Sugar prices on the mend,see no export subsidy:Shree Renuka

Latha: Are the global sugar prices going to give sugar manufacturers especially global ones like you some hope in 2016 and the last quarter of this year?

Murkumbi: Many respected analysts had been forecasting a deficit in 2016 calendar year after three years of consecutive surplus and with the expiry of the October futures contract on the New York exchange this view has now gained a consensus in the market. Sugar prices in the global market have moved up by about 17 percent in the last one week. They are also being helped by a more positive commodity environment -- crude has bottomed, the dollar is weaker -- but overall 2016 on the world market looks to be a deficit year.

There is only one event, which is yet to be crystallised, which is what happens with the exports out of India. I am pretty confident now that export parities are close to domestic prices and the sector, the industry as well as the government are determined to export a significant amount of sugar in the coming year and with that I would say that domestic prices would also follow the global trend. They have already started moving up from a bottom of Rs 19,000 a tonne in July, we are now at around Rs 25,000 ex-mill. So, I would expect some further correlation between global prices as well as with domestic prices.

Sonia: Now that global prices are rising, do you get a sense that the worst of the downward cycle in global sugar prices is behind us?

Verma: I believe so and I think Mr Murkumbi is the right person to give an idea of that. I am seeing that almost all the global experts, all the global agencies are now predicting a shortage, a deficit in the next year and therefore, from India we can look to export some sugar.

Sonia: You told us about the domestic prices. How much exactly have the global prices gone up and do you get a sense that the worst of the downward cycle is behind us?

Murkumbi: Globally, the bottom for the world market was 10.15 cents. Right now, the market is trading around 13.6 cents – almost 30 percent up from its bottom in July.

Domestic market, while as I said, prices in Maharashtra have moved up Rs 19,000 to the current level of Rs 25,000, we are still at a negative margin. So compared to cane prices, we are still negative. Of course, the loss has reduced quite significantly and if the world market continues its trend, I would see strong exports from India.

We have a surplus of about four million tonnes in the country. If we could export a significant portion of that, which now looks more likely than it did two months ago then domestic prices also should go to a level where earnings before interest, taxes, depreciation and amortization (EBITDA) margins would be positive in the coming season.

Latha: Is it cash positive to export at current prices of that 13 cents that you were talking about?

Murkumbi: There is a loss but the government last month has notified a plan of compulsory exports mill-wise allocation. I believe the government's policy for the next season is a work in progress and we may see further announcement on this especially after the Bihar elections are over and when we are about to start crushing. Given that we expect some positive support from the government, I am quite hopeful.

Latha: You would have your ears close to what government is thinking both in terms of sugarcane arrears, exports, what are you picking up in term of possible relief that the government is contemplating?

Verma: Let me clarify one point. I do not think the traditional export subsidy that we used to get will come ever in the future because that was not World Trade Organisation (WTO) compatible and that was not helping us because the government subsidy in the last two years we saw came on February 28 or February 27, which was very late, it was not enough and therefore we could not export.

We need to understand and there is a realisation within the industry, and as Mr Murkumbi pointed out, that if we export whatever 15 percent of the surplus that we have -- 15 percent of our production if we export -- we recover it from the balance 85 percent that we sell in the domestic market. If we look at the current negative, the losses that we suffer on the exports, it would work out to just about Rs 1.25 per kilogram (kg) of domestic sales. Therefore, if the domestic prices improve by Re 1 or Rs 2, we would recovered the losses that we would have incurred on the exports. Therefore I do not believe may come out with any exports incentive in the traditional fashion.

However, you asked me on the cane arrears. Now, we have told the government from the industry’s side that you have increased the cane price by a very steep margin in the last five years by almost about 70 percent and it is now beyond us. The prices are not supporting this kind of cane price. The Commission for Agricultural Costs & Prices (CACP) has recommended a formula saying that if the cane price paying capacity of the industry is below the fair and remunerative price (FRP), the government should create a price stabilisation fund to bridge that gap. That is what we are pursuing, that if the government wants to support the farmers with a higher cane price, they need to directly pay to the farmers some amount so that the industry does not suffer any further. We expect that the government might come up with some support to the farmers directly.

Latha: And when do you expect this to happen, any timetable?

Verma: That is anybody’s guess but obviously the Bihar elections are on the way. So, we believe it should be somewhere in November, we expect some announcement from the government.

Latha: Is that the only part that you are expecting that the farmers could be given some direct support on the lines of the CACP advice? Or are there any other measures you are expecting or are in discussion with the government?

Verma: I think that is the best solution and that is what we are expecting. I mean the whole crux of the problem of the Indian sugar industry is a very high sugarcane price, which we are not able to afford.

So, if the government wants to support and give the farmers a high price, that is a social welfare programme and if the government fills in that gap and gives it directly to the farmers, that is the best solution and that is the only solution that probably will help the industry move forward from here because then you have a viable industry.

Latha: But, the high price is being dictated by the state governments, will the central government fill in?

Verma: If you look at the state governments, only Uttar Pradesh (UP) is the biggest problem, otherwise Uttarakhand, Punjab and Haryana are not producing much sugar. Tamil Nadu is not a mandatory state advised price. The other states do not announce a state advised price.

If you look at UP, in the last couple of years, UP has kind of helped the industry. Last year, they have given Rs 40 per quintal and therefore the industry in UP has paid Rs 240 per quintal of sugarcane. So, there is more and more response, more and more responsible action from the state governments also.

Now, if the central government kind of bridges and says the industry is unable to pay Rs 230 per quintal of FRP and industry is able to pay Rs 220 and that gap is bridged by the central government, it is going to be very difficult for any state government morally to ask the industry to pay a higher price than Rs 220 what the central government establishes.

Sonia: Sugar production is expected to fall because of the weak monsoons but how much will it fall this year? How much are you expecting production to fall next year and at what stage of the sugar cycle are we in currently?

Murkumbi: WE have had five years of continuous record production, a production more than domestic consumption. This year, we have just revised our estimates downward to 27 million tonnes. Planting intentions for next year -- there is some problem with water availability in large parts of Maharashtra and some parts of Karnataka and I would expect on the whole that planting would be lower than the current year. But it is too early to tell. November to January is the period when planting happens.

Latha: Your numbers?

Verma: Same. He is talking about Indian Sugar Mills Association’s (ISMA) numbers, 27 million this year. The consumption is going up, that is the best part. So, the numbers are getting very closer, the gap is not very large, the surplus will not be very huge in the next few years.