India's sugar industry is prone to extreme cyclical swings.
Part of it has to do with sugarcane itself, which, for the farmer, is practically a two-year crop. The plant-cane to be sown in Uttar Pradesh (UP) this March-May is harvestable only after 11 months in February-April 2013. It is followed by a ‘ratoon' automatically sprouting from the root stubbles of the plant-cane, which will take another 9-10 months to mature between November 2013 and January 2014.
Thus, once a farmer has planted cane, his land is ‘locked' for 20-21 months. The decision to go ahead is an investment call taken based on the cane price received from the sugar mill
The implications are obvious. If low sugar prices lead to mills not paying, farmers would switch over to alternate crops, impacting cane availability for the next two years. By then, soaring sugar prices result in a scramble for cane. As its prices are bid up, farmers feel enthused to plant again. They usually overplant, which is the prelude to the next crash.
SAWTOOTH PATTERN
The accompanying graph captures the above phenomenon in terms of oscillations in India's annual sugar output. It shows how a good production year in 1991-92 was followed by two bad ones, with the cycle being repeated thereafter, and in a more pronounced manner in the recent period.
Given that sugarcane is largely an irrigated crop, these fluctuations aren't attributable to rainfall vagaries. Rather, they are more a function of cane prices influencing farmers' planting decisions. On this slender thread hangs the vicissitudes of a roughly Rs 80,000-crore industry.
The extensive regulatory paraphernalia surrounding the sugar sector is precisely aimed at dealing with this problem of cyclicity. The government today fixes cane prices and assigns ‘reserved' areas for procurement by individual factories. It also decides how much sugar each mill can sell (‘release') every month in the open market, after surrendering a certain percentage of production as ‘levy' for ration shops.
These controls haven't helped smoothen the sugar cycle, though. There are moves now to dispense with monthly releases and levy obligations on mills, as part of a larger industry deregulation plan. But it again fails to address the real issue of cyclicity. This, we have seen, is primarily related to the long gestation period of sugarcane — and will remain so long as the focus is confined to what mills do with their sugar and not with their cane .
BYPRODUCT APPROACH
Currently, mills in India crush cane only to produce sugar. Whatever alcohol or cogen power they generate is entirely from molasses and bagasse that are byproducts of sugar manufacture. Well over 85 per cent of mill revenues come from sugar: Its price decides their paying capacity and, ultimately, also the cane area planted by farmers.
Any durable solution to the sugar cycle problem, then, calls for reducing the industry's reliance on virtually a single revenue source. That can happen only if factories have full freedom to convert the juice from crushing cane — whether for crystallising into sugar or directly fermenting into alcohol for potable, industrial or fuel blending purposes. Flexibility to produce more or less sugar, depending on its prices relative to alcohol, would impart greater revenue stability. It makes regular cane payments to farmers possible and avoids destabilising acreage shifts to other crops.
Right now, that flexibility just doesn't exist. Mills typically crush cane with total fermentable sugars (TFS) content averaging between 12 per cent in UP and 14 per cent in Maharashtra. Much of this TFS — sucrose plus reducing sugars (glucose and fructose) — gets crystallised into sugar.
The uncrystallised, non-recoverable part goes into what is called ‘C' molasses. The latter, constituting around 4.5 per cent of the cane, has a TFS of 40 per cent. Every 100 kg of TFS, in turn, yields 60 litres of fuel ethanol.
Thus, from one tonne of cane, a UP mill can produce 95 kg sugar (at 9.5 per cent recovery) and 45 kg of molasses (18 kg TFS) that gives 10.8 litres of ethanol. Alternatively, if the entire 12 per cent TFS in the cane is fermented, it would result in 72 litres of ethanol and zero sugar.
FLEXIBLE SOLUTIONS
But in between these, there are intermediate options, too, where the cane juice does not have to be crystallised right till the final ‘C' molasses byproduct stage. The molasses can, instead, be diverted after the earlier ‘A' and ‘B' stages of sugar crystal formation. Sugar production, in the event, will be more than if the whole juice were fermented into ethanol, even if less than from the full crystallisation/‘C' molasses route (see table).
In Brazil, mills are designed to facilitate segregation of the sugar and ethanol production streams at the cane juice stage itself. The juice obtained after crushing is first clarified and evaporated to either 60 per cent or 30 per cent solids content. The former goes for making sugar, and the less concentrated secondary juice for ethanol.
“A normal factory there can flexibly convert up to 55 per cent TFS into sugar and the balance to ethanol. We could do the same here through the ‘A' or ‘B' molasses route”, noted Dilip Jain of Integrated Casetech Consultants, a subsidiary of Simbhaoli Sugars Ltd.
DECONTROL IN SPIRIT
But technical feasibility alone isn't enough. At the Rs 27.5-a-litre price oil companies are offering today, it is economically unviable for mills to divert any cane juice or even ‘A' and ‘B' molasses for ethanol.
As the table shows, ethanol must be priced between Rs 34 and Rs 44 to generate revenues equal to what they are grossing from the regular full crystallisation/‘C' molasses route.
Effectively, it would require decontrolling ethanol along with sugar and linking the former's price to petrol. That's how it is in Brazil, where ethanol is used either for 25 per cent blending with petrol or as 100 per cent hydrous spirit to power flexible-fuel vehicles.
In India, petrol prices are already decontrolled. Yet, oil companies pay a fixed Rs 27.5 rate for ethanol that is lower than their ex-refinery realisation of nearly Rs 40 on petrol. Mills, therefore, have no incentive to supply more ethanol, even if they are allowed to produce directly from cane juice.
One way out is to have an automatic linking formula and enforce it on the oil companies. Even better, suggests M. Manickam of Sakthi Sugars, is to completely open up fuel retailing to enable anyone — mills included — to buy petrol and do the blending.
In the US, there are ethanol blender pump dispensers at the fuel stations itself. These draw petrol and ethanol from separate storage tanks to generate pre-programmed blends. If the system takes off in India, the prices of the two fuels would converge as a matter of course.
But what happens to sugar? Wouldn't its supplies be affected if mills are given unfettered freedom to do anything with their cane? Not really. The laws of economics will ensure that if sugar prices rise too much, mills would divert less juice to alcohol.
That's probably easier than getting farmers to plant more cane and wait till it is harvested and crushed.