Stress in the Cane Industry

August 10, 2018
7 months

What is the issue?

  • The sugar industry is currently facing a serious financial crisis.
  • Improper government policies are what have caused this malice.

What is the overall crisis about?

  • Glut - Sugar output is estimated to have surged by nearly 10 million tonnes in the 2017-18 sugar season (Oct 2017 to Sept 2018) to 32.2 million tonnes.
  • While this is already way above the demand of around 25 million tonnes, the estimated output for 2018-19 is slated to be even higher at 35 million tonnes.
  • Notably, this spike is largely because of the government’s recent pro-cane grower’s stance with an eye on the forthcoming general election in 2019.
  • Stress - Excess supplies have dragged ex-factory sugar prices below production cost, leading to cane price arrears of about Rs 180 billion.
  • The bulk of these are accounted for by sugar mills in Uttar Pradesh due to the relatively higher cost of state’s mandated procurement price.
  • As the glut in the market is likely to depress prices further, banks have moved the sugar sector to the “caution list”.
  • This would make it harder for them to borrow and resultantly only make the possibility of recovery grimmer.

How did this come up?

  • The genesis of the sugar sector’s woes is rooted in the overproduction of both sugarcane and sugar, and the consequential meltdown of sugar prices.
  • But, instead of dis-incentivising additional cane production, the government is taking measures which would enhance more cane cultivation.
  • The recent sharp hike of Rs 20 a quintal in the “Fair and Remunerative Price” (FRP) for cane (floor price fixed by the centre), is an example.
  • Mandatory additional payment for sucrose recovery in excess of 10% and cash dole of Rs 5.50 per quintal of cane used by the mills, also further production.
  • Also, permitting direct conversion of cane juice into ethanol, instead of using only the by-products for this purpose, might encourage more cane production.  
  • Fiscal incentives for setting up more distilleries, and creation of a 3 million-tonne sugar buffer are some other misguided policies.
  • This aside, the government has also doled out an elaborate package of sops to the sugar factories to continue their operations.

What is the way ahead?

  • The solution lies in letting the production of both sugarcane and sugar move in tandem with overall market demand (including exports).
  • The way to achieve this objective is outlined explicitly in the report submitted by the Rangarajan Committee on sugar deregulation in 2013.
  • The revenue-sharing formula for cane pricing mooted by it can help strike the needed balance between supplies and demand and also establish a buffer.
  • This mechanism also seems fair to both cane growers and sugar producers as it envisages sharing 70 to 75% of the revenue earned by the mills with farmers.
  • Nonetheless, the transparency in the assessment of the sugar factory revenues is vital to make this system a success, which could prove challenging.


Source: Business Standard

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