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Sugar import: When economics and politics don’t match

Given a likely supply-demand gap, slashing import duty may be necessary but the environment post-UP polls may not allow it.

Written by Parthasarathi Biswas , Harish Damodaran | Pune/new Delhi |
February 23, 2017 2:00:36 am
Sugar import, BJP, uttar pradesh sugar import, up bjp, sugar import issues, sugar supply, sugar manufacturing, sugarcane farming, Maharashtra’s mills, Maharashtra sugar mills, UP Assembly elections, indian express news, india newsm business news The problem, however, is in Maharashtra and Karnataka, where cane plantings have suffered on account of drought last year. Illustration: C R Sasikumar

Whether or not the Bharatiya Janata Party (BJP) wins in Uttar Pradesh (UP) — we’ll know on March 11 — its government at the Centre will soon be faced with a tricky issue relating to import of sugar.

From a purely economic standpoint, there is some merit in allowing duty-free imports, mainly of raw sugar by domestic refineries and mills having the capacity to process these into whites in the ‘off-season’ after March-April, when cane isn’t available for crushing.

The supply situation in sugar is precarious at best. India produced 284.63 lakh tonnes (lt) of the sweetener in 2014-15 and 251.21 lt in the 2015-16 sugar season (October-September).

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In the current season, mills in UP have, as on February 21, crushed 574.17 lt of cane and produced 58.37 lt of sugar at an average recovery of 10.17 per cent. With 111 out of 116 mills still running, they seem well on course to crush 780-790 lt of cane. That, on an average recovery of 10.5 per cent for the whole season, would translate into an output of 82-83 lt, as against 68.47 lt in 2015-16 and 71.38 lt in 2014-15.

The problem, however, is in Maharashtra and Karnataka, where cane plantings have suffered on account of drought last year.

graphhh

Sugarcane, unlike wheat or cotton, is a 12-month crop. The impact of lower cane acreage from poor rains in 2015-16 is, therefore, being felt on production for the current season.

Maharashtra’s mills had, till February 20, crushed 363.11 lt of cane and produced 40.56 lt of sugar. With 124 out of the total 150 factories already shut and even the remaining mills not having cane to crush beyond mid-March, sugar output in 2016-17 is unlikely to cross 42 lt. This is a steep drop over 84.72 lt and 105.15 lt in the preceding two seasons, and the lowest since the 22.33 lt level of 2004-05.

Karnataka, likewise, may not see production of more than 22 lt this season, as against 40.48 lt in 2015-16 and 49.89 lt in 2014-15.

The combined output decline of 61-62 lt in Maharashtra and Karnataka will, thus, more than offset a 14-14.5 lt increase from UP.

Small dips are also expected in Tamil Nadu (from 13.7 lt to 11 lt) and Andhra Pradesh plus Telangana (from 8.3 lt to 6.3 lt), while unchanged for Gujarat (11.19 lt).

Assuming output to be 5 lt higher in all other states put together – including Punjab, Haryana, Bihar, Madhya Pradesh and Uttarakhand — gives an all-India production figure of around 205 lt for the 2016-17 season. Adding opening stocks of 77.1 lt as on October 1 — not everyone’s sure about this official estimate of sugar actually being held by mills at the season’s start – takes the overall availability to roughly 282 lt.

The food ministry reckons domestic consumption in the current season at 255 lt. Even reducing that by 5 lt because of demonetisation leaves closing sugar stocks of just over 30 lt, equivalent to one-and-a-half months’ consumption and below the normative requirement of two-and-a-half months.

Precarious stocks can be a problem, especially in a scenario of the coming monsoon turning out not-so-good, raising questions over the production prospects for 2017-18 as well. An early festival season this time — Raksha Bandhan is on August 7 (August 18 in 2016), Dussehra on September 30 (October 11) and Diwali on October 19 (October 30) — does not help either. The frontloading of festival-time demand, even as mills start crushing only from November, could have implications for prices.

While all this makes for an economic case to slash the import duty on sugar to zero, from 40 per cent now, doing it may not be politically easy, though.

The reason for it has to do with the ongoing UP Assembly elections, where the BJP has reportedly suffered reverses in the state’s main western cane belt. The apparent loss of support from the region’s vocal Jat peasantry — which backed it hugely during the 2014 Lok Sabha elections — has been significantly linked to sugarcane. Cane growers in the state had seen three consecutive seasons (2013-14 to 2015-16) of no price increase, coupled with delayed payments from mills. This time, they were looking for a better season, given cane shortages in other states. But demonetisation threw the makers of alternative sweeteners (gur and khandsari) out of business, reducing competition for cane and forcing growers to supply only to sugar mills.

Even if the BJP emerges victorious in the Assembly polls, it is certain that the party would do everything to regain the Jat community’s trust for the big national elections in 2019. That could also engender a more cautious policy response with respect to sugar imports.

But imports themselves may not be an economically feasible proposition today. Much of world sugar trade takes place in ‘raws’, which are transported in bulk vessels of 55,000-60,000 tonnes capacity, as opposed to whites shipped in smaller 12,000-15,000 cargoes or even 26-27 tonne containers over shorter distances.

Further, imported raw sugar can be processed in the off-season only by refineries or mills having boilers that can run both on bagasse (the fibrous residue left after extraction of juice from the cane) and coal/lignite (when cane isn’t available).

Currently, Shree Renuka Sugars Ltd has two port-based refineries at Kandla (Gujarat) and Haldia (West Bengal) with aggregate raw sugar processing capacity of 5,000 tonnes per day. EID Parry and Simbhaoli Sugars also have refineries at Kakinada (AP) and Kandla, with respective capacities of 2,000 and 1,000 tonnes each. Mills in Tamil Nadu, Karnataka and Maharashtra with dual-fuel boilers are estimated to have an additional capacity of 2,000 tonnes per day.

If all these refineries/mills were to operate from April to September — assuming that imports are made duty-free after March 11 and a minimum voyage time of 30 days from Brazil — they can at most process about 18 lt of raw sugar.

Besides, there is no price parity that makes imports viable at present. Raw sugar is trading in New York at 20.8 cents a pound or 21.64 cents ($ 477 per tonne), after factoring in a 4.05 per cent ‘polarisation premium’ for extra sucrose content.

Adding ocean freight of $ 25 takes the landed cost of the raws alone to $ 502 or Rs 33,634 per tonne. Inclusive of expenses towards port clearance and inward logistics (Rs 1,300), refining and processing losses (Rs 4,000) and interest/storage for 45 days (Rs 500) translates into an ex-factory cost of over Rs 39,400 per tonne (Rs 39.40 per kg) for white sugar processed from the
imported raws.

By comparison, Indian mills are realising an ex-factory price of Rs 36.5-37.5 per kg for the sugar they are producing from domestically sourced cane. So, for imports to happen, prices have to go up. And if imports don’t happen, sugar prices are bound to rise sooner or later. In the event, balancing the interests of consumers and producers isn’t going to be easily for this government — more so, post-UP elections.

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First published on: 23-02-2017 at 02:00:36 am

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