Sugar decontrol may be effective from March: ISMA's Verma

There was a lot of noise about sugar decontrol being introduced very soon. In fact, the food minister at the Associated Chambers of Commerce and Industry of India (ASSOCHAM) event in mid-February raised expectations and said that they are likely to take a decision on partial sugar decontrol within 15 days. Abinash Verma, Director General of the Indian Sugar Mills Association (ISMA) told CNBC-TV18 that he expects partial sugar decontrol to be implemented in March.

He also feels the government may do away with sugar levy whereby sugar mills are obliged to supply sugar for public distribution at a discounted price. Another problem facing the sugar industry, the release mechanism that entitles producers to sell produce according to the limits set by the government may also be abolished, believes Verma.  Here is the edited transcript of the interview on CNBC-TV18. Q: What are your expectations with respect to sugar decontrol itself? Realistically, when do you think it may come through and what will be taken up because there were so many proposals made by the Rangarajan Committee with respect to introduction of new cane pricing formula, the levy quota removal etc, what is your expectation? A: First of all, about the timeline, we will have to wait for the government to take a decision. But, we believe it should happen very soon in the month of March itself. Regarding the proposals that are being very actively considered by the government, we believe that the government would look at partial decontrol which would be on the sugar sale side. Two very important controls which we believe are very archaic and have outlived their utility are abolition of the regulated released mechanism under which we are told every month or every quarter, how much of our sugar we can sell. Secondly, there is a burden on the industry to supply the levy sugar for the public distribution system at a discounted price. We believe that these two controls would be considered for removal very shortly and we think it should happen in the month of March. Q: This is a government constrained for money. Do you think that at a time like this they will be willing to forego the reduced prices at which you guys supply to the public distribution system (PDS) or you have some assurances, some reason to believe that this step will also be contemplated as early as this month? A: First of all, let us understand why should an industry be told to bear the levy burden of a social welfare programme of the government, no other industry is being told to do so. _PAGEBREAK_ Q: It is not my stand to defend what the government has been doing or will do. I am only asking you how realistic is the expectation, quarterly releases yes, they do not lose much and they probably believe that the market is believing the judgement of the companies is better and it would be done without any cost to them but, I am only asking you, do you have any reason to believe that something which will force the government to put in cash will be taken at this juncture, do you have some confidence or are you privy to any such conversation? A: No, I cannot talk about my being privy but, I can certainly tell you about the figures that you are asking. Today, the central government bears the burden of Rs 2,500 crore for the levy sugar burden that they have to bear and the industry is bearing about Rs 3,000 crore. When we are talking about the government taking over the burden, we are talking about Rs 3,000 crore being taken over by the government. If you look at Rs 3,000 crore in comparison to the total food subsidy bill, which is about Rs 90,000 crore to Rs 95,000 crore a year, it is hardly anything, not even 4 percent. That is one. Secondly, the levy sugar price at which it is bought from us is linked to the fair remunerative price for the sugarcane which has gone up in the last two years from 2011-2012 for the next season 2013-2014, from Rs 145 to Rs 210 which is almost a 45 percent increase. Obviously, if the government is going to increase the levy sugar price, the burden from Rs 2,500 crore in another eight to ten months would go up to Rs 4,300 crore or Rs 4,500 crore. So the government without doing anything will be increasing its burden by about Rs 2,000-2,100 crore in just about 8-10 months. It therefore, makes sense to take away this burden and continue doing decontrol so that in the process the industry also improves, the farmers also get a better deal and the consumers also get a better deal. I am not talking about a very huge amount. Q: You said within the month of March itself you are expecting some news to come in on sugar decontrol, what about the introduction of a new cane pricing formula, do you expect that to be discussed within this month itself and when do you think it will be practiced because when we spoke with a couple of sugar companies some weeks ago, they mentioned that it will take about two-three years for a proper cane pricing formula to be practiced in reality? A: The government is taking these steps as a follow up of the Rangarajan Committee recommendations. The Rangarajan Committee itself divided the whole decontrol process into two parts. One is the sugar sale part and the other is the sugarcane control part. This part that you are talking about is the pricing, linking the sugarcane price to the revenue realization of the industry. The Rangarajan Committee also said that since this process, the sugarcane control side process involves the state governments and directly impacts the sugarcane farmers, there has to be some kind of a deliberation in the next two-three years. It is necessary to get the farmers on board, explain to them and get the state governments on board because these powers are today exercised by the state governments also.
 
There has to be a process of discussion and deliberation over the next two-three years on the sugarcane side. Q: Going by the way the government has been behaving and the extent to which it is constrained by finances, let us assume that the quarterly release mechanism at least is done away with in the current month. If only that were to come, would that seminally benefit sugar companies, what will it do to their profit and loss (P&L) in FY14 itself, will it do anything much? A: We have controlled our sugar sale side for a very long time. So the immediate freedom would mean that if we are pressurized for cash flow requirements, for liquidity requirements, we will tend to sell more into the market. Initially, for the short-term, I will say for the first three-four months there will be more and more sugar which will come into the market and the sugar prices might see a fall. But, as process moves on and as we learn, there will be stability in price. If I am allowed to sell as per the market conditions, if I am allowed to get my cash flows whenever I require to pay the farmers, then I borrow less of working capital. Today, the working capital that I borrow is at 14 to 16 percent which adds to my cost of production phenomenally. Plus, the burden of carrying the extra sugar over a year or one and a half years also adds to my inventories, to my carrying cost. Both of these reductions in the cost of production is going to benefit the industry at least in the next one year or so and in the long-term. Q: You have your ear to the ground with respect to what is happening in production as well as in prices. There is talk that perhaps the next season could see some weakness in terms of lower output and that could further help stabilise domestic sugar prices, both with respect to sugar prices as well as output, what is the trend that you are expecting, how much do you think it could fall in FY14? A: I will talk about the sugar year because we talk about production in sugar year from October to September and not the financial year. That would be easier for me. If you talk about the October-September 2013-2014 sugar production, I believe it is slightly early to talk about the numbers. But yes, there is apprehension because of lower rainfall in Maharashtra and the northern part of Karnataka which contribute almost 50 to 60 percent of the country’s sugar production. Due to lower rainfall, the sowing is a slight concern there. But how much is it going to impact in terms of numbers, whether it is going to reduce the production by 2 to 2.5 million or 1.5 million, we will have to wait for another couple of months. By that time we will be ready with the satellite mapping figures. But yes, we believe that next sugar production year will give us lower sugar production as compared to the current. If that is going to improve the sentiments in the market and improve the prices that could be one possibility, but if you talk about sugar availability, I do not believe that there will be any shortage this year or next year. There will be enough sugar and we may not require to import any sugar for the next two years. _PAGEBREAK_ Q: What is the current math on the output in the current year finally and the carry forward that we should expect in October? A: As of now, we have already produced about 118.6 million tonne and about 50 sugar mills all over the country have already closed by this time. Most of them are in Maharashtra and due to the lack of adequate amount of sugarcane and the initial estimates of ISMA at 24.3 million tonne, we are around that number and we believe it should be a minimum of 24.3 million tonne or a couple of lakh tonne more, beyond 24.3 million tonne. But, it should be around that number for the current season. Q: That will give you about 15 lakh tonne as carry forward? A: Not at all. If you talk about the consumption, we expect the consumption to be 22.5 million tonne and with a carry forward from the previous year into this current season of about 6 million tonne, we believe the carry forward into the next year i.e. October 2013 should be about 7 to 7.5 million tonne. Q: What would that do to prices in your mind, what kind of a range do you foresee for domestic and international prices? A: International prices are more determined by the production in Brazil and Brazil is having a good crop recovery and they should come out with a larger sugar production unless more and more sugarcane gets diverted to ethanol in Brazil because ethanol production is also picking up now in that country. The general expectation from the international market is that next year there would be a surplus for the third consecutive year, of about 7 million tonne or so and that would continue to keep the international prices down. As far as the domestic prices are concerned, as I mentioned, we have enough sugar to take care of the domestic requirement. We do not require to import and there is no concern of a very big surplus, this surplus is well within manageable quantities. Therefore, there will not be much pressure on the sugar mills to go in for some kind of a distressed sale. All that matches some kind of a decontrol process from the government with a regulator released mechanism going away and the sugar mills having a better chance of grabbing a good opportunity to sell in the open market. I believe that the prices should become reasonable and it should crawl up to cover our cost of production.