Sugar industry facing shortage on low acreage, poor recovery

The sugar industry has moved from a situation of glut to one of shortage within a period of just six months, thanks to lower sugarcane acreage and poor recovery rates. This has caused a sharp price rise of 35-40 per cent, and the outlook remains firm.

In fact, retail sugar prices have jumped by 35-40 per cent on an average since October 2008 to Rs 25-26 a kg. Interestingly, the price-rise comes at a time when prices of most commodities – industrial and agricultural – are under severe pressure due to economic recession. The industry, which has just emerged from two particularly bad seasons, says the current realisation (Rs 2,100-2,200 ex-factory in Uttar Pradesh) is still below production cost. Sugar season runs from October to September.

“There is a shortage, but today’s production cost is not being met by the realisation. Sugarcane cost is high and recovery is down by 1 per cent. The industry is still in the red. If prices decline from here, the industry will be unable to make payments to farmers and next year’s sugarcane crop will be affected,” said S L Jain, director general of the Indian Sugar Mills Association (ISMA).

One should also not forget that the government had provided an interest-free loan of Rs 4,000 crore to the industry to make payments to the farmers. From next fiscal onwards, the industry will have to repay Rs 1,000 crore to the government to clear this loan over a four-year period,” he added.

According to ISMA, sugar output in the October-February 15 period of the current season is 11.6 million tonnes, down 19.44 per cent from the corresponding production period in the previous year.

The government has made a downward revision in the season’s total production from 22 million tonnes at the start of the season to 16.5 million tonnes, a revision of 25 per cent. Jain, however, expects output to remain within 16 million tonnes.

The year of shortage follows two consecutive seasons of record output. During the two previous season (2006-07 and 2007-08), sugar mills across the country had piled up arrears to the tune of a few thousand crore rupees since realisations had crashed. Owing to staggered payments by mills, sugarcane acreage declined by over 25 per cent this year as farmers shifted to better paying crops, like paddy and oilseeds.

The price-rise has prompted the government to take decisions like relaxing raw sugar import norms and imposition of stock-holding limits on sugar. Freight assistance on export was also withdrawn. However, no visible impact has been made so far.

Sugar has a weight of 3.62 per cent in the wholesale price index (WPI) – that’s more than cement (1.73 per cent) and wheat (1.38 per cent), and just lower than iron and steel’s combined weightage of 3.64 per cent. This is the reason that the government pays close attention to any price-rise in sugar.

source: BS