Reforms in sugar sector

Presentation before

Dr. Rangarajan Committee

Submissions to be made today

Some important characteristics of Indian Sugar Industry

The Government Controls

ISMA’s views and suggestions for reforms in the sector

Recommendations of various Committees/ Authorities

2

The Indian Sugar Industry

2nd largest producer of sugar in the world

5 million hectares & 50 million cane farmers and dependants.

Rs.80,000 crore industry. Cane payment of Rs.55,000 crore

are directly paid to farmers without middlemen.

65% of sugar consumed by bulk consumers

Located in rural heartland, directly contributes to rural

economic development & employment

3

The Infamous Indian Sugar Cycle

4

185.27

201.40

135.46

126.91

192.67

283.61

263.56

145.38

189.12

243.94

260.00

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12( E)

Production trend of last ten years

Sugar Production( lakh tons)

The Infamous Indian Sugar Cycle

5

185.27

201.40

135.46

126.91

192.67

283.61

263.56

145.38

189.12

243.94

260.00

167.81

183.84

172.85

185.00 185.00

199.00

219.00

229.12

213.28 207.69

220.00

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12( E)

Production- Consumption trend of last ten years

Sugar Production( lakh tons) Sugar Consumption( Internal Releases) lakh tons

Cyclical sugar trade in last 20 years…….

6

-2.0

-0.2

-0.94 -1.00

-0.41 -0.12

-0.55

-2.14 -2.40

-4.08

0.56 0.41 0.01 0.06

1.02

0.42 0.07 0.02 0.07

0.99 1.08

1.77

0.27 0.01

1.11

1.73

4.96

0.17 0.24

2.6 million tonne

Import Export

Cane Price Arrears (as on 31st March in Rs. crore)

7

1191 1668

2817 3047

2076

876 972

2321

5188

1225

2723

4315

8918

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Cane Price Arrears vis-à-vis Sugar Inventory

8

0

20

40

60

80

100

120

140

160

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000 2010-11

Cane Arrears( Rs. Cr) Sugar Inventory(lk tn)

0

20

40

60

80

100

120

140

160

180

200

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2011-12

Cane Arrears( Rs. Cr.) Sugar Invenotry( lk tns)

Cane price arrears directly related to sugar inventory which industry forced to carry

Industry has no control on cash flow which are need to pay cane price to farmers

during crushing season.

Controls on Indian Sugar Sector

Minimum

Distance Criteria

between mills

Levy Sugar

Obligation on

mills

Import and

Export

Dual Cane

Pricing:

Centre/State

Regulated

Release

Mechanism

Cane Area

Reservation

GOVT. POLICIES

Compulsory

sugar packing

in jute only

Central Govt. controls State Govt. controls

Sugar Industry: No Control Over Its Own Fate

Raw Material: Its Price and Availability

Sales: Volume as well as Levy Obligation

: Stock Limits on Traders, Bulk Consumers etc.

: Sugar Inventory

Selling Price of Sugar: Below cost of production

Packaging Material of Sugar: Price and Quality

Export-Import of Sugar: Quantity and Policy Restrictions

Cash Flow Planning: Payment to Farmers and Lenders

10

1. Abolition of Levy Sugar Obligation

11

Sugar industry is the only industry in India to bear the burden of social

welfare program of Government (PDS)

Benefit does not reach the targeted population

Price is only 60-65% of cost of production and open market price

States should buy levy sugar from open market, similar to other

commodities

Lower returns (Rs.2500 crore annual losses) to mills adversely

impacts cane price of farmers

Actual Lifting of sugar

12

19.71

23.54

13.92

23.2

26.65

9.73 9.21

13.89 11.78

19.39

0

5

10

15

20

25

30

2006-07 2007-08 2008-09 2009-10 2010-11

Levy Sugar released( lk tn) Actual Lifting( lk tn)

Upto April*

Annual levy requirement on paper -27 lakh tonnes

* Data not available beyond April 2009

Carry forward rule of past obligations

13

Levy obligations of mills can be carried forward by 2 years

Sugar mills forced to carry physical stocks of levy

Blocks cash flow & capital: adds to interest burden, carrying

cost, production cost

30/9/2011: Levy sugar obligations of 21 lakh tons, worth Rs.

6000 crore, carried forward

Patna High Court: Levy obligation cannot be carried forward

beyond three months.

Sugar for PDS should be procured by Government

Similar to other commodities in PDS, like wheat, rice etc.

Government should buy sugar for PDS

Additional subsidy to Govt. would be Rs.1,500-2000 crore (very

small compared to Rs.80,000 crore of food subsidy bill in 11-

12)

Inefficiencies in present system and diversion will be removed

14

Sugar supplies on market rates: alternatives

Sugar industry can deliver the sugar in respective States at

specified destinations. Options for payments could be:

Central Agency/FCI be made responsible, wherein

Suppliers, rates & transportation costs can be finalised through open

tenders: annually, quarterly or monthly

payments be made by the Agency/FCI to mills

Kerala model could be adopted

monthly tenders be floated and market rates given by State Govt

Mills be paid by States upto issue price and balance be recovered

by adjustment against Central excise/duties/taxes

15

2. Problems of Regulated Release Mechanism

16

Only industry in India to be told how much to sell each month

Mills can’t plan their cash flows

High inventory burden on sugar mills adding to cost of production

Food Ministry has accepted in a note to PM & FM and also in a note

to CCEA in 2008 that the present system has

“not quite achieved its objective of keeping the market prices

at a desired level”

Surplus releases by Sugar Directorate

almost every month vis-a-vis actual consumption

17

10

12

14

16

18

20

22

Releases Carried forward

3. Export-Import Policy of Government

Timing of permissions is important

International prices and domestic price situation

Export bans in past when exports were actually viable

Effect of exports on cane arrears & sagging domestic prices

India should have presence in global market on regular basis

Control of Government be restricted to controls over tariff

rates, and on not quantity restrictions

Objective should be to ensure India becomes net exporter on

continuous basis and becomes self-sufficient for domestic

needs

18

World Sugar Market Settlement Quotation on day of EGoM (White FOB- London*- USD / tonne)

Mar, 2011

May, 2011

Aug, 2011

Oct, 2011

Dec, 2011

Mar, 2012

May, 2012

Aug, 2012

Oct, 2012

Dec,2012

Mar,2013

15th Dec,2010 768 730 664 605 588

23rd March,2011 688 654 630 616 608

19th April, 2011 625 606 605 602 589

21st Nov, 2011 625 614 606 605 608

2nd Dec,2011 614 606 598 600 604

7th Feb,2012 647 632 613 611 615

22nd Feb,2012 649 628 624 625 628

26th March,2012 649 633 623 627 631

Today's Future 559 555 564 572

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Lead time between actual issuance of notification on export mandate by

EGoM creates pressure on margins

4. Compulsory jute packaging order

Jute Packaging Materials Act, 1987 covered food-grains, cement, fertiliser and sugar.

Cement excluded in1998 and fertilizers excluded in 2001.

Food-grains being in public sector, FCI/State agencies procure 60% of jute bags at an

administered price announced by Government every month.

Sugar being in private sector, strictly under JPMA and no price protection provided.

Not enough raw jute in India to require compulsory packing of sugar in jute bags.

Cost of 50 kg. HDPE bag is Rs. 15 per bag and cost of 50kg. Jute bag is Rs. 35 per bag.

Translates into increase of 40 paise/kilo of sugar.

Loss of Rs. 1000 crore revenue to sugar industry.

Loss of Rs. 700 crore to cane farmers approx.

Sugar should be completely removed from JPMA.

Treat sugar industry at par with other private industries like cement and fertilisers

20

5. Pricing of Sugarcane

Central Government fixes a uniform FRP (SMP till Sept 2009)

FRP is based on CACP recommendations & fixed criteria

But 5 States fix SAP (on political considerations, without any

transparent laid down criteria and no relation to sugar price)

Dual cane pricing distorts cane and sugar economy and is

contributing majorly to cane price arrears and cyclicality

Present system leads to major swings in cane price payments

Ranges between 55% to even over 100% of sugar price

21

Cane price arrears during last 5 years: Uttar Pradesh & Maharashtra (in March – Rs. crore)

Cane arrears are higher in case of UP because of a political SAP and

no relationship with returns on sugar sales

22

680.62

1938.28

574.92

1196.33

4736.65

329.53

1080.59

418.37 484.38

2006-07 2007-08 2008-09 2010-11 2011-12

U.P. Mah

Indian sugarcane prices are the highest in the world

23

Avg. sugar prices from Oct- Mar 2011-2012

0

5

10

15

20

25

30

35

40

45

50

India USA Bangladesh Pakistan South Africa

Brazil Mexico Thailand Australia

Avg. sugarcane prices from Oct- Mar 2011-2012 $ / tonne

Indian sugar price amongst the lowest in the world

24

0

10

20

30

40

50

60

70

80

90

Rs. per kg Avg. sugar prices from Oct- Mar 2011-2012

Most of the benefits goes to bulk consumers, who consume 65% of total sugar

High cost of production: Low ex-mill price: Two largest cane producing states

2500

2600

2700

2800

2900

3000

3100

3200

3300

Cost of Production

Ex-mill Rates ( Rs/ Qtl)

Uttar Pradesh

2500

2600

2700

2800

2900

3000

3100

3200

3300

Cost of Production( Rs./Qtl)

Maharashtra Ex-mill rates

Maharashtra

(Rs/ qtl)

(Rs/ qtl)

Cane price – Sugar price linkage

Presently, there is no relationship between cane & sugar price in India

Major sugar producing nations like Brazil, Australia, Thailand,

Mauritius, even Kenya and Tanzania have such a direct linkage

Nandakumar Committee recommended such a formula in 2010

Recommends for a fixed % of sugar , bagasse & Molasses

realisation

Guarantees share to farmers of hike in sugar prices in off-season

Ensures a fair return/ savings to sugar mills too

Will reduce cyclicality in sugar production

26

6. Cane Area Reservation

Followed in most States except Maharashtra, Gujarat

Obligation under reserved area is mutual:

Farmers are required to supply all cane to the mill

Mill to procure all cane produced in the area, even if incurring losses

Arguments in favour

Mills are assured of an area and thereby cane supply

Reserved cane area encourages investment in farm & extension

activities

Farmers have an assured buyer, esp. in surplus years

Avoids unhealthy competition amongst mills

27

Cane Area Reservation (contd.)

Arguments against

Assured area and supply can lead to complacency and lack of

investment etc. in farm

Farmers will get freedom to choose buyer for their cane

Few States revise area annually (political considerations) causing

uncertainties of re-allocation of area

Some members of ISMA support cane area reservation, while others

have no problems if areas are de-reserved. But if reservation is

continued, should be long term.

28

7. Minimum Distance between Mills

Minimum distance criteria should be continued, but depending

upon capacity of mills and cane density, States should revise

distances as and when need arises.

25 kms prescribed in Punjab, Haryana and Maharashtra

whereas other States have a distance criteria of 15 kms

Minimum distance prescribed

to ensure adequate cane area and sugarcane for each mill

since cane cannot be carried over long distances

to check unhealthy competition

29

Views of various Committees & Authorities

Mahajan Committee (1998)

Tuteja Committee (2004)

Thorat Committee (2009)

Finance Ministry, Commerce Ministry, Planning

Commission and Food Ministry (2008 note for CCEA)

Nandakumar Committee (2010)

CACP (2011)

30

Mahajan Committee (1998)

Cane area reservation should be on permanent basis.

Decontrol of sugar in a phased manner over two years period.

Levy sugar first to be reduced to 20% for two years and then complete

decontrol.

Interest to be paid to mills for non-lifting of levy within time limit.

If Govt. wishes to continue sugar under PDS, required quantity to be

purchased from industry by tendering/fixed price.

Regular annual export quota of one million tons.

Maintenance of buffer stock on regular basis.

31

Tuteja Committee (2004)

Payment of SMP along with price sharing benefits as

per Clause 5A to continue.

Present system of 10% levy.

Maximum three months for lifting of levy, after which levy

quota automatically be converted to free sale.

Dispense with the release mechanism for free sale

sugar w.e.f. 1st October, 2005.

Distance between two factories to be fixed at 25 Kms.

32

Thorat Committee (2009)

Government should withdraw from fixing price of sugarcane. Mills

and farmers should settle prices and terms of raw material supply.

Factory-wise cane area reservation policy should be scrapped.

Abolition of levy sugar mechanism. Government should procure

sugar from open market for supply under PDS.

Removal of sugar from EC Act. Complete deregulation of sugar

sector.

Monthly release mechanism should be completely done away within

a phased manner.

Minimum distance between factories at 25 Kms.

Sugar packaging order should be withdrawn.

Long term and stable EXIM policy.

33

Nandakumar Committee (2010)

Recommended revenue sharing formula for cane price

i.e. fixed % of sugar, bagasse & molasses realisation.

34

Proposal of Food Ministry to CCEA on decontrol of sugar

sector (2008)

Abolition of levy sugar obligation w.e.f. 1st Oct. 2008.

Authorise State Govts./UT Admns. to procure sugar from

open market for PDS.

Dispense with the regulated release mechanism for non

levy sugar w.e.f. 1st October, 2008.

To approve ten year validity period for the above policy

changes.

35

Views of Finance Ministry, Commerce Ministry,

Planning Commission on Food Ministry’s proposals.

Finance Ministry

Levy sugar obligation be abolished and Government to

purchase sugar from market for distribution under PDS.

Abolition of regulated release mechanism to give greater

freedom to producers but initially with quarterly releases.

Commerce Ministry

Concurred with the proposal of Food Ministry buying sugar

from open market for supply under PDS.

Planning Commission

Concurred with the proposal of Food Ministry regarding

removal of levy obligation and dispensing with release

mechanism with slight modification.

36

CACP RECOMMENDATIONS (2011-12)

Central Government should persuade State Governments not

to fix SAP.

Government to review present controls of sugar sector.

Initiate decontrol of release mechanism of free sale sugar

and removal of levy sugar obligation in phases.

Formulation of policy on all aspects of EXIM policy on sugar

to enable Indian sugar industry’s competitive presence in

world market

Distance between two sugar factories to be kept as 25 Kms.

37

Controls are out-dated, archaic & no longer good

Industry is of strong opinion that Government controls

are contributing/ aggravating

Cyclicality in sugarcane/sugar production

Depressed sugar price, below cost of production

High burden of sugar inventory on mills

Cane price arrears

Lack of research and investment in the sector

Low cane yields and low sugar recovery

Urgent need for reforms

38

Growth of the Brazilian Sugar Sector

Presentation before

Dr. Rangarajan Committee

The Brazilian Story

The National Intervention Period: 1930 to 1990

1933: State intervention in sugarcane sector started with

establishment of the “IAA” (Sugar and Ethanol National Institute*)

During the 70´s, the national program had a twofold objective, namely:

increasing sugar exports and reducing energy dependency:

Sugarcane Breeding Program to improve productivity

Proálcool (Ethanol Program)

began in 1975 as a response to the oil crisis

established an E-5 mandate and encouraged development and demand of pure

ethanol-fueled cars (E-100)

2

Brazil: Government Intervention period

Four major pillars

Production: plan & regulate annual sugar and ethanol

production; the amount of sugarcane delivered to each

industrial plant; the amount of ethanol and sugar to be

produced in each state

Seasonal plans were released every year informing farmers and

millers about the sugarcane quantity to be processed and the

price to be paid.

Exports: manage raw and white sugar exports

3

Brazil: Government Intervention period

Four major pillars (contd.)

Prices: Set prices for all products (sugarcane, sugar and

ethanol), based on their production costs

Government set parity prices between sugar and ethanol to make it

financially indifferent for the mills to produce either sugar or

ethanol; pure ethanol prices at the pump should not be higher than

65% of gasoline prices

Consumption: Set mandatory blends for ethanol with

petrol, plus incentives for establishment of ethanol

distilleries attached to existing sugar mills

4

Deregulation of Sugar Sector: A gradual process

During early 90´s, the Brazilian economy dramatically moved towards

liberalization, openness and privatization.

Sugar sector ran along the same pathway: the first movement was the

closure of IAA, in 1990. This was followed by a gradual process of

liberalization of the sector:

Elimination of public production and exports controls (1990)

Sugar and Ethanol Inter-Ministerial Council(CIMA) established in 1997

for policies for self-sustaining economic growth of the industry;

recommend for the ethanol level blending in gasoline (20-25%);

5

Deregulation of Sugar Sector: A gradual process

Effective measures regarding liberalization of ethanol

and sugarcane prices started only in 1997. Given the

social, economic and environmental importance of

the sector, it was established a phasing-outprocess,

concluded just in February of 1999

One of the major constraints for this process to move

faster was the resistance of the sector on how to price

the feedstocks

6

Model for cane pricing: Consecana Model

1999: creation of sugarcane payment model named

“CONSECANA”

It is a private sector arrangement which main objective it to

share risks between sugar and ethanol producers and

sugarcane growers

Main rules: (1) the revenue of the sugarcane grower is

proportional to the industrial revenue; (2) price of

sugarcane supplied by each grower depends on the level

of sucrose that the product contains

7

Main Rules of Consecana Model

Revenue of cane grower is proportional to industry’s revenue

Cane costs account for 60% of total sugar and ethanol

production costs. Therefore, the sugarcane grower receives on

average 60% of the agro-industrial revenue.

Price of sugarcane supplied by each grower depends on the

level of that the product contains.

Quantification of the sugar contained in sugarcane is determined

in terms of TRS (“Total Recoverable Sugar”*).

A dynamic model, subject to revisions (general revisions

conducted every 5 years)

8

Slide 7

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Slide 10

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Slide 11

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Thank You