Had the regulatory department performed its minimum expected functions, this situation would not have aroused.  Whether loss/gain in trade, the farmer is taken for ride by mills as well as regulatory bodies.  

 GOI gives Sugarcane development Fund (SDF) loans to mills on soft terms, for exclusive spending on cane development, irrigation activities. In reality these loans are seldom used for the purpose it was intended and again farmer is taken for a ride.

Sugarcane is perishable & has to be crushed within 48 hours after harvesting; hence farmer is left with no option than supplying it to mill, irrespective of commercials.  If some enterprising farmers look for alternatives like jaggerry making, the regulatory body promptly comes into picture. The same will be appreciated if similar enthusiasm is shown in farmer’s payments.

Cane Yields- Status of Research Institutions:

Sugarcane yields /Ha are around 100, 90, 85, 80 & 75 Tons in TN, Karnataka, Maharashtra, AP, and Gujarat respectively and in last 10 years the yields recorded are almost flat. It is observed in one of the best managed mill in coastal AP,   despite having R & D facilities in place the yields are stagnated around 75 to 80 tons/Ha. If the yields improve for some climatic changes the credit is taken by researchers and low yields are attributed to farmers and their cultivation practices.

With increased cost of cultivation, higher transport & harvesting costs(20to 25% of price) coupled with stagnated yields, the income levels of farmers coming down drastically and in better awareness states like AP, TN cane cultivation is coming down.  The day will not be far in other states too. Still cane is a favorite crop for some, as it is a lazy man crop, with minimum guarantee and assured credit linkages.

Sugar cane is of bamboo family and native to India, with abundant availability of germ plasm. The existing research facilities, manpower capabilities & commitment levels etc have to put to critical analysis. Focused research to develop targeted yield coupled with increased sucrose content shall be the key result area (KRA) for Sugarcane breeding institutes at Coimbatore, Lucknow and Agricultural universities.  Similarly it is the responsibility of researchers to bring in cane harvesters suiting our farm conditions. It has become a habit for our research centers to bring some machines from China/Brazil etc and piddle with them. There is no focus on original research. GOI, in particular MOA/PMO have a take lead in sensitizing our Agriculture research to ensure benefits to farmers.  

Status of Sugar mill owners                           

It is a known fact that owning sugar mill is status symbol and many well known industrialists made tons of money, few others took cooperative route and rose to the levels of top politicians with capacity to influence  country policies. There are many seasons with huge variation between sugar & cane prices in favor of sugar price, but the farmer was not compensated.

In bad years they make hue and cry and make the farmers suffer. In many units no stone is unturned to generate unaccounted wealth to fund elections, lavish life styles of managements etc. All these are at the cost of farmer, very important but very weak link in the entire supply chain.  In any industry irrespective of sale of their end product, the raw material suppliers are paid. How sugar mills can withhold farmers payments, what way farmer is related to mill profits or losses? 

Need for Government interventions:

The sugar industry issues got Prime Minister's attention & chaired a high level meeting on 01.08.2015.  The issues discussed are ethanol blending with Gasoline, sugar exports, farmer’s payments, effect of incentives, long term measures. It's certainly sweet news to sugar chain and wish that the efforts will sustain. PM recently visited China & China is the 4th largest sugar importer after USA, Germany, and UK. Like Brazil & Mexico have trade agreements with USA, we shall attempt for bilateral agreement with China & Indonesia (5^th largest importer of sugar), both Asian countries with logistical advantage. Many African countries are the fastest growing sugar importing countries and with existing presence of Indian trade (particularly Guajarati), the entry may not be difficult.

Ethanol blending program:

India always figures in top five fuel importing countries, having huge impact on foreign exchange. Any attempt to reduce fuel imports will contribute to healthy economy. Though this fact is known to everyone, it took generations to convince oil companies to allow 5 % blending of ethanol that too in few states, initially at price less than market and at market price. They quote the reasons of food security, balancing economy etc as reasons, but the hidden agenda is the pressures from Chemical, liquor & Pharma lobbies.

Farmers interests are used as a conduit, in fact if the blending increases to the level of 20% by 2017 (2009 National Bio fuel policy) or 27% like in Brazil in phased manner, I am sure it will have positive impact on farming. The maize prices which are low at present will go up, subsequently area under cultivation will increase considerably & also cane growers will be benefited with increase in molasses/ethanol prices. As the ethanol blending got the attention of PM, let us hope that it will get into action immediately.  

Sugar Industry- Future vision:

It is very interesting, nothing goes as wastage in sugarcane. The tops are good fodder for cattle, wastage of green foliage can be part of farm yard manure, the dry leaves with urea treatment are excellent organic manure.  Bagasse is input for Cogen power (green power), paper, and packaging applications. Molasses is  input for making Rectified Spirit (RS) / Extra Neutral Alcohol(ENA)/Ethanol with wide range of uses in chemical, Pharma, beverages, bio-fuel applications, other than its use in cattle feed, ferroalloys industry. Filter cake, byproduct of sugar process is commercialized as organic fertilizer.  In fact with huge demand for Bagasse, molasses to produce power & Alcohol , sugar will soon lose its main product status. Future looks bright with emerging new technologies of ethanol production from cane fiber, which is being commercialized. Sooner aircrafts are going to fly with ethanol fuel.

1000 Kgs(1 Ton)  of Sugar cane produces about 100 Kgs sugar (Rs.3000), 300 Kgs Bagasse generating 660 Kgs steam or 130 KwH power i.e., 100 KwH export surplus power ( Rs. 500), 45 Kgs Molasses converting to 11.25 Liters ENA ( Rs.500), Press Mud/Bio Fertilizer -  30 Kgs (Rs.60/-). The total realization at current prices is Rs. 3760/- as against average cane payment of Rs. 2800/- . Considering the cost of conversion with efficient management, integrated units even with rock bottom sugar price of Rs.2500/- will just break even. If integrated units are showing huge losses, their operations are to be critically reviewed in the interest of public money.

Impact of policies on sugar industry:

Molasses politics have adverse impact on sugar industry. In UP, molasses is allocated to cheap liquor & IMFL at concessional rates (both have differential rates), some states implement ban on molasses export to other states, some have export pass fee etc. Due to these inconsistent policies molasses rates vary between Rs.1800 to 5500 in sugar states & as high as Rs.12000 in deficit states like Orissa where demand is huge for Ferro alloys & liquor. What is the link between farmer & liquor? Why should he subsidize liquor industry? How Governments are encouraging liquor production by giving them concessions? Is it an essential commodity affecting the larger sections of society like Onion?

Cogen power is another area and there are long term agreements, short term agreements, open access sale etc. Under non conventional energy norms, the Bagasse based power is paid lower tariff than coal based power. As it is green power this shall be treated on far with wind or solar power and similar tariffs shall be extended. These will improve cash flows of mills and benefits will extend to farmers.

Till last year there is no Value added tax (VAT) on sugar sales and recently few states introduced 5% VAT & also Central sales tax (CST). These are giving scope for black market trade and disturbing the traditional markets. Let us hope that GST will resolve these issues.

GOI declare Fair & Remunerative Price (FRP) & respective State Governments declare State Advisory Price (SAP).  This is the area where politics play a major role. I am really confused with this. Is the system helping farmer or mill owners or balancing the both? Why should GOI intervene & decide on cane price (FRP) to be paid my mills to farmer? If the pricing is done on scientific lines considering all the factors, where is the scope for State Governments to increase it further and declare SAP? It is a commercial transaction between farmer & sugar mill. Why should politics enter in the form of Governments as middle men?

50% of sugar in India is used by bottlers & sweet makers and other 50% goes into domestic consumption. In coffee/tea, sugar comes next to milk & coffee/tea powder and in sweets also sugar comes next to oil/ghee & besan. In value terms also it is insignificant. For reasons best known to policy makers, sugar is classified as essential commodity. Removing sugar from essential commodity status will not have any negative impact on consumer and certainly help sugar mills & farmers.  

Sugarcane pricing:

In case of milk, the milk pricing is very transparent and undisputed, as it is based on fat & solids non fat (SNF) and the credit goes to operation flood under Dr. Kurien's uncompromising leadership.  In case of Sugar, sucrose content is like fat & Bagasse and molasses are like SNF in milk. If we can evolve a system of payment linked to Sucrose content, it will reduce pressure on mills for early cutting orders; balance the effect of cane varieties etc. If mills want to crush cane earlier or later than maturity cycle (both will affect sucrose content), they will compensate the farmer for differential sucrose content. Industry, ISMA, GOI, Farmer Organizations, Research Institutions, State Governments have to play vital role in making it a reality.

At present,  Commission for Agricultural costs & prices (CACP), Dept of Agriculture & Cooperation, Ministry of Agriculture, GOI is deciding the Fair & Remunerative Price(FRP) of Sugarcane considering

1. Cost of cane production

2. Returns to farmers from alternative crops

3. Availability & price of sugar

4. Sugar recovery

5. Byproducts prices

6. Reasonable margins for growers on account of risk & profits.

In fact prior to 2009-10, in pricing formula the farmers are entitled to 50% of mill profits (Sugarcane act 1966) and for best known reasons it was virtually unimplemented and replaced by point No.6 i.e., Reasonable margins for growers on account of risk & profits. 

As for the CACP published data, the Fair & Remunerative price( FRP) as percent of value of sugar for 08-09, 09-10, 10-11, 11-12, 12-13, 13-14 & 14-15 are 42.41, 45.86, 55.07, 49.72, 58.12, 80.47, 84.30 respectively. This clearly implies that the mills enjoyed huge margins till 2012-13 and in last three years including this season only they are just breaking even/making losses.  It is evident from the data that farmer was always put to disadvantage situation. Increase in harvesting costs, steep increase in wage labor cost coupled with unfair pricing pushed farmer to a corner. It is better to bring in positive corrections before he bounce back. 

Integrated sugar complexes:

There are many mill owners who had clear vision, understood the need of professionalism, integrated plants & efficient operations. They are able to cope up with cyclic nature of the industry and clear farmer dues. They are role models & real heroes for cane growers.

These progressive entrepreneurs who took up expansions/modernization/ new plants during last 5 to 6 years are suffering for want of serving huge debt. GOI shall direct financial institutions/Sugar Development Fund to reschedule the loans & offer concessional interest, purely on merit of the case basis.

Relevance of Rangarajan committee recommendations:

These inconsistencies in CACP cane pricing gave scope for relooking and Rangarajan committee aptly recommended the pricing on revenue sharing model. Sugar cane is highly perishable and it has to be processed within 48 hours after harvesting, sugar mill has to have sufficient cane to crush in reasonable distance (as cane is bulky & perishable it is not viable to bring from long distances). The relationship between mill & farmer is insufferable and interdependent and third party interventions may lead to inconvenience and strain in relationship. It is appropriate for GOI/others to limit themselves to advisory role rather than influencing. 

Like GOI declaring minimum selling prices (MSP) for few crops, it can be declared for sugar cane and it will help farmer in decision making.  Rangarajan committee recommendation of 70% realization of sugar & first stage byproducts or 75% realization of sugar alone as cane price, as a concept its good and in depth analysis  of cost of production, considering all end products pricing etc is required.

Concluding remarks:

In order to make the process more transparent and giving choices to mills & farmers to spread the risk, the following is recommended.

• Farmer can grow cane without any commitments to any mill and can decide freely on its sale, price, converting into jaggerry, some other innovative marketing. Risk & rewards are purely to farmer.

• Farmers can enter into agreements with mills on predetermined prices taking MSP as a guiding price. The agreement price has to  be more  than MSP & it can vary dependent on customized extension & input packages.

• Farmers can enter into agreements based on future prices of sugar & end products. To validate the percentage sharing, cost of production & profit sharing (sugar & byproducts) are to be decided. This also can be with or without inputs/extension linked package.

The farmers shall be given the opportunity of exercising any of the options or in combination based on  his comfort and risk taking ability. This pricing policy coupled with sucrose based pricing will be more realistic and for sure make the farmers feel more comfortable. If these are implemented with transparency, policy makers & political system will be admired as heroes by farmers.

Last but not the least, Agriculture scientists have to play a major role in improving the cane productivity & sucrose content. Also farm mechanization needs immediate attention. If these are cracked, the scientists will become real heroes of farmers. 

ALL STAKEHOLDERS ARE REQUESTED TO LOOK INTO THE OPTIONS/RECOMMENDATIONS WITH HOLISTIC APPROACH AND CONTRIBUTE FOR HEALTHY SUGAR CHAIN AND STRENGTHEN THE WEAK LINK I.E., FARMER.

Guruva Reddy Bonthu

grbonthu@gmail.com 9866889246