UP: Cane pricing policy conundrum

The UP sugar industry is passing through its worst financial crisis ever. The depleted cash reserves of many sugar mills including some becoming sick are clear signs of a beleaguered industry. The situation is so grave that rating agencies have downgraded the credit ratings of almost all sugar companies in UP.

Banks are unwilling to extend loans to sugar mills in the State, clearly worried at the continuous losses being incurred by them every year.

The UP sugar industry is finding it extremely difficult to survive to see another sugar season. Already, 66 of the 95 private sugar mills in UP have given ‘suspension notices’ to the State Government that they cannot start their crushing operations in 2014-15 season starting next month.

They have even stopped their factory’s repair and maintenance operations. These 66 mills generally produce 2-3rd of the State’s sugar production and supply 3-4th of the ethanol and cogenerated power. Most farmers will struggle to even find a buyer for their cane.

So, what is the problem and what should be done to resolve it? The main issue plaguing the UP sugar industry is the unrealistic and unreasonably high cane price, announced by the State Government every year with no relation to the revenue realisation of the sugar mills.

The high cane prices are not determined on economic considerations. There is no laid down, transparent criteria to calculate the cane price.

The 70 per cent increase in cane price in UP in the last four years compared with an increase of just about 7-8 per cent in sugar prices during the same period is a proof of the problem. It is not difficult for anyone to guess why the industry has lost money in these years.

A steeply increasing cane price inflates the cost of production, which the mills fail to recover from the sale of sugar. The depressed and non-remunerative ex-mill sugar prices, trading below the cost of production, have only added to their woes. With continuous financial losses, the mills’ paying capacity has now been badly curtailed.

They are unable to pay farmers on time. Cane prices arrears have become a regular phenomenon in UP, with the huge arrears now getting carried forward to the next season. Farmers, especially the small and marginal ones, struggle to meet their daily needs.

There is absolutely no doubt now that the current policy of announcing SAP (State Advised Price), has impacted sugar mills and farmers alike. Cane yields and sugar recoveries have either remained flat or fallen in some areas of Uttar Pradesh.

Rejected varieties of cane, which should have no longer existed, and which give 20-30 per cent less sugar recoveries, are still being grown in a quarter of the cane area in the State. Is the policy doing enough to encourage better varieties? No.

Therefore, if the policy has not helped farmers or the industry, the time has come to adopt a more transparent formula, which would encourage varietal improvement, higher yields, better sucrose formation, etc.

The policy should also ensure enough margins to the sugar industry to help them meet their other liabilities and also invest on improving farm and factory efficiencies.

Maharashtra and Karnataka State Governments have, during the last one year, already enacted laws to adopt the revenue sharing model, whereby a ‘linkage formula’ will henceforth determine the price of cane at 70 per cent of revenue realised from sugar and primary by-products, or at 75 per cent of revenue from sugar alone (giving 5 per cent weightage to by-products).

After considering the costs incurred by both farmers in producing sugarcane and millers in producing sugar, the Commission for Agricultural Costs and Prices had recommended for these sharing percentages, and for a two-stage payment of cane price to farmers.

With a two-instalment payment system, first at Fair and Remunerative Price (FRP) and second as per the formula, cane farmers will get their payments on time, which will stop arrears from piling up.

All farmers will at least get the FRP to begin with. The formula assures a fair return to the mills, timely payment of cane price to the farmers as well as ensures that the farmers get a fair share of the profits or higher prices, if any, earned by mills. It makes the farmers and millers equal partners in the business of cane production and sugar making.

The ‘linkage formula’ is also practiced by all other sugar producing nations in the world. Countries such as Brazil, Thailand, Australia, Mauritius, etc., including African countries, all follow a rational cane pricing formula.

If revenue sharing formula has a proven track record, there shouldn’t be any reason why the UP Government is not adopting it, especially when two Indian States, producing 50 per cent of India’s sugar, have also adopted it.

The UP Government should scrap the system of fixing SAP, and must look at adopting a rationalised cane pricing formula. At the start of the crushing season of 2013-14, the State Government had agreed to this, and had also constituted a Committee under the Chief Secretary to recommend a rational cane pricing policy.

The Committee was constituted on January 11 and was given time till April 2014, to submit recommendations.

Experts feel that a ‘linkage formula’ to determine the price of cane in UP, will stop the arbitrary pricing of cane and instead allow for an automatic determination of cane price linked to the price of sugar and primary by-products. It will be more rational and transparent, and will be fair and reasonable to both farmers and millers.

A better paying capacity of the mills will ensure that sugarcane farmers get their cane payments on time. Mills will also be able to timely repay their bank loans.

Banks will come forward to extend loans and the 66 mills, which were forced to give suspension notices, will start their crushing operations next season. The UP industry will survive.

The writer is Director-General of Indian sugar Mills Association. Views are personal.