FACTORS DETERMINING INDIAN SUGAR PRODUCTION AND ITS COMPARATIVE ADVANTAGE



This was prepared by Mr Satish Kansal for the Sugar and Beverages Group, Commodities and Trade Division, FAO.

 

INTRODUCTION

India has become largest producer of sugar cane/sugar producing 280 MnT of cane and 16.5 MnT of sugar in 1995-96, making it the largest producer of sugar in the world, representing about 20% of cane sugar production. India also produces another 10 MnT of traditional sweeteners (gur 9 MnT, khandsari 1 MnT). India also has a large consumer base, thus makes it quite vulnerable to international sugar market, in the event of surplus or deficit situation. At the sametime it has good potential and prospects.

Sugar production commenced in 1920's but it got industry status in late 20's/early 30's when India had 29 sugar mills producing just 100,000 tons of sugar. The industry, facing competition from imported sugar, sought tariff protection. Sugar production picked up under the Sugar Industry Protection Act passed in 1932 and country became self sufficient in 1935. Also cane pricing act was enforced to provide good cane price to farmer. This was followed by land reforms putting ceiling on land holdings to protect small farmers, formation of cane grower cooperatives and setting up of sugar mills jointly with farmers called as cooperative mills on ownership and sharing basis. Today this sector produces 60% of country's production.

Under the structured Industrial Development Policy, sugar industry was part of the Five-Year Plans introduced in 1951 and has been under the direct control of the Government ever since. Sugar industry is highly politicised and so closely controlled by the Government which has no parallel in the industry. Govt. control, covers all aspects of sugar business i.e. licensing/capacity/cane area, procurement/pricing/sugar pricing/distribution and Imports and exports.

Sugar scene in India has been that of protectionism. The mills, the farmers and the consumers all have been protected one way or another. Whereas the protection to farmer and consumer has been consistent, it has not been so consistent for the mill owners.

Overall government policy has given impressive results. The production has gone upto 16.5 MnT. per capita consumption up from 5 to 13 kg over a period of 3 decades. There is a potential - what is needed, is some changes in policy to make it world class player.

Winds of liberalisation have touched sugar also. Licensing is liberalised. The imports freely allowed. Exports deregulated. Many lessons learnt. Competition became intense. Customer more demanding on quality and service.

The document gives an overview of agricultural background development in cane. Sugar production, consumption, policy/regulations. The paper ends up dealing with important issues, aspects of deregulation, decanalisation of exports, the potential and the comparative advantage of Indian sugar.

 

HISTORICAL BACKGROUND

History of sugar and sugar cane in India goes back to several thousand years BC. Indian mythology vouches for this since it contains some legends depicting origin of sugar cane.

It was sometimes in 4/6th century art of sugar making was discovered. Method was crude beyond imagination. Cane was cut in pieces - crushed under heavy weight - juice thus obtained was boiled and stirred, till it turned solids.

Solids of uneven shape and size were called sarkaran, a Sanskrit term of 'gravel'. Modern word 'sugar' is derived from the word Sarkara.

Thus it could be rightly said that India has been the original home for sugarcane as well as sugar manufacture.

However, for all practical purposes, scientific sugar processing by vaccum pan method may have started sometimes in 20s. The development process was slow. Country met its sugar requirement through imports. In mid 20s number of sugar mills sprang up in UP and Bihar. By 1930-31, there were 29 sugar factories producing just 100000 MT of sugar and they found adverse competition from Japanese sugar which was ruling the Indian market.

 

Good beginning leading to self reliance

Industry took up the matter with "Tariff Board" and Sugar Industry Protection Act was passed by the Indian Legislature in 1932. Under this act, protection was granted to the indigenous sugar industry. Salient features:

  • The act shall be for a period of 14 years ending on 1 March, 1948.
  • Performance was to be reviewed before 31 March, 1938.
  • Govt. to identify measures for next 8 years.

However, anytime during the period of Act, if it was found that sugar was being imported at the prices to make domestic industry ineffective, Govt. should have power to levy additional duty on imports. With enforcement of Sugar Protection Act, within a period of four years country became self-sufficient in sugar by 1935. It was a great beginning indeed.

 

Balancing of revenue (tariffs)

However, the Govt. lost revenue by way of custom duty on reduced imports. Govt. again reviewed the position in 1934 and decided on two fold action:

  • Imposition of excise duty on factory produced sugar.
  • Union Government passed legislation to enable provincial Government to enforce minimum price of cane to be paid to cane growers.

The main objective of the Act was to regulate the price of sugarcane intended for use in sugar factories and assure sugarcane growers a fair price for their produce.

Govt. of U.P. enacted Sugar Cane Rules in 1934 followed by Bihar and Orissa Sugar Cane Rules in 1934. In 1951, Central Govt. took over control of sugar industry under the Industries Development and Regulation Act.

The post protection history of Indian sugar industry is amazing. From the mere 32 mills in 1931-32 number of units rose to 130 by 1934-35 and the production arose from 0.17 MnT to 0.95 MnT. The rate of expansion was 460%. The growth continued till 1938-39, when the production touched 1.28 MnT.

 

Exploitation leading to land reforms

Most of the new mills were set up by private rich individuals/industrialists in North Indian states of UP and Bihar. They owned sugar cane farms and also purchased cane from small farmers - who were at the mercy of such mill owners. The exploitation of small farmers by sugar mills, led the Government to take various measures. First was policy of land reforms. Ceiling was put on holding by an individual including a sugar company. This led to disinterest of private sugar mills. But the growing need of sugar and so the sugar cane gave birth to Govt. partnered Cane Growers Programme in which growers co-operatives owned sugar mills. - First such step was in Maharashtra - Western India - 50 years later this sector produced 60% of country's production. Success was attributed to stable alliance amongst small/medium/large cane growers and Mills where they are partners.

 

First set back

The first cycle of reversal was seen during the period 1939-44 and it continued till 1950-51 for various reasons when the output fluctuated between 0.89 to 1.1 MnTons mainly on account of instability of cane supplies caused by weather conditions, preference of farmers to essential food crops which gave them higher return. Food production became a priority during the war period.

 

Development after 1951 - the five-year plans

The Govt. of India was entering into industrialisation. With limited resource, on one hand and to provide focus and prioritise the Industries on the other, Govt. introduced 5 year plans and which have been subsequently referred to as First Five-Year Plan. Second Five-Year plan and so on. The objective of these plans was to have a structured and planned and timely implementation of the industrial, infrastructural, services sector and agriculture growth.

Here we are

  • We produced 16.4 MnT sugar in 1995-96.
  • Installed capacity stands at 12.4 MnT.
  • Number of sugar mills is 448.
  • New mills and expansion in pipeline.

 

SUGAR PRODUCTION

Indian Sugar production growth came up under structured and planned sugar programme. The demand, the production requirement, the capacity needed and cane production went through a planning process and close monitoring by the planners over past 4 decades.

Further in order to achieve the set targets. Govt. has been setting up committees, task forces from time to time to make policy changes in consultation with Industry, State Agriculture Departments etc. such as cane and sugar pricing policy, levy price fixation free sales / levy sugar ratio etc. Also government has been closely monitoring the licencing policy.

The production of sugar cane, the cane utilisation, the production of sugar has been given in Annexure II. The target and actual production in the last year of the plan is as under:

Government has been encouraging setting up of new sugar mills as well as expansions upto 5000 TCD allowing upto 100% of sugar for new mills and 80% for expanded units, to be marketed in free market for certain number of years. Thus the growth has been lateral. Today there are 448 mills with installed capacity of 12.5 MnT with average size of 2150 TPD with some units of 10000 TCD and few of 5000 TCD.

In India, sugar cane is also utilised for production of traditional sweeteners like gur and khandsari. The country produces a total of about 10 MnT (9 MnT Gur and 1 MnT Khandsari). This sector enjoys all the freedom. No controls, no restriction on cane prices - the sector can pay commercial price. Thus poses a direct threat to sugar industry and sugar production has not followed cane production.

However, over a period of time with changes in Govt. policy on free sale/levy ratio from 35:65 TO 60:40 can utilisation for sugar has gone up from 30% to 55% and for gur/khandsari sector has come down from 58 to 34% (Annexure III).

Sugar Industry has gone through a structured planned growth based on projected requirement of sugar for consumption.

 

First Five-Year Plan

Since the consumption was seen going up additional capacity came up by way of new unit as well as through expansion of the existing units.

  • Achieved output in 50-51: 1.12 MnT
  • Target sugar production: 1.50 MnT
  • Mid plan revised target: 1.80 MnT
  • Production in last year: .89 MnT

Second Five-Year Plan

The Industry continued to perform well and Govt. also encouraged the growth with increase in demand.

  • Production 1960-61: 3.50 MnT
  • Installed capacity: .45 MnT

Third Five-Year Plan

In 1965-66 which was the last year of the Third Five-Year Plan Industry continued to grow and exceeded the planned targets.

  • Planned Target Production: 3.50 MnT
  • Production in 65-66: 3.54 MnT

Third and Fourth Year Plan Gap Period

Until now the Govt. was fully controlling the Sugar Industry. It anticipated that if total control continued the Industry could go into a reversal mode. Govt. adopted the policy of Partial decontrol with effect from Ist October 1967 The policy has since seen total control to partial control to decontrol and back to partial control. Why this has happened will follow later in the chapter.

Results were encouraging. Mills could produce more/sell more at a good/bad price and pay more to the farmer.

  • Production 66-67: 2.13 MnT
  • Production 67-68: 2.16 MnT
  • Production 68-69: 3.76 MnT

Fourth Five-Year Plan

The Govt. for the 4th plan fixed target for production at 4.7 MnT and license capacity of 4.87 MnT. Since capacity was not coming up the licensed capacity target was raised to 5.5 MnT.

  • In the first year of the 4th plan i.e. 1969-70, production was all time high 4.6 MnT.
  • With high stocks on hand, Govt. decontrolled sugar in May 1971.
  • Sugar prices crashed in domestic market - mills could not pay the farmer dues.
  • Farmers moved to other crop causing decline in sugar production in following season 1970-71 to 3.1 MnT (Down by over 32%).
  • Sugar prices in domestic market moved up. Industry volunteered to offer uniform price for Rs. 1500/T for domestic market and also offered to export 3.5% of its production.
  • Govt. again brought industry under its control effective Ist July,'72.

Fifth Five-Year Plan

Planning Commission appointed task force to develop programme of sugar industry for the fifth plan period 1974-79. Its findings:

  • Requirement: 5.5 MnT
  • Export/Buffer stock: 0.5 MnT
  • Total Need: 6.0 MnT
  • Capacity Target: 7.0 MnT

The Industry performed extremely well by exceeding plan targets (5.72 MnT) by producing 6.47 MnT in 1977-78. Action:

  • Govt. decontrolled sugar from August 1978 and withdrew monthly release system for domestic market.
  • Mills panicked, off loaded all its stocks. Mills were on way to sickness.
  • Learning from history, Govt. acted fast once again imposed partial control with effect from 17.12.1978.

Sixth Five-Year Plan (1980-85)

Govt. focus and attention on sugar industry further increased - Objective realistic growth and pricing structure. Appointed committee for the same. Recommendation:

  • Cost structure reviewed and price of levy sugar fixed on Statutory Minimum Cane Price (SMP) without linkage to free market price for sugar or actual cane price paid.
  • Govt. continued to announce SMP linked to 8.5% recovery.
  • To continue dual sugar policy.

Following the recommendation, the policy of partial decontrol continued in the real sense from 30th Nov.'1980.

Sugar production fluctuated from 3.9 MnT in 1979-80 to 8.7 MnT in 1981-82 industry suffered losses - causing delay in cane payment. Production came down to 5.5 MnT in 1983-84 leading to imports.

Seventh Five-Year Plan

The estimated requirement of sugar 9.8 MnT during the 7th plan period 89-90. The projected growth rate was 5%.

Targets:

Licensed capacity 13.26 MnT

Installed capacity 11.46 MnT

Licensed capacity by the end of 89-90 stood at 16.21 MnT against the target of 13.26 MnT. The installed capacity was however only 9.34 MnT (unimplemented licensed capacity of about 7 MnT).

Govt. also announced a pragmatic sugar policy with increase in statutory minimum price of cane basis recommendation of the Commission of Agriculture Cost and Prices and change in the levy/free ratio of the sugar in year 1992-93 to 40/60. Industry got a boost.

  • Result once again the status changed from importer to exporter.

Eighth Five-Year Plan

Govt. constituted a Task Force to deliberate various aspects of the sugar industry in the 8th plan period:

Requirement 13.41 MnT

Installed capacity target 14.12 MnT

Licensed capacity target 18.20 MnT

Eighth plan was delayed by two years and Government made projections on the basis of parameters on the year 1994-95. The status at the end of VIIth plan:

Target (MnT) Actual(MnT)

Licensed capacity 20.0 21.1

Installed capacity 15.5 12.5

Production:96-97 14.8 13.0

Consumption: 96-97 14.6 13.5

There are 448 mills with installed capacity of 12.4 Mt average capacity of 2150 CD. Over 100 new mills and expansion of existing mills will add 9.0 MnT to capacity.

Ninth Five-Year Plan - Targets

The targets of the Eighth Plan have been achieved. The approach paper indicates the following plan:

Year

T a r g e t (MnT)

Lic. Capacity

Installed Cap.

Production

Consump.

1997-98

20.1

16.4

15.5

14.2

1998-99

21.2

17.2

16.4

15

1999-00

22.3

18.2

17.2

15.8

2001-01

23.5

19.1

18.2

16.5

2001-02

24.8

20.2

19.1

17.5

 

PROCESSING

India is the only country in the world who produces plantation white sugar. All other countries are producing either raw sugar or refined sugar or both. Thus the processing capacities are quite different and so also is the quality of sugar.

In terms of number of mills, India ranks first with 448 Mills, followed by China 241, Brazil 231. World total of 2500. Average size is 2150 TCD, much lower than world average. In India, we are still setting up 2500 TCD mills whereas the trend globally is to set up 10000 TCD mills. (Annexure IV.V)

Capacity

Mill capacity is calculated basis normal crushing period. At the end of eighth plan, the target licensed capacity was 18.9 MnT and installed capacity of 14.1 MnT against which the licensed capacity was 21.0 MnT and installed capacity of 12.4 MnT. The target production in 1995-96 was 14.1 MnT against which the country produced 16.4 MnT. This was due to high sugar cane production and early/late crush incentive. However, there is still a shortfall in achieving installed capacity. The reasons for non fulfilment of target were:

  • Non availability of finance from institutions to new sugar factories and to existing factories for expansion.
  • Specified capacities have been installed but could not be utilised due to certain technical reasons such as Letter of Intent, compliance of pollution controls etc.

In 1995-96 the total installed capacity was 12.4 MnT and there were 448 mills i.e. average capacity of 2150 TCD. Its distribution was as under:

Capacity TCD

No. of Mills

<1250

63

1251-2500

313

2501-5000

60

5001-9000

8

10000

4

  • There are about 100 new units or expansion schemes under implementation which will add to capacity of about 9.0 MnT.
  • The current licensing policy envisages new units of minimum capacity of 2500 TCD.
  • Government has recently announced incentive schemes for new mills as well as for expansion of existing units by way of additional release of sugar for free markets.
  • All the same time, the minimum distance between the two mills has been reduced from 25 km to 15 km.

Thus the growth of capacity continues to be horizontally.

 

BY- PRODUCTS & DIVERSIFICATION

Baggase

Basic utilisation of baggase continues to be as a fuel. Dry baggase contains 40% cellulose, 30% pentasone and 20% lignin. It is suitable raw material for paper industry. 30% of cellulose requirement comes from agricultural residues. However, since the mills are scattered all over the country, collection of surplus baggase poses a problem and makes paper units uneconomical. Efficient utilisation yet to come up.

 

Co-generation of power-use of baggase

Baggase is used as captive fuel in the mill as power. Most efficient as well as balanced mills should be able to save baggase to the extent of 10% of its production. The potential for co-generation and export of power to the grid after meeting mills own requirement of energy is estimated by expert bodies, at 3600 MW by 1996-97. India has not exploited its huge potential like other countries like Hawaii, Mauritius etc. where co-generation of power from sugar mills has become a dependable source for supply of power.

Central Government needs to coordinate this with state government electricity boards for utilisation of the surplus power which sugar mills even can generate. Co-generation should be encouraged. Commercial aspects of power purchase arrangement and distribution needs study.

The investment required is about 60% of what will be required for setting up a conventional thermal power plant. A beginning has been made with 5 such plants coming up.

 

Molasses

Molasses for many decades have been fully controlled in every aspect i.e. price/movement/end use etc. In 1993, the Central Govt. decontrolled the molasses. Most states have complied with the centre's directive but some state government's like Bihar, UP have reimposed controls like dual pricing, Movement end use controls etc. this is only helping in keeping free market molasses prices high leading making availability difficult for distilleries and country liquor production thereby encourages illicit liquor production from Gur - hence more diversion of sugar cane.

There are total 283 distilleries and 108 sugar mills having distilleries attached. Total installed capacity is 2700 Mn Litres. At current level of sugar production and surplus availability, total is estimated at 400 Mn Litres which could go upto 700 Mn Litres by the year 2000.

 

Developments – agricultural

Just after India attained freedom, 50 years ago, Indian governments first and immediate concern was food production. In the words of the first Prime Minister of India - "Everything can wait, agriculture can not." The words expressed common concern as population was growing at a much faster rate than food production.

That the country became self sufficient in food grains was a demonstration of unprecedented collaboration between policy markers, administration, scientists and overwhelming response of farmers. To give a further boost Farmer was provided incentive by way of an attractive support price and disposal mechanism by way of procurement of the food grains by the Govt. agencies.

The agricultural thrust continued in other agriculture commercial crops as well like oilseeds, sugar cane where Govt. appointed technology missions and where India became self sufficient from a net importer. In sugar, it became an exporter, exporting as much as 1 MnT in 1995-96. Today India has made a place for itself in the world agricultural map where it enjoys a prominent position with rest of the world.

 

Developments - Sugar cane

It was in mid 1960's that sugar became a priority and Govt. set up task force to plan requirement and growth. Policy was to focus on cane production. utilisation and processing capabilities. Remunerative cane prices led the farmer shift to sugar cane and oilseeds.The growth in sugar cane production has been both in acreage and yield. Whether this trend will continue, will depend upon crop economics as farmer has been adopting commercial approach.

There is a need for rationalisation of sugar cane policy to encourage farmer to improve yield and mills to build up rapport with farmer to build up trust, commitment resulting in assured supplies of clean and freshly cut cane (improve extraction). In return farmer gets better and quick return.

 

Support system for agri crops

Agriculture sector still contributing 28% to India's GDP. Projected growth rate is 3.5%. The focus of agriculture scientists has been on increase in productivity, by providing scientific inputs - demonstration by State Agriculture Departments in fields with farmers of such practices.

To overcome the biggest apprehension of exploitation of farmers by financiers and traders. Govt. provided support to ensure remunerative prices as well as marketing of agriculture production.

 

Price support system

Price support system for agriculture produce has been one of the significant factors providing confidence to the farmer. The commission on agriculture costs and prices, in the Ministry of Agriculture is vested with the responsibility of determining the minimum price a farmer must get, which brings him prosperity and keeps him motivated. Various state departments of agriculture monitor the quality and the value of direct inputs like seed, pesticides, Irrigation, fertiliser, manure etc. and also the fixed costs like interest, rental of land etc. Farmer is compensated more than the cost of the inputs.

At the same time to encourage the farmer to experiment in new crop (most recent being sunflower) - the farmer is compensated lot more than the cost of input. A typical costing to arrive at the minimum support price, is annexed.

 

Procurement system

Procurement system also needs a mention. Govt. procures the food grains and stores to provide relief to the farmer who otherwise will have to hold an inventory and block his finance.

Also Govt. has appointed some state federations and cooperatives to intervene in the market i.e. to support prices of oil seeds, grains etc.

 

CROP ECONOMICS

The phenomenon of crop switch is driven by one single factor i.e. farmers confidence in the price support system and the payment commitments against his cost of produce. For inducing the farmers to invest in yield apart from raising infrastructure and use of inputs, price support to farmer has to be demonstrated. With total area sown stable at 142 Mn Ha, further increase has to come only from increase in yields whatever may be the means i.e. seeds, irrigation, pest treatment, harvesting, etc..

Farmers attitude of commercialisation has been amply seen by shifting from food grains to sugar cane and oil seeds. This trend can not be assumed to continue and if farmer could shift from food grains to non food grains - he can also switch back if non food grains become less remunerative at any stage.

The attached table will show the cost of production of crops competing with sugarcane. The data is sourced from the Central Agricultural Dept. who in turn get it from state agriculture deptts but the same is not so regularly compiled.

While calculating the return per hectare of land - a farmer may decide on cropping basis only operating costs or basis total costs.

The agricultural practices vary from state to state depending upon the irrigation facilities, soil condition, weather, inputs from local state agriculture depts. State support in form of subsidies on water, power, diesel, etc.etc. as and also work attitude of regional labour.

 

Sugar cane economics (interstate)

U.P., Maharashtra and A.P. are amongst the largest producer of sugar cane, representing 60% of total cane produced. The variations are because of different agronomic conditions and farming practices.

 

Comparisoin of return on various crops in same district

In order to make an effective comparison, a study was conducted for a season in Western U.P. taking into account all elements of various inputs i.e. direct costs.

Operations

Unit

Wheat Paddy

Potato

Sugar cane

plant

Field preparation Rs. 700 875 700 3800
Sowing/Transplanting Rs. 690 840 7800 7000
Fertilizer & Manure Rs. 2100 2325 2775 6000
Irrigation Rs. 750 1250 625 4000
Plant Protection Rs. - - 1000 2000
Harvesting/Disposal Rs. 4500 4000 1850 6060
Total Cost Rs. 9115 9665 20900 32860
Yield Ton/Ha 5 5 21 58
Value of Product Rs. 20000 21250 31500 41400
Return/Ha Rs. 10885 11585 10600 8540
US$ 306 325 298 240

 

Multicropping pattern

  • Overall return to farmer is basis multi-crop cultivation
  • Multicropping results in maximisation of crop production.
  • Various multicropping patterns with sugarcane are followed like
  • Wheat/sugar cane plant
  • Potato/sugar cane plant
  • Mustard/sugar cane plant
  • Ratoon cane crop constitute 45% of cane area or 30% of cane production - Even with ratoon - short duration crop are undertaken like pulses.
  • In India, one ratoon is common while in areas like U.P., Punjab, Haryana, practice of multiple ratoon is in vogue. Other countries also adopt multi-ratooning like Mauritius 6 to 8, Australia 2 to 3 and in Cuba 3. To 5.
  • Thus with multicropping-ratoon sugar cane and plant cane with other crops gives the best return to farmers.

 

Sugar cane production

Sugar cane is one of the important cash crop. The production has grown dramatically over past several years. Sugar cane growing area in India may be broadly classified into two agro-climate regions:

REGION

STATES

Sub-Tropical

Uttar Pradesh, Bihar, Punjab, Haryana

Tropical

Maharashtra, Gujarat, Tamilnadu, Andhra Pradesh, Karnataka

 

Sugar cane industry was initially set up in the sub-tropical region. Till 1950’s - 90% of area under sugar cane was in this region. With commencement of planning process, sugar cane found its route in tropical area. sugar cane being a tropical crop finds favourable agro climatic conditions for its growth in this region - i.e. higher yields. Growth after 1950’s was more in this region and by 1994-95 the sub tropical region, sugar cane area was 65% and cane production 55% of the total cane produced.

Now the tropical region is already developed and reached near saturation level. The biggest state in this region - Maharashtra faces acute problem of lack of water which effects cultivation of sugar cane. The sub-tropical belt, with fertile land, high water table and irrigation, appears to be the area for future growth.

India has total 26 states. Sugar cane is produced in 15 states. Above 9 states produce 97% of cane. 5 states contributed to about 87% of sugar cane produced in 1994-95.

 

The trend

The sugar cane crop has been in growth mode though there have been fluctuations and a sharper increase came in last 15 years. The growth can be attributed to:

  • Government’s thrust on sugar production - planned growth
  • Govt./State Agriculture Dept’s input on field extension, seed varieties, crop maintenance
  • Cane development programmes of sugar mills
  • Increase in cane support price covering more than input costs
  • Crop switch resulting in more crop area in sugar cane due to better return
  • Increased irrigation facilities and increase in energy consumption for irrigation
  • Favourable monsoons.

 

UTILISATION OF SUGAR CANE

The sugar cane produced in the country is utilised for the following purposes:

  • Production of white sugar
  • Production of traditional sweeteners
  • Gur
  • Khandsari
  • Seed, feed and direct consumption (chewing)

Production over the period has shown a significant growth. Over the past fifteen years. Production of sugar cane, white sugar is not consistent due to utilisation pattern of sugar cane.

The above data would reveal a trend that would indicate:

  • Cane used for seed/chewing/feed as percentage stays constant at about 12%.
  • Cane utilisation for sugar has been moving up and down.
  • There is inverse relationship between sugarcane production and percentage utilisation for gur and khandsari.

On yearly basis, loss of sugar production is lot more than drop in sugar cane production and likewise increase in production is also much more than increase in sugar cane production. Thus such reversals can be witnessed again in 1996-97.

 

Role of traditional sweetners - gur/khandsari

Gur is produced by continuous direct heating of crude extracted juice in open pans - till it turns solid paste. Khandsari is sugar produced from unrefined cane juice.

The trend and the data reveals that sugar production has a strong and direct rivalry with traditional sweeteners segment i.e. gur and khandsari.

While healthy efficient competition is order of the day but gur and khandsari is an inefficient utilisation of limited resources of raw material, i.e. sugar cane

 

Comparative Extraction and Recovery from Sugar Cane (%)

PRODUCT

Juice/Extraction

Recovery

Gur

55

9.5 to 11.0

Khandsari

70

6 to 7

Sugar

90-92

9 to 10

 

Let us take a look at gur and khandsari and the concessions these two sweetners enjoy over white sugar.

Gur

  • Predominantly produced in UP, Maharashtra, Andhra Pradesh and Tamilnadu.
  • Initially produced to meet basic farmers’ own need of sweetener.
  • Direct consumption in household in winter season as a digestive sweet.
  • Gur is commodity which is traded on futures - thus provides speculation.
  • Gur has no controls - some commodity taxes such as Cane Purchase Tax, Trade Centre (Mandi) tax are also evaded.
  • Thus gur manufacturers can pay more for sugar cane at the time of shortage, causing diversion.

Khandsari

  • Immediate substitute of sugar.
  • It is sugar produced from unrefined juice.
  • Competes directly with sugar due to excise duty difference.
  • Good Khandsari sells at marginal discount to sugar.
  • At times of low sugar cane production i.e. high molasses price, high sugar prices - Khandsari operation is profitable.
  • Hence can pay for sugar cane - even more than sugar mills causing diversion.

 

Competition with sugar mills

Thus because of complete freedom. gur and khandsari enjoy, they give stiff competition to sugar mills - be it cane procurement, cane prices, unrestricted sale of product as well as by - product.

Net Result: In the event of low sugar cane crop

Whereas

SUGAR MILLS
  • Have to sell sugar at dual price to the extent Govt. decides nd not beyond two weeks.
  • Have to sell Molasses at dual prices at ratio fixed by Govt
  • Have to pay for sugar cane at fixed price.

On the other hand

GUR / KHANDSARI MILLS
  • Can sell product and Molasses at free Market price
  • Can sell forward - there is a futures market for Gur.
  • Thus with more cash and good margins pay market price for cane
  • high at time of shortage and low at the time of Glut.

This explains the reason of excessive diversion of sugar cane and the changes in the sugarcane utilisation pattern for sugar versus traditional sweetners.

Impact on overall sugar economy

  • Khandsari manufacturing is a waste of precious agricultural resource of sugar cane. The recovery is 6 - 7% against 10% in sugar.
  • Thus on every 10 MnT cane utilised for khandsari, means a loss of 300,000 tons of sugar equivalent.
  • At times of cane shortage, it has been found that upto an extra 10% of cane gets diverted to gur and khandsari.
  • This explains that sugar production is not in line with sugar cane.

 

PRICING

Sugar cane pricing

Till mid 1960’s industry was fully controlled. To provide support to farmer, in 1965-1966, the sugar cane price for sugar mills was fixed based on production and input costs called SMP (Statutory Minimum price). The sugar mills on one hand paid SMP. Gur and khandsari producers could pay lower or higher than SMP. This would result in diversion of sugar cane to khandsari and gur causing a decline in sugar production and also lower cane production.

Therefore, Government adopted partial decontrol policy i.e. mills could sell 35% sugar in free market enabling mills to pay more than SMP (like khandsari & gur) but the same was administered by states called SAP. Thus sugar production went up from 2.13 Mn. T in 1966-67 to 2.16 Mn. T in 1967-68 to 3.75 Mn. T in 1968-69.

In early 70’s, Government appointed a commission, amongst other things, the tasks being to recommend mechanism to stabilise sugar cane supplies to sugar mills. The commission got known as Bhargava Commission, which sought the views of industry, cane growers, Cooperative Sugar Federation. The cooperative mills wanted 100% benefit of free market sugar benefit to farmer on the logic that levy price was fully covering the production cost whereas private mills wanted 50% sharing. While sugar cane constituted 70% of the sugar cost Bhargava Commission recommended 50% of the profit sharing (on the logic that sugar mills will have to pay 60% income tax on 50% profit - mills will effectively get 20%).

The government accepted the Bhargava formula and incorporated the same in the Sugar Cane Control Order of 1966.

Thus in practice, country has two systems of sugar cane price movement. In cooperative mills dominated states, i.e. Maharashtra, Karnataka, Gujarat, sugar cane price is based on profit sharing formula while in other states dominated by private mills - State Government advise the sugar cane price known as State Advised Price (SAP). The statutory minimum price or SMP is used only to determine the price for levy sugar

But this is not the end. The politicians need to impress upon farmers that when they fight for farmers right, the later has to discharge its obligations i.e. apart from guaranteeing supplies also improve quality/productivity and not to ask per unit price alone. (At the time of shortage farmers are lured by gur and khandsari manufacturers who can pay more.).

The farmers need to understand that cane price has to has a relation with sugar price. Concept is already in place in some parts of the country. The mills, farmers and cooperatives and politicians need to work together agree on the principle of cane pricing which should have a relation to sugar sales proceeds, quality and productivity. Then only a natural continuous growth can be expected.

Sugar cane prices based on Bhargava formula will lead to competitive farming and competitive processings. Both farmer and mills will have to become competitive in respective areas.

 

Sugar pricing

The country has dual sugar pricing policy.

Levy sugar price (fixed by Government)

It is a peculiar situation where raw material price is fixed by the Government which goes up every year. Sugar price for the levy sugar (40% of production) is fixed without taking into consideration of all factors that go into production - i.e. 40% of the sugar is sold below cost of production. Thus Government, for all its valid reasons, has protected the farmer and the household consumer who gets levy sugar.

Non levy - sugar (free market price)

Once the house-hold consumer is protected through levy price - mills should be left free for the free portion of sugar. But it is not so. Free is not free at all. How much quantity - and when all the Govt. decides. The quantity is determined based on historical data of past plus to keep the prices under check - who uses this sugar. 80% of free sale is used by Institutional users who are free to charge on their product.

Besides the controls, on sales, are such that mills are forced to sell its product fortnightly basis due to fear of the quantity short-sold getting converted into levy. The advantage is taken by the trade i.e. the retailer. He adjusts his price upwards when the mill rate goes up but does not drop when mill is forced to sell at lower price.

The sugar price is perhaps the lowest in India comparing to other countries. The annual increase in 1994-95 over 1988-89 is only 5.3% as against 13.5% in case of Rice, 10.8% in case of wheat, 13.5% in case of food grains. 18.0% in case of groundnut. The sugar cane price is up 20%. (Annexure VII). Annexure VIII shows the sugar cane price announced by the Government (SMP) and the actual cane price paid. Annexure IX shows the Trend in Sugar prices.Thus, there is no mechanism by which sugar mills can price or hedge their product in the market where price fluctuation can be as much as 8 to 10%.

India perhaps is the only country in the World where sugar cane price is going up and the sugar price is not keeping pace. Sugar cane prices - both SMP and SAP have been going up. Sugar prices have not followed cane prices. India is the only country where there is no relation between sugar realisation and cane prices. Therefore, if the growth is to be assured, cane pricing-one of the key issues for the health of sugar industry, has to be realistic.

 

TRENDS IN SUGAR CONSUMPTION

When we speak of per capita sugar consumption for India, we shall consider traditional sugar cane based sweetners ( gur & khandsari) as well.

Thus with sugar and gur/khandsari consumption taken together the consumption stands at around 24 kg/annum. Trends and comparisons with other countries (Refer Annexure X,XI)

  • Per capita consumption of all sweetners has been fairly stable at 20kg until 1980.
  • In this period however there has been a gradual shift from gur/khandsari to sugar.
  • In 1960 - sugar was 4.8 kg or 25% of all sweetners which in 1980 grew to 8.2 kg or 42%.
  • Between 1980 to 1995 - total consumption grew to 24 kg with sugar at 13 kg or 55%.
  • Thus growth between 1960 to 1995 has been as under:

1960 –1980

Total sweeteners steady at 20 Kg. sugar Up from 4.8 to 8.2 kg.

Gur khandsari down from 15.2 to 11.5 kg.

1980-1990

Total sweetener moved upto 24 kg.

Sugar upto 13 kg.

Gur/khandsari down to 10.7 kg.

Sweetners consumption India vs world

  • Today India’s per cap. consumption of 24.4 kg is higher compared to world average of 20.4 kg.
  • Well high above Asia average of 12.8 kg.
  • Lowest is in China at 6.5 kg - which distorts Asia average - (alternate sweetners basic buying high)
  • Compare’s well with Pakistan 23, Srilanka 24.1, Thailand 24.9.
  • But behind Philippines at 28.7 and well behind Malaysia 39.8.
  • Also substantially behind developed countries such as US, Canada, Australia, New Zealand, EC and developing countries and major sugar producing countries such as Brazil, Cuba.

Trend in consumption pattern

  • Major increased witnessed between 1980 to 1995
  • World average19.8 to 20.4
  • Asia average 8.6 to 12.8
  • Asia average increase is 50% hence. We confine discussion on Asia:
  • Japan Down 10% to 21.5
  • China Up 50% to 6.5
  • Thailand Up 80% to 24.9
  • Malaysia Up 25% to 39.8
  • Pakistan Up 150% to 22.9
  • Sri Lanka Up 50% to 24.1
  • Philippines Up 28% to 24.4
  • India Up 20% to 24.4
  • While there has been a general trend in health consciousness but Western habits are catching up fast. Good growth potential in:
  • Soft drinks
  • Food products
  • Confectionery segment
  • Back to India, the dual pricing/marketing policy clearly segments two sectors i.e.
  • House hold direct consumption i.e. levy sugar i.e. 40% of production.
  • Out of free market sugar 60% of production - 80% goes for indirect consumption and 20 % for direct consumption.
  • Thus total off- take for house-hold consumption would be 48% of sugar produced.
  • 4% growth in sugar consumption is expected. (2% from the population growth and 2% is expected from the institutional segment).

 

REGULATIONS

The Industrialisation in india has been highly regulated and protected leading to monopolisation and centralisation. Over a period of time, however the Govt. encouraged new business - new entrants but beginning of the 1990’s the reforms and liberalisation has changed the environment. Protection has disappeared. Imports exports liberalised. Production have overtaken, demand competition has increased, new technology has come in supported by direct foreign investments, All this has resulted in growth in consumerism driven by better quality and availability at reasonable prices.

Sugar however remains insulated, liberalisation and reforms touched sugar limiting to only imports and in some way in exports. Some of the major regulatory measures at the central Govt. and State level are as under:

 

ISSUES RELATING TO SUGAR INDUSTRY

Central Government Measure

Licensing

  • Sugar Industry is a schedule industry under Industrial Development Regulation Act requiring license to manufacturer.
  • Gestation period has been reduced from 3 years to one.
  • Minimum capacity of a new sugar mill is 2500 TCD and expandable upto 5000 TCD.
  • Minimum distance between 2 sugar mills is now 15 kms which used to be 40 km.
  • Cane availability is now not so critical requirement.
  • Government gives incentives where in new mills can sell upto 100% of the sugar in free market against 60% of existing mills - Government has also announced such incentive for expansion upto 5000 TCD.
  • The impact has been horizontal growth-causing cane shortage-higher per unit processing cost etc. etc.

 

Production Monitoring

The Sugar (control) Order 1966, regulates the production, sale of sugar, stock limit. It also prescribed standard of quality - to which sugar must conform at the time of delivery.

 

Sugar Cane Pricing

Sugar Cane (control) Order 1966, was issued to promote sugar industry and to ensure fair deal to cane growers by fixing minimum price payable by sugar mills. Act provided cane price fixation basis 50% profit sharing. Not enforced in some states where such state fix its own price.

 

Sugar Supplies for Public Distribution

The Levy Sugar Supply (control) order 1979, was issued empowering the Govt. to direct sugar mills to supply levy sugar to authorised persons/organisation etc. at a price fixed for the season.

 

Dual Sugar Pricing Policy

Under the provision of the Sugar Control Order, Govt. has been regulating the sugar supplies for distribution under PDS and free market. Several times in the past, industry has gone through complete control or partial control to complete decontrol and back to partial control. (Annexure XII)

Under the current policy 40% of the sugar produced is to be delivered by mills, for public distribution, at a price fixed from season to season. Balance 60% can be sold in the free market as per quantity decided by Govt. on month to month basis for each mill. Also mill has to sell minimum 47.5% in the first fortnight and 52.5 in second.

 

Quality/Packaging

Governed by Indian standards. Grade 31, 30, 29 and Packaging only in 100 kg jute bags. Consumer packs allowed in 1, 2, 5 kg in any packaging. Exports packing can be in 50 Kg and in any packaging material and so also imports

 

State government regulations

Over and above the central Govt. control, each state Government enforces its own regulatory measures to protect the State/farmers. Following are some typical controls in the State of Uttar Pradesh which are there in other states in some form or other.

 

Restriction on Sugar Cane Purchase Order, 1966

This Order provides for restriction on purchase of sugarcane by gur producers. It also provides for permits for purchase of sugarcane by a khandsari manufacturer holding a licence.

 

Sugar Cane Cess Act, 1956

This Act has been promulgated for imposition of cess on cane sold to a sugar factory. At present the rate of cess is Rs. 140 PMT on sugar which is collected at the time of delivery of sugar.

 

Sugar Cane (Purchase Tax) Act, 1961

This Act proposes to impose a tax on the purchase of sugarcane by the owner of a sugar factory. A sugar factory is not allowed to remove any sugar until Purchase tax has been paid thereupon. At present the rate of Purchase Tax is Rs.220 MT on sugar.

 

Sugar Cane (Regulation of Supply & Purchase) Act, 1953

This Act regulates the supply and purchase of sugarcane required for use in a sugar factory, khandsari unit and for manufacture of gur, it provides for:

  • Declaration of reserved area/assigned area for the purpose of supply of cane to a sugar factory.
  • Speedy payment of the price of cane (action for delays)
  • Cane purchase by mill through cane growers coop-societies.
  • Payment of commission to cane growers coop-societies.
  • Power to declare some cane unsuitable for sugar mills.

 

Sugar Cane (Supply & Purchase) order, 1954

It provides for rules and regulations governing purchase of cane in a reserved area/assigned area and purchase for cane at cane purchasing centres within the reserved area of a sugar factory.

 

Molasses Control Order

While the Central Government has decontrolled the molasses, the State Governments, had imposed its own regulations like:

  • Ban on interstate movement
  • Restriction on end use i.e. sale to a specified consumer.
  • Ratio of control fixed rate and free market rate
  • Also specifies consumers who will get at control price.

 

Regulations for trade - domestic

Sugar is governed by the Provision of Essential Commodities Act. The act provides stipulations on trade licenses, stock limits and rotation period for stocks. In addition, there are restrictions on sales and distribution, i.e.

  • Mills can sell only to licensed dealers.
  • A dealer can sell to another dealer only once.
  • At times dealer is not allowed to sell to another dealer in the same state.
  • Anybody storing more than 900 kg. of sugar needs license.
  • Stock to rotate before 15 days.

 

Sugar - distribution and trading practices

Under the dual pricing policy Government announces from time to time portion of the sugar, that can be sold in the free market and what is to be supplied at the fixed price under the public distribution system called levy sugar.

 

Levy Sugar sales/distribution system

Currently 40% of production (effectively due to non-levy unit 33%). Quantity for distribution per month fixed unit per kg/family etc. Varies basis additional requirement arising due to important festivals.

Food Ministry issues allocation of various food departments/corporations. Such deptts approach individual mills to lift the sugar and for onwards supply to various public distribution system (ration shops) appointed by the State Govt.

Consumer get their sugar allocation on fortnight basis against the ration card issued to each family head.

In reality, however, not all such sugar reaches bonafide users and finds way into open market due to large price differential that exists between levy and free market sugar (Rs. 5.50/Kg. Or 6.25 c/lb).

 

Free sales sugar marketing system

Quantity

Currently it is 60% of the production for older mills. Extra fee sale sugar is allowed for late and early crushing and also for new units. Effectively it is 67%.

 

Free Sales Release

Food Dept. assesses the monthly requirement for the country basis-historical demand pattern over the previous years and allowing growth ranging 4 to 5%.

The statewise allocation is then fixed basis historical data plus any specific festival demand for the month in that state.

Millwise allocation is then made basis production/stock of the mills on pro-rata basis. Individual mill adjustments are made for the export release of the previous months or additional incentives out of late/early crush.

 

Period of Sale

Mills have to complete sale and despatch of 100% of the such sugar released by the government on monthly basis and within stipulated period, so prescribed.

Also in order to reduce speculation and ensure supplies in market, mills are bound to sell the quota evenly in two fortnights of the month i.e. 50:50. However, the only relaxation is that mills can sell upto minimum 47.5% in a fortnight and a maximum of 52.5%.

Failure can lead to prosecution under the sugar control order and such quantity can be converted in levy sugar. Thus mills are forced and have to comply with this requirement. This is one singular factor which determines the price of sugar in market (not consumer).

 

Authorisation for Sale

Such sugar can only be sold to government approved licenced wholesaler only and to actual users who have a storage/dealing license.

Further these wholesalers have to sell only to retailers but can sell to another wholesaler only once. The wholesalers also have to sell such sugar within 15 days of receipt - on first in first out basis (earlier this was 7 days).

The institutional bulk consumers, in order to meet their requirement and to buy at the best prices are also required to have a wholesaler license. (Any person/user can store sugar upto 900 kg without license).

There is no restriction in movement of sugar from one state to another.

 

Customer Base

  • House Hold Users: 900 Million
  • Retailers selling sugar: 300,000
  • Licensed wholesalers: 70,000
  • Establishments: 800,000

 

Trade Channel

Thus driven by statutory requirements most trade from the mills is to licensed wholesalers - who in turn service retailers for the household customers and endusers for institutional demand.

Moreover, with such a large customer base spread all over the country, neither it is possible for the individual mill to access them, nor service. Thus trade is an important link in the supply chain.

In order to make sure of commitments/transactions and collection of sales proceeds a system of indent and order collecting agent got developed over a period of time in most states. These agents are appointed by the mills whose role is:

  • To book order from wholesalers.
  • Place such orders and delivery instructions on mills
  • Arrange deliveries from mills to the wholesalers.
  • Collect payment from the wholesalers
  • Pass on sales proceeds to the mills

The mills for the above service pay a consideration by way of commission (0.5 to 0.75%).

The secondary sale is transacted through brokers. Such brokers bring the wholesalers and the retailers in contact for the ultimate sale and charge a free (upto 0.25%)

The retails either pick up the sugar or the wholesaler makes the delivery to the retailer at a cost.

 

Segmentation - Consumer base (Typical)

The distribution/segmentation of the Sugar is

000 MT

%

PDS

4400

33

Free Market

9100

67

Total

13500

100

 

The distribution of the free market segment is

Institutional

7100

78

Household

2000

22

Total Household

6400

48

 

Thus almost 52% or say half of the sugar produced goes in for indirect consumption i.e. institutional segment.

- Large Buyers such as:

000 MT

%

* Soft drinks bottlers

300

4.23

* Biscuit manufacturer

600

8.46

* Food products

50

0.70

* Confectionery

200

2.81

* Pharmaceuticals

50

0.70

* Hotel/restaurants

100

1.40

* Sweet meat

5800

81.70

Total

7100

100.00

 

Segmentation - regional

The product quality in different sates is based on customer preferences/cane quality/processing capabilities etc. also driven by local sugar availability.

 

Sugar market - major trading centres

Sugar is allowed to move freely through the country. Apart from local price, cross movement shift in different states from neighbouring states taken place due to transportation costs and local prices, the differentials got determined basis delivered cost in consuming centres.

Major Trading centres are Mumbai Ludhiana Kolhapur
Calcutta Vijaywada Chennai
Delhi Ahmedabad

 

Sugar Price

Determined by demand/supply gap in each state and cross movement from surplus to deficit states. Each state has developed preferences of colour/grain size etc/

Primarily sale is on Ex.Mill basis and free market price is more trade driven then customer driven as almost 100% sugar is marketed through trade and mills have to sell the sugar to fulfill statutory obligation - thus demand is actually created by Trade.

While sugar price at mill level and wholesale level fluctuate, within 5 to 6%, retial price moves only upwards.

Also sugar price entirely depends upon Govt. fix on price. Sugar prices had been kept artificially low both for fee sale as well as PDS

  • Have not followed cane prices
  • Have been far behind compared to other commodities
  • There is no relation to International prices.
  • Indian sugar average price at 17.0 c/lb is perhaps lowest all over the world (Ref Annexure XIV)

 

INTERNATIONAL TRADE

India has always been in the International market either for imports or exports. In last 15 years, India imported 6.596 Mn. T sugar and exported 4.496 MnT. Imports have outweighed exports. The volume of exports and imports are based on suplus or shortfall anticipated or determined between demand and supply.

It is likely due to inconsistent policy, delayed action, monopolization etc. the imports and exports may have not been most efficiently handled and India may have paid high price for imports and perhaps didn’t get best price for its exports.

 

Policy on international trade

The International Trade in India has generally been highly regulated both in terms of authorisation as well as volume. There has been a dramatic change since 1991. With the wave of economic reforms and Liberalisation Policy, even essential commodities like edible oils and sugar also got freedom/relaxation in imports/exports. While imports of sugar were put under OGL, exports got decanalised.

 

Imports

In last 3 decades. First import was in 1979-80 and the imports unitl 1993 were canalised through Government agencies such as

* State Trading Corporation of India.

* Food Corporation of India.

  • Govt., under advise of the Food Ministry, would access the shortfall and give a directive for import.
  • In 1993-94, anticipating a heavy shortfall of over 2 MnT, Govt. allowed free imports under open general license. Almost half of imports were private. Today imports are freely allowed.

 

Exports

India entered the world market as an exporter in the year 1957 and has exported sugar all along. The quantity has been as low as 20000 MT in the year 84-85 to as high as 1.02 MnT in the year in 1995-96. The exports have never been an economic proposition due to dual sugar pricing policy which makes the free market prices high.

Thus to boost exports Govt. enforced an act in 1958, called as Sugar Export Promotion Act. The very purpose of the Act, as the title suggest, was to boost exports. Salient Features were:

The exports were canalised through two canalising agencies:

- State Trading Corpn. of India (STC)

- Indian Sugar General Import Export Corpn. (ISGIEC)

These agencies will procure sugar from the mills willing to supply the sugar, otherwise, as per act. all mills were obliged to supply for export.

The profit and loss so achieved on the exports would be shared amongst all the mills on the apportioned quantity.

 

Impact of decanalisation of exports

How much sugar will be exported - the decision rested with the Central Government i.e. it will announce how much sugar can be exported. The monitoring agency will then issue public notice on the system which broadly is:

- Exporter to have registration with APEEDA.

- Exporter enters into an agreement with a buyer in another country and then applies to APEEDA for export registration certificate with following:

- Bank certified original contract

- Copy of the letter of credit.

- Registration fee.

- Non performance bank guarantee of 5% of contract value (to be encashed in the event of export not taking place in time).

- In case of merchant exporter, consent letter of the mill supplying sugar.

The procedure was simple, it was on two counts that export didn’t get a boost.

One Fear of 5% Bank guarantee encashment.

Two Export not profitable.

India could still export upto 0.5 MnTons was a matter of chance that Pakistan’s demand came and India got advantage of low freights. 80% of the exports were to Pakistan. In long run, the policy of decanalisation is a non starter, under the dual sugar pricing policy because domestic price of free sugar is high. International price will determine the economics. The contribution is negative. The loss will be solely be borne by the exporter (earlier it was shared by the entire industry).

 

ISSUES RELATING INDIAN SUGAR INDUSTRY

Profitablity of sugar business

The Reserve Bank of India’s study, in respect of select Industries, has indicated that gross profit in sugar industry has been lowest at 9%. The post-tax profit has been significantly lower. Risk free Investment give an yield of 15%.

The study conducted by industries association of the sugar industry, for listed companies covering 15 year’s performance has revealed that:

  • It incurred losses in 9 out of 15 years.
  • Over 50% of units incurred losses.
  • Gross profit over capital employed has been as low as 1.2% and never crossed 12%.
  • Even the best mills could not pay dividend over 10%

Therefore, the key issue is to develop strategy and a consistent policy which will help the sugar industry and sugar production to grow. To see a growing Trend line is not good enough.

 

Sugar mills capacity

The Government has been issuing licenses based on its planned requirement of sugar and also the gestation period which could be upto 3 years. There has been delays in conversion of license into Installed capacities due to:

Investors delaying the investments because of declining profitability during the period.

Financial institutions not coming up for committing finances in companies with sugar as a core-business.

Some basic issues leading to poor health of sugar industry remain unaddressed - the licensing policies have been modified to attract investments by way of incentive i.e. New sugar mills will be allowed to market upto 100% of its production in free sale (against 60% from existing units) for a certain period.

There lies the catch - while the new units come up, some old units become sick and close and may decide to set up another new mills. Thus effectively there was no substantial increase in capacity but more free sale sugar in market - i.e. Lower prices or delayed release for old mills at the expense of new mills.

The government, on the advice of Committee of Members of Parliament, scrapped the incentive schemes effective 31st March 94 and all new licenses (over 50) were to be without any Incentives/Sops.

But it was not be - sugar is the only industry where only one thing is certain that policy can not be certain. Despite with good production in 1994-95 and 1995-96 and capacity utilization of 110% and 125% at installed capacity of 12.4 MnT with another 1 MnTon in pipeline, under some pressure. Government again announced an inventive scheme with retrospective effect i.e. covering all licenses issued after 31st March, 1994 which earlier did not have provision for such incentive. Under this scheme-

CAPACITIES

INCENTIVES

High recovery Others
New Mills: 1750 TCD Back ward 100% Free 100% Free Sale
area 2500 TCD Normal 5 years 8 years
area
Expansion: Upto 2500 TCD 85% Free Sale 100% Free Sale
2500 to 5000 TCD 80% Free Sale 90% Free Sale
(Quantities subject to some ceilings) (For 5 years on additional production)

 

All such capacities either from new units or expansions have to come by October 1999 to avail such incentives. There is a need to address to the basic issue whether we need horizontal growth. To achieve economy of sale, to be competitive, per unit capacity must grow vertically to target average capacity of 3500 TCD which today is no more than 2150 TCD. The licensing issue must be addressed accordingly.

  • Expansion only to be allowed
  • New capacity only in cane surplus regions
  • Minimum capacity not less than 5000 TCD

 

Policy towards traditional sweeteners

The role of traditional sweeteners has been dealt with in details. There the issue is not to do away with this segment. It can’t even be suggested since these have been there and their are consumers for these products particularly gur.

The consumption pattern has already gone through a shift i.e. conversion towards sugar. During 1960 to 1980 sugar at 4.8 Kg. represented 25% of all sweeteners at 20 Kg. Sugar has gone up from 4.8 Kg. to 13 kg and gur and khandsari per capital has come down from 15 kg to litle over 10 kg and we see it going down further to 9 kg where it will stabilise.

While gur has a demand of its own in the rural population base - there is no justification in allowing gur to be diverted to manufacture illicit liquor. (What a pity to use a product what sugar by product - molasses can do)

Khandsari production recovers 4% less sugar and produces 4% extra molasses - what a waste of valuable resources of cane again.

There is need:

To remove control on sugar or bring gur and khandsari under similar controls.

To have uniform taxes/duties for all sweeteners.

To impose ban on further capacities in gur/khandasri sector and to be covered by licensing.

To have common cane price and not more than the price fixed by Government.

Once all sweeteners are governed by the same regulations/controls we see these two sectors stabilishing on the strengths of its own. Net impact will be no more fear of diversion of sugar cane. The efficient segment will survive and will benefit all segments the farmer, the consumer and the producer.

 

Sugar cane pricing

It was almost two decadeds ago when the committee comprising of cane growers, sugar mills, co-operative decided the cane price to be determined basis minimum statutory price. Plus 50% sharing of profit. This is also in line with International practice where sugarcane price is related to sugar sales realisation.

But in actual practice only few states like Maharashtra, Gujarat, Karnataka have followed this agreement. In other states, the respective government’s fix the price for political gains. Here the Central Govt. has to act firmly once for all, that cane price will be as per the provision of the sugar control order.

There may be a need to relook, if necessary, in order to maintain a growth rate of 3 to 4% in sugar cane production. The farmer in India has options. If he shifted from wheat/paddy to sugar cane or oil seeds - he can always go back.

Sugar cane price for farmer is a sensitive issue. It has to be such that the return/hectare of his land, is well placed compared to wheat/paddy etc. Wheat procurement price in 96-97 have been increased by 35% (From Rs. 3800/ton to Rs. 4750/ton equivalent to US$ 106 to US$ 132/MT). Have free sugar price have support price for cane.

 

Estimate of production

Apart from the various issues which we need to address, is tasks of managing inventory well. With latest communication systems/information systems/techniques available what we got to set right is the system of Forecasting/availability. We know the carry forward stock, demand is reasonably known, we got to have a realistic estimate of sugar production.

This is one single factor where we have gone wrong time and again. If the estimates and actuals can be off by as much as 15%. Decision making becomes difficult. Take a look at last few years.

Some of the reasons are:

  • Lack of scientific/organised base thus lack of correct information in the first place.
  • Vested interest - may be to get better prices in domestic prices or to increase exports.
  • Incorrect assessment on variation in yield/recovery
  • Delay in correction/revision of estimate due to sudden change in weather conditions or other un-foreseen factors.
  • No structured information system to assess usage of sugar cane by gur/khandari units - the so called "Cane Diversion Phenomenon."

The industry/Govt/co-operative’s body should be constituted and have scientific assessment.

 

Management of surpluses/deficits

Over last five years, we have witnessed a closing stock of the season of as low as 1.224 MnT in October, 1989 equivalent 1.5 month’s consumption to as high as 7.95 MnT in October, 1996 equivalent to 7.5 month’s (or 60%) consumption. The standard norm in India is 2.5 months or 20% of consumption (2.8 MnT) i.e. excess inventory of 4.7 MnT at the end of 1996. The impact of this has been:

Blockage of excess Inventory of over Rs. 5000 crores. (US $ 1680 Mn)

Yearly impact: Rs. 1200 crores (US $ 335 Mn)

Damage of stocks

Low prices of sugar in domestic market

Delay in payment to farmer - forcing him to shift to other crops.

Drop in Production in next year

The inventory can be used to its advantage. The carrying cost provides the flexibility.

The advantages:

Carrying cost goes down thus low total cost.

Increased liquidity to pay the farmer.

Regular presence in International market.

 

Deregulation liberalisation

Delicensing

With 448 sugar mills in existence and an other 100 in pipeline, this aspect should be examined. The policy should be to:

Encourage new capacity with development of cane responsibility. Min. capacity 5000 TCD.

Expand vertically to achieve economy of scale.

New capacities in surplus cane areas. Minimum distance norm should stay and distance be flexible between 25 to 40 kms. 15 kms distance could make some sugar mills unviable.

Incentives if any, to be in the form of reduced excise duty etc. - not of high free sale quota.

 

Capative Farming to Improve Yield/Recovery

Low or stagnant recovery of sugar from sugar cane is an issue which has not been dealt with at national level. Over last 10 years, while the yield has gone up by 24.5% i.e. from 57 MT/Ha to 71 MT/Ha, the average recovery has been fluctuating between 10.3% to 9.9% it has been lower in the year of high cane production. Some reasons.

  • Staling of cane (Min. 12 hrs to as high as 8/10 days).
  • Unplanned harvesting
  • Cane lodging.

Government should encourage captive farming. Sugar mills will take more interest in cane development, newer varieties, tissue culture, sophisticated farming/crop treatment techniques/planned harvesting etc. Impact will be higher yield. Better recovery.

Inprovement of 0.1% recovery would yield 0.15 MnT of sugar.

 

Decontrol/Doing away with a dual pricing

There have been three options such as full control, partial decontrol and complete decontrol. Over past 4 decades - all have been experimented with two/three times. But almost for three decades now, since 1967-68, except for a brief spells of decontrol/control in between 25.5.71 to 30.6.72 and 16.8.78 to 17.12.79 partial decontrol has been in existence. In this policy a certain portion of sugar has to be supplied at Government fixed price called levy and balance can be sold in free market.

The ratio of levy to free has changed over a period of time from 35:65 to 60:40 (1992-93).

Decontrol has not been successful in the past. In 30 years, it did not work for 30 months. Why risk again - the industry view is divided while some section is for decontrol and the cooperatives/Federation against.

 

Why control and what to do

  • In free market economy where is the need of control - cement. steel, vegetable oils, fertilizer have been decontrolled. This resulted in better quality, availability, improved performance of the sector.
  • Dual pricing to be done away with. It should be free market pricing of 100% sugar.
  • However, in order not to allow the policy to fail as in the past, quantity should be fixed by month.
  • Mills could be given flexibility of selling upto 10% more or less to be adjusted in next month.
  • The monthly quantity should be worked out basis expected demand and to maintain prices within a range.
  • Regulatory mechanism for monthly quantity should stay. This is a must to stabilise domestic prices and unauthorised pumping of stock by mills once flexibility has been provided.
  • Domestic prices will make exports viable.
  • Sugar, for Public Distribution System, will be procured by the Govt. agencies in free market or Imports for distribution at the price it wants.
  • To guard against violent fluctuation in prices, futures trading in sugar to be allowed
  • In domestic market for domestic sugar.
  • At London and New York exchange for international trade.
  • Use of futures market should be seriously and expeditiously considered even in partial decontrol policy.
  • Sugar cane prices should be based on support price, concept basis cost and comparable return/hectare of land.

 

Packaging

Industry should be left free what it does for packaging. It could be 1 kg to 5 kg for Household consumers, 10kg to 25kg for small institutional consumers and 50 kg for bulk users, 100 kg packing should be banned under the ILO convension.

 

By-Products

Molasses, molasses base products should be de-regulated. The price to be determined by the free market forces. Trading and interstate movements should be freely allowed.

 

Regulations

There is need to look at all the controls/legislations. Regulations, acts. etc. at the Central Government level and the State level. The process need to be simplified - multiple regulatory bodies to be replaced by single body. The list of compliance should be by exceptions. Producers/traders etc. need to be told what they can’t do.

 

International trade (imports-exports)

The Sugar policy has to have a provision for import and export of sugar. Amongst largest producer of sugar, India is the only country where it has a large consumer base, therefore, its exim policy has to keep this in mind.

Ideally the imports and exports have to balance the gap and surplus situations and to sustain and to maintain reasonable price level of sugar.

Since 1980, total Imports have been 6.6 MnT against total export at 4.50 MnT though India has been an exporter all through out. Thus India could be in the international Trade for both import and export depending upon its domestic production which with stable inventory could keep domestic prices at a reasonable level to boost production. What it means is export more at a time of high physical stock and cover through futures import with option of delivery in the event of subsequent lower production, if any, i.e. maintain floating inventory.

Who should import and who should export is an issue to which there can not be a straight answer because of complexity of Indian agricultural and sugar business dynamics.

Under the liberalised economy to suggest control may look conservative, but at the same time, the imports and exports of sugar are needed with following objective:

To maintain domestic sugar prices with in a band.

Thus maintain certain minimum inventory and monthly plan of import/exports.

And encash opportunities in the international market.

Under free pricing, sugar exports could be deregulated. But India with such large consumer base can not afford total freedom on volumes. Some regulatory - quantitative or tariff are necessary to maintain adequate availability.

 

Sugar industry body

The issue or organisations needs to be debated between industry and Government to set up a responsible and responsive organisation. Logically with such a large base of 448 sugar mills, an effective centralised agency should take this responsibility.

The sugar industry associations could play more responsible role like Austrailia. South Africa etc. Then only they could achieve stablilished policy for sugar business.

There is a need of coordinated and concerted effort for appreciation and consolidation of the needs of the consumer. farmer, processor and to address to various above issues if India has to attain the glory of self sufficiency and attain the status of net exporter and an important significant player in the international market.

 

COMPARATIVE ADVANTAGE- INDIAN SUGAR

Here we address some of the factors which give India an advantage in the international market, in comparison to other sugar producing countries. We will also dwell on some issues which place India in a disadvantageous situation. Broadly advantages and disadvantages are summarized as under:

ATTRIBUTE

ADVANTAGE

DISADVANTAGE

Product Plantation White Sugar Less flexibility for exports as cannot offer Raw Sugar
Quality 45 to 200 / ICUMSA Over Brazil Over EEC and can’t compete with refined sugar.
Sugar Policy High regulated and controlled and politicized.
Sugar Cane price 63% of Av Sugar Price With assured price farmer does not bother about quality and delivery
Sugar Prodn. 70 Mt Ha Compares well with major producers
Sucrose content 12.00% Low against 12.5% in thailand. US-but far behind Austrialia, Brazil
Sugar recovery 82.50% Next only to Australia 90.0%
Economy of scale 2000 TCD Low compared to other countries.
Factory Production
costs Less competitive compared to Thailand, Austrialia
Cane Farming/ Harvesting Manual Av Farm Holding 1.57 Ha No control on cane quality, cane procurement due to low land holdings.
Cane Utilisation Traditional sweetener segment. Free from controls.
Fobbing Costs 6.5% of Ex. Mill Cost Compares well with major sugar exporters even with Port berthing delays
Export market Natural markets Natural markets of Srilanka Pakistan, Bangladesh, Nepal, Indonesai, Gulf Exports are opportunity based due to dual pricing policy.
Price Hedging Mechanism Trading on Futures All imports and exports open to market risks.
  • India produces only plantation white sugar while most countries produces. Refined or raw sugar or both.
  • Traditionally India has not produced raw sugar as it does not have a market locally and it would cost 30$/MT to convert into white sugar making it uneconomical.
  • This puts India in somewhat disadvantageous position. If opportunity arises, can not offer
  • Raw sugar
  • Also Indian sugar has to compete with world’s refined sugar.
  • At the same time, produces granular sugar which has a market in Pakistan, Bangladesh, Indonesia.

 

Sugar policy

The dual policy of sugar pricing, keeps the free market price artificially high thus export is not economically viable most of the time. The difference over average price, in case it was free pricing, could be Rs. 1350/MT (US $ 35 to 40). The export policy is not consistent resulting into restricted exports even when there is an opportunity - In fact non compliance penalty of 5% export value has become a disincentive. Indian farmer gets 62% of sugar price as cane price - compares with 50% in Pakistan, 68% in Brazil. However, cane price is not linked to sugar sales realisation nor it is linked to cane quality leading to low recoveries.

 

Productivity

India has improved its productivity considerably over a period of past two decades and compares well with major cane sugar producers (Annexure II and XV). However, the improvement has only been on yield of sugar cane per hectare which has gone up from 58 in the year 1984-85 to 71 in the year 1995-96. At this level of average 70 MT per hectare, it compares well with other sugar producing countries. However, within the country it is as low as 46 in the state of Bihar and as high as 113 in the state of Tamil Nadu. There is a scope of improvement in some states like UP, Bihar, Punjab, Haryana, Andhra Pradesh with average touching 75 MT. (Dealt in Chapter on cane production).

The sucrose content averages 12% which is not good as compared to Brazil/Austrialia. With better farming practices and favourable climate, it could improve to 12.5%. Sugar production as percentage of cane has been ranging between 9.3 to 10.3%. Here also 1% improvement is achievable.

There is substantial scope of improvement in productivity both in terms of yield as well as sugar contents and recovery by adopting better harvesting practices and close coordination of sugar mills with farmers. It has been estimated that better farming and harvesting practices could result upto 1.0% improvement in extraction which can lead to 10% increase in production.

The comparison with other sugar producing countries is as under:

COUNTRY

Recovered sucrose production per hectare (MnT)

Av. Cane sucrose content (%)

Av. Sucrose recovery rate (%)

Austrailia

10.5

15

90

Brazil

5.5

13.5

76

Cuba

5

12.5

82.5

India

6.5

12

82.5

Mexico

6.5

12

78

South Africa

7.5

13

85

Thailand

5

12.5

80

U.S.

8

12.5

82.5

 

Cost of production

While there is not much information with respect to cost of production of other countries, on the basis of information available through a paper presented at an international conference, India is a low cost producer but because of lateral capacity expansion, with average capacity of 2000 TCD, can not reap the benefit of economy of scale. Same is true in farming sector where land holding is mere 1.57 Ha.

But there is a scope of improvement in sugar content and recovery which can bring the cost down by as much as $25/MT.

 

Sugar stocks

The biggest burden on the Indian Sugar Industry is the inventory carrying cost. The average period for which the sugar remains with mills in 8 months and the time it takes to finish previous season’s stock can be as much as 18 months. The Govt. has created a buffer stock of 1 MnT for one year - cost will be $60/MT plus blocking $ 335 Mn worth of foreign exchange. Thus $ 60/MT is net flexibility for export. The opportunity gets missed year after year because of too-cautious approach.

 

Export markets

India has a distinct advantage of its geographical location. It is land locked with neighbouring countries like Pakistan, Nepal, Bangladesh and Bhutan. Also Sri Lanka is the nearest country by Southern India. All these countries (except Pakistan who like India is exporter/importer depending upon its consumption) are regular importers of sugar. Besides some Gulf countries as well as Indonesia have a market for Indian granular sugar. India is most competitive for Pakistan, Bangladesh, Srilanka and Nepal.

Indian Sugar will have $ 30/MT freight advantage over Brazil, 15$ over Thailand, Besides Indian sugar should command premium over Brazilian sugar.

 

Fobbing costs

While infrastructure bottlenecks do exist but if the export is planned on regular basis and planned well, it could be well organised effectively. Indian FOBing costs from Coastal factories and distant factories are as under:

   

Unit: Rs./MT

Head

Coastal Mills

Distant Mills

Transportation

300

1000

Godowning

50

50

Insurance

25

25

Handling expenses

100

100

Clearing/Forwarding

50

50

Demurrage

150

150

Total Rs./MT

675

1375

US$MT

19

38

% of Ex. Mill costs

6.5

13

Average Ex. Mill Cost: Rs. 10500/MT

 

Recently loading rates upto 3000 MT/day have been achieved by way of sharing the advantages with the port labour.

 

 The FOBing costs in India, for coastal Mills, as percentage of Ex. Mill cost compares well with other countries.

Country

FOBing Costs %

Ex. Mills Cost of Production

India - Coastal

6.5%

- Distant

13.0%

Austrailia

3.0%

Thailand

7.0%

Cuba

8.0%

France

9.0%

Brazil

20.0%

South Africa

11.5%

 

SUMMARY

  • India is one of the largest producer of sugar in the world and so also the consumer. Can manage its inventory to its advantage by rotating the same through imports and exports.
  • Agriculture growth pegged at 3.5% - sugar cane has to compete and compete on its own.
  • There exists a potential in terms of increase in productivity, extraction and production.
  • Like in the past planners/policy makers/farmers producers - should get together to form a policy also acceptable to politicians.
  • Optimistion of sugar mill capacity - vertical growth need of the day.
  • Pricing
  • Decontrol may not be the answer - at the same time dual pricing policy has to go to provide level playing field for all sweeteners.
  • Govt. can procure sugar from market and subsidies in case, it is a must for PDS.
  • For the good of consumer, farmer and the mills sugar price should move in a band, meaning monthly inflow to market to be regulated by Government.
  • Balanced export/import policy.
  • Mills and farmers to work together to improve yield and extraction through better harvesting.
  • To become internationally competitive - i.e. cost effective and quality producer.
  • To be ready for free marketing i.e. to hedge on futures.
  • With consistent policy and competitiveness India can be a regular player in the international market.