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Urgent need of increasing MSP of sugar and corresponding prices of ethanol

Source ChiniMandi

Posted on October 1, 2024

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In recent years, the sugar industry has faced significant challenges due to fluctuating market prices and rising production costs. The Minimum Selling Price (MSP) for sugar, a crucial safety net for farmers, has not kept pace with these changes, leading to financial strain on sugarcane growers. Concurrently, the ethanol sector, which holds immense potential for reducing India’s dependence on fossil fuels and enhancing energy security, has also been impacted by stagnant pricing policies. This article delves into the urgent need to increase the MSP of sugar and adjust ethanol prices accordingly, highlighting the economic and environmental benefits of such measures. By addressing these issues, we can ensure the sustainability of the sugar industry, support our farmers, and contribute to a greener future.

IMPACT ON SUGARCANE FARMERS: The impact of a low Minimum Selling Price (MSP) on sugarcane farmers can be quite significant and multifaceted. Here are some key points:

1) Financial Strain

Reduced Income: When the MSP is low, farmers receive less money for their produce, which can lead to financial instability. This is particularly challenging for small-scale farmers who rely heavily on their sugarcane crops for their livelihood.

Debt Cycle: Lower income can push farmers into a cycle of debt as they may need to borrow money to cover their production costs, leading to increased financial stress and potential defaults on loans.

Production Challenges-

Cost of Production: The cost of inputs like seeds, fertilizers, and labor often increases, but if the MSP does not rise accordingly, farmers struggle to cover these costs, leading to reduced investment in quality inputs and lower yields.

Maintenance Issues: Insufficient funds can result in poor maintenance of fields and equipment, further reducing productivity and crop quality.

2) Social Impact-

Migration: Financial difficulties can force farmers to migrate to urban areas in search of alternative employment, leading to a decline in rural populations and potential disruptions in local communities.

Mental Health: The stress of financial instability can have severe impacts on the mental health of farmers, contributing to higher rates of anxiety, depression, and even suicides in extreme cases.

3) Economic Consequences-

Market Instability: Low MSP can lead to market instability as farmers may switch to other crops or reduce their sugarcane production, affecting the overall supply chain and leading to price volatility.

4) Impact on Allied Industries: Industries dependent on sugarcane, such as sugar mills and ethanol producers, can also suffer from reduced supply and increased costs, impacting their profitability and sustainability.

5) Environmental Impact-

Sustainable Practices: Financial constraints may force farmers to adopt less sustainable farming practices, such as overuse of chemical fertilizers and pesticides, which can degrade soil health and reduce long-term agricultural productivity.

Addressing the issue of low MSP is crucial not only for the well-being of sugarcane farmers but also for the stability and sustainability of the broader agricultural and industrial sectors. By ensuring fair pricing, we can support farmers, enhance productivity, and contribute to a more resilient agricultural economy.

IMPACT OF DELAYED MSP REVISION ON THE SUGAR INDUSTRY: The government’s delay in revising the Minimum Selling Price (MSP) for sugar has created significant challenges for the sugar industry. The MSP, which was last set at ₹3100 per quintal in 2019 when the Fair and Remunerative Price (FRP) of sugarcane was ₹2750 per quintal, has not been updated to reflect the subsequent increases in the FRP. Over the past few years, the FRP has been revised five times, and for the 2024-25 sugar season, it stands at ₹3400 per MT for 10.25% basic sugar recovery, with an additional ₹320 per MT for each 1% increase in recovery.

Financial Strain on Sugar Factories –

The production cost of sugar has now exceeded ₹4000 per quintal, putting immense financial pressure on sugar factories. This discrepancy between the production cost and the outdated MSP has led to several critical issues:

Short Margins and Negative Net Worth: Sugar factories are operating with very thin margins or even negative net worth, making it difficult to sustain operations.

Non-Performing Assets (NPA) and Debt Restructuring (NDR) Problems:  The financial instability has resulted in many sugar factories facing NPA and NDR issues, further complicating their financial health.

Working Capital Loan Challenges: Banks are hesitant to extend working capital loans to sugar factories due to their precarious financial positions, exacerbating liquidity problems.

Operational and Legal Challenges-

 As the sugar year 2024-25 commences on October 1, 2024, sugar factories are under pressure to start crushing operations. According to the provisions of the Essential Commodities Act and the Sugar Control Order, they are required to make Fair and Remunerative Price (FRP) payments to sugarcane suppliers within 15 days of procurement. The delay in revising the MSP complicates this obligation, as factories struggle to generate sufficient revenue to meet these requirements.

IMPACT ON ETHANOL PRODUCTION: The failure to increase ethanol prices simultaneously with the revision of the Minimum Support Price (MSP) of sugar can have significant repercussions for the sugar industry and the broader economy. Here are the key points:

1) Shift in Production Focus-

Switch to Sugar Production:  If ethanol prices are not adjusted to be cost-effective, sugar factories are likely to prioritize sugar production over ethanol. This shift occurs because producing sugar becomes more financially viable compared to ethanol, given the higher MSP of sugar.

Government Ethanol Targets: This switch can disrupt the government’s ethanol blending targets, which aim to reduce dependence on fossil fuels and promote cleaner energy sources. Achieving these targets is crucial for energy security and environmental sustainability.

2) Market Imbalance-

Excessive Sugar Production: With more factories focusing on sugar production, the market could see an oversupply of sugar. According to the demand-supply theory, this surplus can lead to a significant drop in sugar prices, adversely affecting the profitability of sugar factories.

Price Volatility: The imbalance between supply and demand can create price volatility in the domestic market, making it difficult for both producers and consumers to plan and budget effectively.

3) Financial Implications

Investment in Ethanol Plants: The substantial capital investment in ethanol plants, estimated to be between ₹40,000 to ₹50,000 crore, could be jeopardized. If ethanol production becomes unviable, these investments may not yield the expected returns, leading to financial distress for investors and stakeholders.

Working Capital Issues: The financial strain on sugar factories due to low ethanol prices can exacerbate working capital issues, making it difficult for them to secure loans and maintain smooth operations.

4) Need for Consistent Pricing Policies-

Linking FRP, MSP, and Ethanol Prices: To ensure the sustainability of both sugar and ethanol production, there should be a consistent linkage between the Fair and Remunerative Price (FRP) of sugarcane, the MSP of sugar, and ethanol prices. This alignment can help stabilize the market, support farmers, and promote the production of ethanol as a viable alternative.

5) Policy Revisions: The government needs to regularly review and adjust these prices to reflect changes in production costs and market conditions. This proactive approach can prevent market distortions and ensure the long-term viability of the sugar and ethanol industries.

By aligning ethanol prices with the MSP of sugar and the FRP of sugarcane, the government can create a balanced and sustainable framework that supports both industries. This approach will help achieve ethanol blending targets, stabilize sugar prices, and ensure the financial health of sugar factories and farmers alike.

OIL MANUFACTURING COMPANIES FLOTED TENDERS FOR PURCHASE OF ETHANOL DURING ETHANOL YEAR 2024-25…Hence urgency for policy decision to revise ethanol prices:

The timing of the tender notices from oil manufacturing companies for the purchase of ethanol for the 2024-25 ethanol year adds another layer of urgency to the need for revising ethanol prices. Here’s an elaboration on this point:

1) Importance of Revising Ethanol Prices in Light of Tender Notices – The recent tender notices floated by oil manufacturing companies for the purchase of ethanol for the 2024-25 ethanol year underscore the critical need for sugar factories to understand the cost-effectiveness of ethanol production before submitting their tenders. This situation highlights several important considerations:

2) Cost-Effectiveness Analysis-

Accurate Pricing Information:  Sugar factories need accurate and up-to-date pricing information to determine whether ethanol production is financially viable. Without a revision in ethanol prices to reflect current production costs, factories may find it challenging to make informed decisions.

Competitive Bidding: To participate effectively in the tender process, factories must ensure that their ethanol production costs are competitive. This requires a pricing structure that aligns with the current market realities and production expenses.

Strategic Planning-

3) Investment Decisions:  Factories need to plan their investments in ethanol production facilities and operations based on the expected returns. If ethanol prices are not revised in line with the MSP of sugar and the FRP of sugarcane, these investments may not be justified, leading to potential financial losses.

4) Operational Efficiency:  Knowing the cost-effectiveness of ethanol production allows factories to optimize their operations, ensuring they can meet the demand from oil companies while maintaining profitability.

5) Market Stability- 

Supply Chain Management: Ensuring that ethanol prices are aligned with production costs helps stabilize the supply chain. This stability is crucial for meeting the ethanol blending targets set by the government and for maintaining a steady supply of ethanol to oil companies.

 Avoiding Market Disruptions:  If factories are unable to produce ethanol cost-effectively, it could lead to disruptions in the supply of ethanol, affecting the overall market and the government’s energy security goals.

Policy Implications-

6) Government Support: The government needs to recognize the importance of timely price revisions to support the ethanol industry. By aligning ethanol prices with the MSP of sugar and the FRP of sugarcane, the government can ensure that factories are incentivized to produce ethanol, contributing to the broader goals of energy security and environmental sustainability.

7) Integrated Pricing Framework:  There should be an integrated framework that links the FRP of sugarcane, the MSP of sugar, and ethanol prices. This linkage will provide a coherent pricing strategy that supports the entire value chain, from farmers to sugar factories to ethanol producers.

The tender notices from oil manufacturing companies highlight the urgent need for a revision in ethanol prices. Ensuring that ethanol production is cost-effective is crucial for the sustainability of the sugar industry, the achievement of government ethanol targets, and the stability of the broader market. By addressing this issue, we can support the financial health of sugar factories, promote sustainable energy practices, and contribute to a more resilient agricultural economy.

CALL TO ACTION-

Policymakers and stakeholders must act swiftly to address these pressing issues. It is imperative to:

1) Revise the MSP of Sugar: Ensure that the MSP reflects the current production costs to support the financial health of sugar factories and farmers.

2) Adjust Ethanol Prices: Align ethanol prices with the MSP of sugar and the FRP of sugarcane to make ethanol production financially viable and meet government blending targets.

3) Implement Integrated Pricing Frameworks: Develop a coherent pricing strategy that links the FRP of sugarcane, the MSP of sugar, and ethanol prices to stabilize the market and support sustainable practices.

4) Facilitate Financial Support: Provide necessary financial support and incentives to sugar factories to help them navigate working capital challenges and invest in ethanol production.

5) Special Request to Hon. Pralhad Joshi Sir, Union Minister, Agriculture, Food And Public Distribution:   We earnestly request Hon. Joshi, Union Minister, Consumer Affairs, Food & Public Distribution to take immediate steps as per the recent assurances given in his public speech regarding the revision of MSP and ethanol prices. Your prompt action is crucial to safeguard the livelihoods of our farmers, ensure the viability of sugar factories, and achieve the government’s ethanol blending targets. By addressing these issues, we can foster a resilient and prosperous agricultural economy that benefits all stakeholders.

In conclusion, the urgent need to revise the Minimum Support Price (MSP) of sugar and corresponding increases in ethanol prices cannot be overstated. The current pricing structure fails to reflect the rising costs of production, placing immense financial strain on sugarcane farmers and sugar factories alike. By aligning the MSP of sugar with the Fair and Remunerative Price (FRP) of sugarcane and ensuring ethanol prices are adjusted accordingly, we can create a sustainable and balanced framework that supports the entire value chain. This approach will not only stabilize the sugar industry but also promote the production of ethanol, contributing to energy security and environmental sustainability.

P.G. Medhe is the former Managing Director of Shri Chhatrapati Rajaram Sahakari Sakhar Karkhana Ltd and sugar industry analyst. He can be contacted at +91 9822329898.

Source Link : https://www.chinimandi.com/urgent-need-of-increasing-msp-of-sugar-and-corresponding-prices-of-ethanol/