The equilibrium in sugar sector dynamics over the last three years between cane farmers, mill owners and government is noteworthy and presents itself with a unique case study of public interests- private sector harmony is a very sensitive business. Sugar industry has been a subject matter for decades in India on the cross interests that always left one party in despair situation, but not anymore. The performance data of mills in Uttar Pradesh (“UP”) shows that a balance has been achieved which has resolved debt crisis for mill owners, farmer has received all its dues and consumer is not complaining. UP is a relevant case study to understand this equilibrium because it does not have climate factor as a variable in this complexity and thus UP data reflects the commendable policy impact of various initiatives by the government for the sugar industry taken over the past five years.
The four key factors which have contributed to this magical formula are, (a) discovery of new cane variety which has increased the sugar recovery in cane by 25% in UP and near the best in country, (b) minimum domestic sugar sale price imposition by the government combined with export incentives and high import duty, (c) enforcement of FRP on cane price which thereby links the cane price to mill owner realisations on sales and most important, (d) a new ethanol policy which encouraged cane juice to be used for ethanol production and thus address a twin problem of sugar glut in the system and help country save forex reserves. Noteworthy, the entire equilibrium has been achieved a pretty low cost for the government (which is less than Rs. 10,000 crores in form of duty/taxes loss on ethanol being blended in oil) as compared to damages to government in other agro commodities.
As a result, Western/ Central UP provides the best sugar business economics in the country and the performance is well balanced to provide sustainable and near annuity income. Cane cultivation is a high water consuming crop and UP’s Gangetic plains have always been most suitable for cane cultivation with least impact of any variations in annual monsoon rainfall. UP remains leading sugarcane producing state in the country with an estimated area of 23.6 lakh hectares followed by Maharashtra (11.5 lakh hectares) and Karnataka (4.2 lakh hectares). The entire eco-system for cane cultivation, logistics and its processing is most developed in UP. The climate/temperature conditions have a strong bearing on the sugar percentage in cane & productivity which in turn has direct correlation to relative sugar economics and overall cane availability (quantum and length of crushing season). Historically, colder conditions and extreme competition for cane pushed UP’s average sugar recovery to less than 10% as compared to about 11 to 11.5% in Maharashtra and Karnataka. Since 2016, there has been a dramatic increase in sugar recovery and cane quality in UP (owing to development of new cane varieties) which has lifted UP’s sugar recovery average to best in the country and with least dependence on monsoon performance. There has also been a more rationale policy making by UP state government of cane prices by adopting the FRP mechanism.
New ethanol policy of government has provided considerable cushion to cyclicality of profits in sugar business, it takes away the sugar glut in the system automatically. The policy has found good acceptance as evident in the data on ethanol blending by Oil Marketing Companies In the last four years. The ethanol offtake by OMC’s has increased at a CAGR of 30% from FY15 to FY19 (FY15 – 111 crore litres, FY19 – 245 crore litres) and likely to reach 500 crore litres by FY 21. The certainity of offtake in a transparent and efficient manner, coupled with increase in fixed sales realization (from Rs. 40.8/ litre in 2015 to Rs. 43.7/ litre (C-molasses) thereafter) has helped increase in contribution of ethanol to almost as high as 40 to 50% in the overall profit pool for the cane processing industry.
On the whole, the UP mills have generated considerable free cash flows, cane arrears in state have nearly wiped off, consumer is not complaining and we have a good sustainable business model which can now find some courage to invest for the future.
