Why sugar is no longer a cyclical activity
According to Vivek Saraogi, Managing Director of Balrampur Chini Mills, India’s sugar sector is no longer a cyclical business, with its fortunes tied to trends in sugar production and supply. His observation is telling for a sector long viewed as a cyclical game by investors and indicates gradual structural change.
“I would be surprised if anyone thinks it is still cyclical. There is no cyclicality and I would like you to believe that too,” Saraogi said. CNBC-TV18 Wednesday.
why is it important
The welfare of the sugar sector, an agribusiness, plays a central role in the fortunes of millions of farmers with enormous political and economic ramifications. Remember election season – how cane dues or insolvent sugar companies or sugar inflation become a polling issue and no political party wants bad press.
Sugar was kept as a government-controlled commodity and sold through the Public Distribution System (PDS) in addition to open market stores. To ensure a regular supply to PDS stores, the government allocates a monthly quota to each sugar factory to sell, ensure deliveries and pay farmers.
It operates largely under the “reservation rod and bond area” system. For example, the Ministry of Food is said to have issued a Cabinet note on increasing the fair price of sugar cane by Rs 15/100 kg. The current fair price is Rs 290/100 kg for 2021-22.
The above arrangement, however, reduces the bargaining power of the farmer, while the mills face their own issues such as flexibility in increasing cane supplies, cane quality et al.
Overall, the system is still not considered effective as it still results in pending dues for farmers and challenges for sugar mills, as pointed out by successive committees and experts, including the C Rangarajan Committee .
The world’s largest consumer goes into a surplus
Sugar prices are linked to sugar production and supply from two of the world’s largest producers, Brazil and India. From a consumption perspective, the demand outlook in India is significant as we are the largest consumer with total domestic consumption of around 2.6 crore tonnes 2020-21, according to the economic survey report 2021-22.
The average annual production of sugarcane in India is about 35.5 crore tons which is used to produce about 3 crore tons of sugar, the report adds.
And for the past few years, production has exceeded consumption, which also gives India a surplus to export. But the excess sugar cane production has come with new problems, as mills are required to buy more cane and pay farmers in a stable demand environment.
Ethanol to the rescue
India plans to increase the proportion of ethanol in gasoline to 20% from April 2023, as part of its national biofuel policy – aimed at reducing the country’s dependence on oil imports and to move towards greener fuels. This helps the mills and heralds the fundamental change and, as Saraogi explains, “the government is incentivizing the mills to divert excess cane/sugar to ethanol production.”
“The government says whatever sugar you produce, we’ll take care of it – diversion to ethanol, a good price and a roadmap that says whatever you pick up, we’ll take it. We’ll pay you a higher price if we increase your input cost or if your input cost increases for other reasons.We’ve seen how ethanol prices have changed over time.You get your adjustments based on your input cost. inputs which is FRP (fair and remunerative price) – if it goes up this year, you can be sure that the price of ethanol goes up,” Saraogi added.