Sugar cos have to pay much more than fair price: Experts

The sugar space has been in the spotlight recently. With the Fair and Remunerative Price, or FRP norms coming in last week, there was an agitation by the farmers in Uttar Pradesh, and there has also been a ban on imports temporarily. Consequently, the sector has been buzzing as we go into the all-important crushing season starting November 15.

In an interview with CNBC-TV18, SL Jain, Former Director General of ISMA & CS Nopani, MD of Oudh Sugar Mills, gave clarity on the FRP norms and a general outlook for the sugar industry.


Here is a verbatim transcript:

Q: Has there been absolute clarity that has been reached on FRP norms right now or is there still bit of uncertainty. Is it absolutely going to be 20%, the difference between the State Advised Price (SAP) and FRP will be paid by the state government and then there is amount above because currently cane prices are anywhere between Rs 180-190?

Jain: I agree with you. As a matter of fact the economics is something different than the prices that the government announced year after year. The FRP is about Rs 130 but as I can see the market, the way the sugar prices are perhaps the actual price paid to the farmers will have to be higher than this price. That should be prospected as a remunerative and competitive price.

So in my view probably the millers will have to pay a much higher price than the FRP, which has been announced. In fact FRP is a first step over Statutory Minimum Price (SMP). But in actual possibility the price has to be competitive. The farmers have got three options, gur fellows, khandsari fellows as well as the sugar industry. So a competitive price will have to be paid.

Therefore, I think that the actual price that will have to be paid will be definitely higher than the FRP announced by the Government of India.

Q: Would you say that the calculation of the FRP itself merits a recalculation or rethinking, or do you think that this is one of those unusual sugar years which happens in once in three –four years when sugarcane supply is way too short compared to say a three year average and maybe the FRP will perhaps work better in the coming years when sugarcane shortage will not be so acute?

Nopani: I think I would tend to agree that as far as FRP is concerned, this is the first year which they have come out with it. We really haven’t seen the detailed calculations of how they have determined it. But the fact is that at the end of the day the current year is an exceptional year where you have a large imbalance between both demand and supply of sugar.

At this stage I think it is only correct that the sugar millers or the sugar industry were to share a portion of the higher sugar prices with the farmers. So, definitely I would tend to agree that we would definitely be seeing a higher price than FRP being paid to the farmers.

What my understanding is that the FRP does give the farmer his cost of production, plus a minimum return. And that is a kind of assured price as far as the farmer is concerned. As compared to calculations, if one were to get a higher sugar price realisation or a better thing then it is only natural that the farmer and the industry were to share that rather than it being retained by any one party altogether.

Q: Your comments as well on the same question. Are you satisfied with the way the FRP has been calculated? You said it is a welcome first step, or do you think the FRP itself should be more dynamic and should take into consideration the real market price in some fashion say a six-month average? Would you want the FRP itself to be rethought?

Jain: Even though I am not privy to all the detailed calculations that have been made but the whole idea was to make it a much better price than hitherto as SMP. What has happened is the production of sugarcane has been continuously declining because it has not been able to stand competition with the other alternate crops.
Now FRP is definitely a step in the right direction. At the moment, as has already been mentioned there is a shortage and in the shortage phenomenon naturally there has to be competition between the three producers. In fact it may be even among the neighbouring sugar factories as well.

Therefore, it is a very isolated kind of a situation. But over a long-term period I think this is a very good statement that the government has done, that FRP, and therefore that will bring about stability over a long period.

Q: I believe currently you pay your cheque to the cooperative society pretty much, which is the SAP amount and the premium on top of that is pretty much being paid in cash. Some issue that will come up for debate possibly in the next couple of weeks is adding that premium in the official cheque amount. But I believe there are some concerns on the fact that then even though the cycle may turn in the next couple of years, your SAP base price maybe set a lot higher. Is that a concern point you share?

Nopani: I am not aware of any payment being done by cheque to them and then a premium being paid. Till last year – the procedure is like this – the State government was announcing an SAP or when the matter was in the court and the court was determining a price, that price was paid to the society and then the society would distribute that to the farmers.

Even in the years when SMP was prevalent; when the high court had stayed the SAP, and SMP was to be paid, the SMP amount was paid to the society plus in case any kind of incentive was given by the industry to the farmers for higher cane plantation or for transportation or whatever then that was also paid to the society and that was then transferred to the farmers.

I do not see any change in that situation coming around. Even if this year, suppose the industry was paying a higher price at FRP, then the industry would pay that amount to the society, whatever be that amount maybe Rs 150-160-170, and then the society would then pay that to the farmers.

So, fundamentally it is the factory, which makes agreement with the society and then the society conveys that to all the farmers.

Q: How do you think the impasse in UP will work out from hereon, the protest by the farmers, their opposition to the fact that they don’t want to sell to the nearest miller as well their protest against imported sugar. How will all this work out and what impact does it have on sugar mills and their financials?

Jain: Farmers always want to have the highest price that could be possible. But one has to look into the environment and the entire gamut of the sugar economy. In that kind of a scenario one will have to take a balanced view, as that’s the job of the government, they have fixed up a price.

Yes, in the current situation which is quite unusual normally, we may have to increase the sugarcane prices now. But I would like to reiterate that the FRP situation which has now come about on a very long-term basis will really help this industry also to survive because India doesn’t have enough land here to keep on increasing. After all consumption is increasing; we are consuming 22.5 million tonnes of sugar.

And for that you need greater landmass than what we are using for sugarcane because all the competing crops are here.

In fact on a longer-term basis one will have to see which are the crops that India can grow to the extent of the requirement, and some of those crops or those commodities may have to be imported as is happening even today.

Q: We are coming across crushing season now. Do you think it will function pretty smoothly despite all the agitations in UP? The shortfall of sugarcane that has been talked out, how is it going to affect a company like yours in terms of your cogeneration capacity and output?

Nopani: As far as the coming season is concerned, now the factories in UP have started operations. We are expecting that some factories would start crushing operations some time later during this week and hopefully before the end of this month most of the factories should come in as far as production is concerned in full production.

As far as the coming season is concerned, again this season we are expecting it to be tight as far as sugarcane supply is concerned. Overall the estimation is that there might be a marginal increase in production figures from last year to this year atleast by another 10-12%. So, from that angle atleast we are seeing there is going to be an improvement as far as sugar production is concerned.

As far as by-products is concerned, like you mentioned cogeneration and even molasses, they are going to be in short supply this year and that means that the cost of the raw materials are going to be high. So it would not help the by-products this year but then that is part of the sugar industry. When sugar does well the by-products are down and when sugar is down by-products do well. So it is like a de-risking of the business.

Q: The kind of range you see for sugar prices this year considering the acute shortage and the continued agitation against imported sugar. Sugar and sugarcane invariably move in a three year cycle and we seem to have seen the peak of sugarcane shortage this year. Do you think therefore sugar year FY10 would be a much better sugar year?

Jain: I entirely agree with it. It is definitely going to be better than last year. But at the same time one will also have to reckon with the fact that even next year we may not be able to fully recover our requirements. There is going to be some deficit and that will have to be made up by way of imports.

But overall, if I take a view, my own view is that probably with a limited landmass and so much of requirement for different crops including food crops, food is the first priority then comes the other crops, therefore the tightness will continue in future irrespective, because the demand is growing and land mass is not increasing. That is the situation which we are in.

Q: Do you think it is the right time for a bit of consolidation in sugar industry. You heard a fair bit of market talk off late with two of the biggest boys in the UP?

Jain: Consolidation is a very important factor for doing the business. I must say that private sector of the industry has done very well. It has not only done sugar, it has gone to cogeneration, gone into ethanol. Huge investments have been made. As a matter of fact because of these investments and without there being enough raw material for the by-product because the product itself is not so much. Therefore definitely sugar industry is passing through some kind of problem.

Q: Do you smell the two big sugar companies are going to merge. Do you smell that big merger which people are talking about is on the anvil?

Jain: I personally don’t think so. I do not think so. But I am not in a position to give you any reasons.

source: moneycontrol