The Indian Government partially decontrolled the sugar trade in April 2013. Under the administered regime, the Government acted as the industry’s personal hedger. It analysed monthly demand and supply, anticipated festival demand and kept wholesale values “within a price band”. Loss or profit depended upon the initiatives of the Government — whether it was pro-producers or pro-consumers.

Lobbying with the Food Ministry was an integral preoccupation with industry.

Market-centric

After dispensing with monthly andquarterly release quotas and levy quotas in the second quarter of 2013, sugar production has become potentially and instantly marketable. The timing of sales — whether in the local markets or for export — will be the prime factor for maximising revenues.

Mills are no longer compelled to hold back disposal, as was the case earlier when the Sugar Directorate gave the ‘stop’ or ‘go’ signal. Stocks can be moved outside the factory premises and stored anywhere in India.

Some MNCs and large traders have already initiated transactions with millers, either as direct buying or booking stocks.

This provides liquidity for producers, while MNCs can access cheap forex finance. Large traders may operate in the grey market giving competition to MNCs. The freedom to trade at any time smacks of speculation. That means more volatility because deals may be done and undone depending upon the perceptions of counter-parties. The risk of default multiplies.

Risk needs to be hedged. Futures exchanges have limited volumes that need to go up for the safety of stakeholders. Daily news about massive defaults by NSEL scares participants from dealing with exchanges — be it spot or future.

The issues of genuine warehouse receipts, quality and specifications have to be addressed. Even banks’ lending to the trade for stocks requires to be watched.

Export subsidies in the decontrolled regime are ruled out. Why would the Centre pick up the mess created by arbitrary pricing by states such as Uttar Pradesh?

But since the Centre has still kept sugar under the Essential Commodities Act, it can revert to controls under extraordinary circumstances.

Surplus, deficient states

There are six sugar surplus states — Maharashtra, Uttar Pradesh, Karnataka, Tamil Nadu, Uttarakhand and Haryana — with surpluses of about 14 million tonnes, while others are deficient by 11 million tonnes. Sugar has to move from surplus to deficient states; the balance 3 million tonnes has to be exported or it remains a surplus float.

However in the years of lower output, imports may have to be resorted to, with coastal refineries playing a vital role. In normal years, price depression may continue unless demand expansion takes place locally or through exports.

The entire east coast of India barring Tamil Nadu, and including West Bengal and the North-East constitutes a ready market of about 6 million tonnes.

Others in the north, west and centre — Jammu & Kashmir, Himachal Pradesh, Rajasthan, Madhya Pradesh and Gujarat — constitute a parallel block of about 4 million tonnes. Down south, Kerala requires about 0.6 million tonnes.

Question of efficiency

Among the surplus states, there is competition in efficiency and pricing.

Maharashtra has about 6-6.5 million tonnes of surplus with lower prices compared with Karnataka and Tamil Nadu. Uttar Pradesh is hit by irrationally high cane prices, lower recoveries and, therefore, the highest cost of production.

Maharashtra’s outward flows all across the country have provided a competitive force for Karnataka and Tamil Nadu. Incredibly, the northern states such as Punjab, Haryana, J&K, and Himachal may line up supplies from Maharashtra, Karnataka and Tamil Nadu, instead of from Uttar Pradesh. Therefore, the biggest risk emerges from Uttar Pradesh. Its surpluses of about 3 million tonnes need to be consumed. But given the high cost of production in UP, themills there will find it difficult to offload sugar elsewhere.

The way forward

Karnataka is working on a model for pricing sugarcane on par with the local market, including profit-sharing. Other states can imbibe that model. (Let the Karnataka Sugar Board not be politicised because its chairman happens to be a minister!)

That will permit mills in surplus areas to compete on an equal footing in deficient states. PDS tenders have been delayed because “modalities” are yet to be settled.

Two or three million tonnes of export are essential to divert excess production from Maharashtra or Karnataka for better price realisation domestically.

Trust and faith in futures exchanges can be restored only if the creditors of NSEL get their dues back from the borrowers — which appears highly unlikely. Merely arrests and court proceedings may not be sufficient.

Finally, Uttar Pradesh’s sugar industry has rightly approached the court to tame the arbitrariness of the State government. With much lower cane prices in other states, the industry has a good case. However, the matter could be dragged to the Supreme Court.

If Uttar Pradesh does not set cane prices right or lower them, the industry could be hit badly by the distress sale of under-priced sugar, damaging the flows and profitability of efficient states. This may be pro-consumer but is, in fact, anti-farmer in the long run.

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