It is essential to cultivate a healthy farmer-miller relationship to mitigate risks such as assured off take of sugarcane or timely payment
of dues, according to a new report on Ease of Doing business by Pahle Foundation, a not-for-profit policy think tank.
"The economic prosperity of a mill depends on availability of high-quality sugarcane, price of sugar, and gains from by-products. Since the first two depend on the timely availability of sugarcane, the importance of the farmer-miller relationship once again comes to the forefront," the report said.
Sugarcane has a complicated pricing mechanism. The central government sets the fair and remunerative price (FRP) through the Commission
for Agricultural Costs and Prices.
The FRP of sugarcane is set after taking into account factors, such as cost of production, return on cultivating alternative crops, retail price of sugar, recovery rates, and comfortable margins for the farmers.
State governments also announce their own price known as State Advised Price (SAP). SAPs are usually declared bearing in mind the distress of the sugarcane cultivator in the state and SAPs are always set higher than that of the FRP, thereby distorting the market.
"The complicated pricing mechanism has resulted in rising farmer dues. The miller alone cannot be held responsible for this. However, this has resulted in a lack of trust between the farmer and the miller," the report said.
The sugar industry has often suffered because of the government's inability to accurately forecast sugarcane output and yields. According to the Indian Sugar Mills Association data had forecast production to be to the tune of 26.1 metric tonne. These estimates were revised to 29.5 metric tonne, indicating an excess production of 4.5 metric tonne. This was over and above the previous season’s closing inventory of 4 metric tonne. The reason for this revision was because both Karnataka and Maharashtra revised their respective production estimates.
"Excess production causes wholesale prices to drop. However, sugarcane prices continued to increase, squeezing the millers from both directions, adversely impacting their profitability," the report said.
The report also finds that the sugar industry is controlled at both ends, of production and sale, resulting in driving down the profitability of the sugar industry.
"Even as India has moved away from excessive controls in all sectors, sugar remains not just a highly regulated sector but an excessively controlled one. To make matters more difficult, there is dual pressure from central controls and benefit. For the sugar industry to become profitable again, reforms will have to begin at the farm," the report said.