Proceed with caution on sugar exports

The issue of fixing the limit for sugar exports during the 2010-11 sugar season (October-September) remains contentious. The sugar industry has been demanding permission to export more sugar on the following grounds: higher sugar production and availability of excess supply in 2010-11; high global sugar prices; low domestic prices and accumulation of cane arrears to farmers.

The opinion within the government is divided. Whereas Ministry of Agriculture is in favour of raising the export limit, Ministry of Food and Consumer Affairs is for a cautious approach in view of the recent experience with high sugar prices, impending festival season and lack of clear understanding of sugar output in 2011-12.

Notwithstanding this, thanks to heavy lobbying by industry, so far the government has granted permission to export 30.61 lakh tonnes (LT) of sugar in the current (2010-11) season.

Yet, the industry continues to demand that further exports be permitted. The latest we hear is that the committee of secretaries on food has recommended additional sugar exports considering the rising trend in global sugar prices.

Two questions emerge in this context from the point of view of domestic consumers: (i) What should be our approach to the demand for additional sugar exports? (ii) Is the government's decision to permit export of 30.61LT of sugar thus far justifiable?
EXPECTED OUTPUT

As per the estimates the current (2010-11) sugar season will end up with an excess supply of somewhere between 78.25 and 83.25LT (see Table). After taking into account 30.61LT of exports already made, the total surplus available as of now is in the range of 47.64 to 52.64LT. To decide on the industry's demand for further exports, we need to have a proper understanding of the expected sugar production and surplus in 2011-12 season.

Very preliminary assessments have pegged sugar output and surplus at 260LT and 40LT respectively in 2011-12. This is based on the expectation of a 5 per cent increase in sugarcane acreage during 2011-12 over the previous season.

The kharif sowing trends up to end-July 2011 report a 2.8 per cent increase in the acreage under sugarcane. Going by historical trends and industry cycle we would expect higher sugar output in 2011-12. Thus, as of now, prospects look good for sugar production in the coming season. Still, it is early to raise the limit for sugar exports by relying on initial assessments and trends on production. The reasons are as follows. First, as is well known, sugarcane crop in India is subject to the unpredictable vagaries of nature. If the optimism on sugar output in 2011-12 fails to materialise, we will be compelled to import sugar in the next sugar season provided we yield to the temptation of exporting the surplus available now.

TOO EARLY TO RAISE LIMIT

Forecasts suggest that international sugar prices will remain high over the next one year due to downgrade of Brazil crop for 2011-12 and rising cost of production. Thus, in case of a domestic shortage in the near future, sugar will have to be sourced from the international market at higher cost thereby escalating domestic sugar prices a la 2008-09 and 2009-10 seasons.

Second, compared to the recent past, the excess sugar supply available in 2010-11 season is not very large to justify more exports. The surplus available during the previous two seasons (2006-07 and 2007-08) of high sugar exports was 135LT and 153LT respectively against 78.25-83.25 LT expected to be available in 2010-11. Even with a huge surplus, India exported only 25LT and 58LT of sugar respectively in 2006-07 and 2007-08.

Third, one major argument made in favour of higher exports is the need to settle farmers' cane arrears. As per Food Minister's response in the Lok Sabha, as on May 2011, Rs 2,803.01 crore is pending for payment as arrears by the industry to farmers for 2010-11 and previous seasons. A substantial portion (Rs 2,591 crore) of the arrears relates to 2010-11 season.

As realisations from exports are currently much above that from domestic sales, the industry expects to pay the arrears through better export earnings.

However, it is to be noted that since April this year the industry was allowed to export 25LT of sugar at heightened international prices. This would help reduce the arrears. Looking from this angle, exports permitted so far seem justifiable.

For reasons highlighted above, it makes more sense to follow wait and watch approach for deciding on further sugar exports.

DEALING WITH ARREARS

If arrears are still a concern the government can create buffer stocks of sugar under sugar buffer scheme. Under this, the sugar factories are reimbursed the interest, insurance and storage charges for the quantity allocated to them as buffer.

This arrangement not only alleviates the distress of mills and farmers but also protects the consumers from higher sugar prices in case shortage emerges in 2011-12 season.

In this context, it is important to note that the sugar buffer stock of 50LT built during May 2007 to July 2008 played a valuable role in augmenting domestic sugar supply in 2008-09, the year of shortage, in the form of carryover stocks.

The main drawback of the buffer scheme is the subsidy burden involved. However, given the current level of sugar surplus (47.64-52.64 LT), the expected subsidy outgo does not seem to be large. For instance, the subsidy incurred on 50LT of sugar stock maintained between May 2007 and July 2008 amounted to Rs 484.07 crore.

source: thehindubusinessline