Ignoring CACP’s dual sugar price policy: Financial strain on Indian sugar industry stakeholders
The sugar industry in India is a vital component of the agricultural sector, providing livelihoods to millions of farmers and contributing significantly to the economy. However, recent financial challenges faced by stakeholders in the industry have raised concerns about the effectiveness of current policies. This article delves into the implications of overlooking the recommendations made by the Commission for Agricultural Costs and Prices (CACP) regarding the Dual Sugar Price Policy for the sustainability of the Industry. We will explore how this oversight has exacerbated financial stringency among stakeholders and discuss potential solutions to mitigate these challenges.
The sugar industry in India is a vital component of the agricultural sector, providing livelihoods to millions of farmers and contributing significantly to the economy. However, recent financial challenges faced by stakeholders in the industry have raised concerns about the effectiveness of current policies. This article delves into the implications of overlooking the recommendations made by the Commission for Agricultural Costs and Prices (CACP) regarding the Dual Sugar Price Policy for the sustainability of the Industry. We will explore how this oversight has exacerbated financial stringency among stakeholders and discuss potential solutions to mitigate these challenges.
ROLE OF CACP IN SUGAR PRICE POLICY: The Commission for Agricultural Costs and Prices (CACP) plays a crucial role in shaping the sugar price policy in India. Here’s an exploration of its role and impact.
1) Recommendation of Fair and Remunerative Price (FRP): The CACP recommends the Fair and Remunerative Price (FRP) for sugarcane, which is the minimum price that sugar mills must pay to sugarcane farmers. This recommendation is based on various factors, including the cost of production, demand-supply dynamics, and the need to ensure a reasonable margin for farmers.
2) Consideration of Multiple Factors: While recommending the FRP, the CACP takes into account several factors such as the cost of cultivation, input prices, productivity, and the overall profitability of sugarcane farming. It also considers the price trends in domestic and international markets.
3) Balancing Stakeholder Interests: The CACP aims to balance the interests of various stakeholders in the sugar industry, including farmers, mill owners, and consumers. By ensuring a fair price for sugarcane, it seeks to protect farmers’ incomes while also considering the financial viability of sugar mills.
4) Policy Recommendations: Apart from price recommendations, the CACP also suggests non-price measures to improve the efficiency and sustainability of the sugar industry. These include recommendations on technology adoption, diversification, and measures to enhance competitiveness.
5) Revenue Sharing Formula: The CACP has proposed a revenue-sharing formula where the price of sugarcane is linked to the revenue realized from sugar and its by-products. This aims to ensure a more equitable distribution of revenue between farmers and mill owners.
6) Addressing Financial Stringency: The CACP’s recommendations are designed to address financial stringency in the sugar industry by ensuring that both farmers and mills remain financially viable. This includes measures to reduce cane price arrears and stabilize the financial health of the industry.
7) Impact of CACP’s Recommendations –
Stabilisation of Farmer Incomes: By recommending a fair price for sugarcane, the CACP helps stabilize the incomes of sugarcane farmers, ensuring they receive a reasonable return on their investment.
Sustainability of Sugar Mills : The recommendations also aim to ensure the sustainability of sugar mills by considering their cost structures and profitability, thereby preventing financial distress in the industry.
8) Policy Influence: The CACP’s recommendations influence government policies and decisions related to the sugar industry, shaping the overall regulatory framework and market dynamics.
The CACP plays a pivotal role in the sugar price policy by recommending fair prices and suggesting measures to enhance the efficiency and sustainability of the sugar industry. Its balanced approach aims to protect the interests of all stakeholders, ensuring the long-term viability of the sector.
RECOMMENDATIONS OF CACP ABOUT SUGAR PRICE POLICY:
PRICE POLICY FOR SUGARCANE 2023-24
Commission for Agricultural Cost & Prices, Department of Agriculture & Farmers Welfare Ministry of Agriculture & Farmers Welfare Government of India, New Delhi November 2022
MINIMUM SELLING PRICE OF SUGAR & DUAL PRICING SYSTEM
The system of levy obligations on mills for sugar produced was discontinued by the Government of India in October 2012 and the regulated release mechanism on open market sale of sugar was abolished to deregulate the sugar sector. However, in view of depressed sugar prices due to surplus production and to protect interest of farmers, Government introduced the concept of Minimum Selling Price (MSP) of sugar based on FRP of sugarcane and minimum conversion cost of the most efficient mills w.e.f 7th June 2018 under Sugar Price (Control) Order, 2018. The MSP of white/refined sugar was fixed at ₹29 per kg w.e.f 7thJune, 2018 for sale by sugar mills at the factory gate for domestic
consumption, which was increased to ₹31 per kg from 14th February, 2019 but has not been revised thereafter by the Government despite strong demand from the sugar industry. Price of sugar should ideally be determined by supply and demand forces of the market. While fixing the MSP of sugar, it is recommended to consider the FRP, conversion cost, financial overhead and normative returns of the mills.
Major share of sugar production is consumed by the industrial and commercial sector, therefore, dual pricing in sugar, lower price for household consumer and higher price for commercial/industrial sector can be implemented. In order to bridge the gap between the cost of production and average realisation of sugar, implementation of the dual pricing policy may be one of the long-term solutions.
FINANCIAL CHALLENGES FACED BY THE SUGAR INDUSTRY STAKEHOLDERS –
The sugar industry in India faces several financial challenges that impact various stakeholders, including farmers, mill owners, and consumers. Here’s a detailed look at these challenges:
1. Price Volatility –
Market Fluctuations: The sugar market is highly volatile, with prices fluctuating due to changes in domestic and international demand and supply. This volatility affects the profitability of both farmers and mill owners1.
Global Competition: Indian sugar prices are influenced by global market trends, including production levels in major sugar-producing countries like Brazil and Thailand.
2. High Production Costs-
Input Costs: The cost of inputs such as fertilisers, pesticides, and labor has been rising, increasing the overall cost of sugarcane production.
Production Costs: Sugar mills face high production costs, which add to the financial burden. The cost of raw material, Spare parts, interest, wages and fuel for running mills is significant.
3. Delayed Payments to Farmers-
Cane Arrears: Delayed payments from sugar mills to farmers, known as cane arrears, are a persistent issue. This delay affects the financial stability of farmers, who rely on timely payments to manage their expenses.
Cash Flow Issues: Mills often face cash flow problems due to delayed payments from buyers and high inventory levels, leading to delays in paying farmers.
4. Debt Burden-
Loans and Interest: Many sugar mills are heavily indebted, with significant loans taken for modernization and expansion. The interest burden on these loans adds to their financial stress.
Non-Performing Assets (NPAs): Some sugar mills have become non-performing assets for banks, leading to financial instability in the sector.
5. Regulatory Challenges –
Policy Uncertainty: Frequent changes in government policies related to sugar pricing, export quotas, and subsidies create uncertainty and affect long-term planning for mills.
Dual Pricing Issues: The lack of a clear and consistent dual pricing policy for sugarcane often leads to disputes between farmers and mill owners.
6. Supply Chain Inefficiencies –
Logistics and Transportation: Inefficient logistics and transportation systems increase the cost of moving sugarcane from farms to mills and sugar from mills to markets.
Storage Issues: Inadequate storage facilities lead to losses due to spoilage and wastage, further impacting the financial health of the industry.
7. Environmental and Sustainability Concerns –
Water Usage: Sugarcane is a water-intensive crop, and the high water usage in sugarcane cultivation raises sustainability concerns, especially in water-scarce regions.
Environmental Regulations: Compliance with environmental regulations adds to the operational costs of sugar mills. The financial challenges faced by the sugar industry stakeholders are multifaceted, involving price volatility, high production costs, delayed payments, debt burden, regulatory issues, supply chain inefficiencies, and environmental concerns. Addressing these challenges requires a comprehensive approach, including policy reforms, improved supply chain management, and sustainable agricultural practices.
EVALUATION OF THE CORRELATION BETWEEN FRP AND MSP IN THE INDUSTRY: The Fair and Remunerative Price (FRP) and the Minimum Selling Price (MSP) of sugar are two critical components of the sugar pricing policy in India. However, the lack of correlation between these two prices over the past five years has led to significant financial challenges for sugar factories.
Current Scenario-
Fair and Remunerative Price (FRP): The FRP is the minimum price that sugar mills must pay to sugarcane farmers. It is determined by the Central Government based on recommendations from the Commission for Agricultural Costs and Prices (CACP). The FRP has been steadily increasing to ensure fair compensation for farmers. From 2019, FRP has been revised five times from ₹2750/- per Tonne to ₹ 3400/- per Tonne.
Minimum Selling Price (MSP) : The MSP is the minimum price at which sugar can be sold by mills. It is intended to cover the cost of production and ensure the financial viability of sugar mills. However, the MSP has not seen a corresponding increase in line with the rising FRP. In Spite of revision in FRP from 2750/- to ₹3400/- per Tonne, MSP of sugar is kept as it is ₹3100/- per Quintal.
Financial Impact on Sugar Factories –
Rising Production Costs: With the FRP increasing, the cost of procuring sugarcane has risen significantly for sugar mills. However, the MSP has remained relatively stagnant, not reflecting the increased cost of production.
Profit Margins: The disparity between the rising FRP and stagnant MSP has squeezed the profit margins of sugar mills. This has led to financial losses and increased debt burdens for many mills.
Delayed Payments: The financial strain on mills has resulted in delayed payments to farmers, leading to cane arrears. This affects the financial stability of farmers and creates a cycle of financial distress in the industry2.
Operational Challenges: Mills are struggling to cover their operational costs, including maintenance, labor, and energy expenses. This has impacted their ability to invest in modernization and efficiency improvements.
Policy Recommendations-
Dual Sugar Price Policy: To address the financial imbalance, it is crucial to formulate “Dual Sugar Price Policy” to ensure that mills can cover their production costs and remain financially viable.
Supportive Measures: Provide financial support and subsidies to mills during periods of high FRP to help them manage their cash flow and reduce cane arrears.
Encouraging Diversification: Promote the diversification of sugar mills into by-products like ethanol, which can provide additional revenue streams and reduce dependence on sugar prices.
The lack of correlation between the FRP and MSP has led to significant financial challenges for sugar factories, impacting their profitability and operational efficiency. Hence, this is the high time to formulate the “ Dual Sugar Price Policy “ to help stabilize the industry and ensure the financial sustainability of all stakeholders.
DUAL SUGAR PRICE POLICY : The sugar industry in India is a cornerstone of the agricultural economy, providing livelihoods to millions of farmers and contributing significantly to the nation’s GDP. However, the financial sustainability of this sector is often challenged by fluctuating market prices and policy inefficiencies. This draft explores the implementation of a Dual Sugar Price Policy, aimed at stabilizing the industry by setting different prices for industrial and domestic consumption.
Current Scenario
India’s total sugar consumption stands at approximately 280 to 290 lakh metric tons (MT) annually. Of this, 70% is used for industrial purposes, while the remaining 30% is for domestic consumption. Currently, there is no control over the pricing of industrial goods produced using sugar, leading to significant profit margins for manufacturers. For instance, sweets priced at ₹600 per kg often contain 300 to 400 grams of sugar, which costs around ₹15 at the current market price of ₹40 per kg. This results in substantial profits for manufacturers, highlighting the need for a differentiated pricing policy.
Proposed Dual Sugar Price Policy
The proposed policy involves setting two distinct prices for sugar:
1) Industrial Sugar Price: ₹65 per kg
2) Domestic Sugar Price: ₹35 per kg
This model is inspired by the dual pricing system for LPG gas, where different rates are applied for domestic and industrial consumption.
Benefits of the Dual Sugar Price Policy –
1) Fair Compensation for Farmers : Ensures that farmers receive a fair price for their produce, covering production costs and providing a reasonable profit margin.
2) Stabilisation of the Sugar Industry: Helps sugar mills maintain a predictable cost structure, improving financial stability and reducing cane arrears.
3) Control Over Industrial Profits : By setting a higher price for industrial sugar, the policy aims to regulate the profit margins of manufacturers, ensuring a more equitable distribution of revenue.
4) Consumer Protection: Keeps the price of sugar for domestic consumption affordable, protecting consumers from price volatility.
5) Encouragement of Sustainable Practices: Promotes sustainable agricultural practices by ensuring fair compensation for farmers, leading to better crop management and investment in sustainable techniques.
Implementation Strategy –
6) Role of Food Corporation of India (FCI): The FCI will oversee the procurement and distribution of sugar, ensuring compliance with the dual pricing policy.
7) Involvement of District Collectors : District Collectors will play a crucial role in monitoring and enforcing the policy at the local level, ensuring that both industrial and domestic consumers adhere to the set prices.
8) Regulatory Framework: Establish a robust regulatory framework to prevent smuggling, hoarding, and black marketing of sugar. This includes stringent penalties for violations and regular audits.
9) Awareness Campaigns: Conduct awareness campaigns to educate stakeholders about the benefits and requirements of the dual pricing policy, ensuring smooth implementation and compliance.
10) Monitoring and Evaluation: Set up a monitoring and evaluation mechanism to assess the policy’s impact on the sugar industry and make necessary adjustments based on feedback and market conditions.
The Dual Sugar Price Policy offers a balanced approach to addressing the financial challenges faced by the sugar industry. By setting different prices for industrial and domestic consumption, the policy aims to ensure fair compensation for farmers, stabilize the industry, and protect consumers. With effective implementation and monitoring, as advocated by the Commission for Agriculture and Cost Prices, this policy can significantly contribute to the sustainability and growth of the sugar sector in India.
IMPORTANCE OF SUSTAINABLE PRACTICEs SUCH AS DUAL SUGAR PRICE POLICY IN THE SUGAR INDUSTRY:
1. Environmental Sustainability-
Water Conservation: Sugarcane is a water-intensive crop, and sustainable practices such as drip irrigation and rainwater harvesting can significantly reduce water usage1.
Soil Health: Implementing crop rotation and organic farming techniques helps maintain soil fertility and reduces the need for chemical fertilisers.
Waste Management: Utilising sugarcane by-products like bagasse for bioenergy and composting can minimize waste and reduce environmental impact.
2. Economic Sustainability –
Cost Efficiency: Sustainable practices can lower production costs by reducing the need for expensive inputs like water and fertilizers.
Market Competitiveness: Adopting sustainable practices can enhance the quality of sugar, making it more competitive in both domestic and international markets.
Revenue Diversification: By-products from sugarcane, such as ethanol, can provide additional revenue streams, reducing dependency on sugar prices.
3. Social Sustainability-
Farmer Livelihoods: Sustainable practices ensure long-term productivity of sugarcane fields, securing the livelihoods of farmers.
Community Health: Reducing the use of chemical inputs can improve the health of farming communities and consumers.
Employment Opportunities : The adoption of new technologies and practices can create jobs in rural areas, contributing to social stability.
Boosting the Ethanol Blending Program…
1. Economic Benefits
Increased Income for Farmers: Producing ethanol from sugarcane provides an additional revenue stream for farmers, helping them achieve better financial stability.
Revenue for Mills: Ethanol production helps sugar mills diversify their income sources, reducing their reliance on sugar prices and improving overall profitability.
2. Energy Security-
Reducing Crude Oil Imports: Ethanol blending reduces the need for imported crude oil, saving foreign exchange and enhancing energy security3.
Renewable Energy Source: Ethanol is a renewable fuel, contributing to a more sustainable energy mix and reducing the carbon footprint.
3. Environmental Benefits-
Lower Emissions: Ethanol blending reduces greenhouse gas emissions, contributing to cleaner air and a healthier environment.
Sustainable Agriculture: Using sugarcane for ethanol production promotes sustainable agricultural practices, as it encourages efficient use of resources.
Implementation Strategy –
Policy Support –
Stable Policies: Ensure consistent and supportive policies for ethanol production and blending to encourage investment and long-term planning.
Incentives: Provide financial incentives for farmers and mills to adopt sustainable practices and invest in ethanol production.
Infrastructure Development –
Production Facilities: Invest in infrastructure for ethanol production, including distilleries and storage facilities.
Distribution Network: Develop a robust distribution network to ensure efficient blending and supply of ethanol.
Research and Development-
Innovation: Promote research into new technologies and practices that enhance the efficiency and sustainability of ethanol production.
Training: Provide training and support to farmers and mill owners on sustainable practices and ethanol production techniques.
Adopting sustainable practices in the sugar industry and boosting the ethanol blending program are crucial for enhancing the income of the industry, reducing dependency on imported crude oil, and saving foreign exchange. These measures not only contribute to economic and environmental sustainability but also ensure the long-term viability of the sugar industry and the well-being of all stakeholders involved.
In conclusion, the implementation of the Dual Sugar Price Policy, as recommended by the CACP, stands out as a pivotal sustainable practice for the Indian sugar industry. By setting differentiated prices for industrial and domestic consumption, this policy aims to ensure fair compensation for farmers, stabilize the financial health of sugar mills, and protect consumers from price volatility. The higher price for industrial sugar can regulate profit margins and provide additional revenue for mills, while the lower price for domestic sugar keeps it affordable for consumers. This balanced approach not only addresses the financial challenges faced by stakeholders but also promotes the long-term sustainability of the industry. With effective policy execution and support from the Food Corporation of India and local authorities, the Dual Sugar Price Policy can significantly enhance the viability and growth of the sugar sector, benefiting all stakeholders involved.
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.
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Source : Chinimandi
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