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What is the sugar problem about?

Published on Fri, Nov 20, 2009 at 12:56 | Source : Moneycontrol.com

Updated at Fri, Nov 20, 2009 at 13:11

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Farmers in the region of Uttar Pradesh have been demanding to be paid Rs 280 per quintal of cane while the government had fixed the fair and remunerative price (FRP) at Rs 130 per quintal while the UP government's state advisory price (SAP) stands at Rs 165 per quintal. UP mills have agreed to pay Rs 180 per quintal and the differential between SAP and FRP will be paid by state government.

The farmers' demand is based on the high sugar realisation by sugar industry. Price of Rs 280 per quintal is based on a realisation upwards of Rs 35 per kilogram of sugar. Maharashtra and Karnataka mills are already paying a cane price of Rs 210-220 per quintal.

Farmers said that the FRP caps their profitability while millers enjoy supernormal profits. The Centre has effectively capped the cane price by fixing an FRP and asking the state to pay differential. A proper linkage is needed between miller's realisations and cane prices.

Farmers had also demonstrated against overseas purchases of raw sugar. India has allowed imports of both raw and white sugar at zero duty to stave off shortages. Imports curtail bargaining power when trying to persuade mills to buy Indian cane at a higher price.

Union Agriculture Minister Sharad Pawar said that the government is likely to make a statement on cane row in Parliament today. The ministry is working on likely changes on sugarcane ordinance and he believes that the cane price ordinance is balanced for farmers and millers.

Ministry outlook for SY10:

India's 2009-10 output is seen at 16 million tonne. India's sugar stocks as on October 1 stood at 2.2 million tonne. Imports are needed to meet the shortfall of 3 million tonne. The government has extended duty free white, raw sugar import deadline.

Cane crushing has been delayed beyond November 18. Sugar shortage is likely to be aggravated if matter is not resolved at the earnest. Sugar prices increased Rs 3-4 per kg in the last week. Besides, UP asked mills to halt import for 1 month on farmers protest.

A proper price discovery mechanism for cane and sugar as followed by major global sugar producers could be a solution for this. Millers' realisations and cane prices needs to be linked (fixed in a ratio like 60:40 in countries like Thailand). Auction processes will arrive at a cane and sugar price other than levy sugar.

Fixing the problem

The focus is on what the solution could be from here on-the FRP will stay but the caveat that the state government will have to pay the difference between the FRP and SAP could be done away with and that could solve a lot of problems.

Also, the UP millers will have to work bilaterally with the farmers to solve this issue that the caveat is removed out of the way and that could lead to a cane price at Rs 210 per quintal to about Rs 230 a quintal. So the profit margins to the sugar millers in the UP as what was thought to be super normal earlier would come down. But of course the cane crushing is now to begin and if bilateral talks could solve that issue it would be a welcome move.