Why sugar leaves a bitter taste: Financial Express: September 3, 2009

Just think of a product valued at Rs 50,000 crore that is consumed by individuals who contributearound Rs 20,000-22,000 crore to its consumption. The product has a combined weight of 5.2% in the WPI and accounts for around 6% of private consumption in both direct and indirect terms. Its price is on the verge of doubling by October as output for the ‘product year’ 2008-09 is expected to decline by more than 50%. The product is sugar, and the story is not new.
Sugar cycles in India are well known, and there is a sugar crisis. every 4-5 years. Production falters, and when not supported by imports, results in higher prices, and panic policy responses. We have already seen the government ban futures trading in sugar (the price continues to increase) and introduce strict stock limits to prevent hoarding (but prices still increase). The logical response is to import sugar, which should have been done earlier when the futures prices indicated that there would be problems on the supply front. But, by delaying the decision, the severity of the issue has been exacerbated.
India is one of the largest consumers of sugar, and the USDA estimates that global sugar output is to fall by 17 million tonnes in 2008-09. Sugar production has been affected by various factors including past decisions to divert land to the production of bio fuels which lowered cane production. This has had an impact even on the current production of sugar in major producing countries. India’s entry into the import market, as a very large consumer, automatically pushes up prices.
The problem in India, of course, starts in the sugarcane fields. Price is controlled through the statutory minimum price programme which assures a fixed price to the farmers. However, farmers are not paid on time as the mills can pay them only after they sell processed sugar. But sugar sales are regulated, even in the free market, through a release system where the government announces monthly releases. While the releases system aims to balance the supplies and ensure that it is available throughout the year, it creates problems for the mills in terms of their ability to pay the farmers on time.
The result is that the farmers often move away from sugarcane cultivation. They also prefer to sell to the molasses and gur manufacturers where payment is less of an issue. Therefore, cane production per se has been whimsical. Further, the monsoon playing truant has affected the production of cane, and given that there has not been substantial improvement in productivity, yields remain stagnant. The yield had touched a high of 71 kg/hectare in FY00 and has remained at a lower level since then. The area under cultivation has fluctuated between 37 lakh hectares and 52 lakh hectares, which lends to uncertainty in the output. The fact that cane is a water-intensive crop implies that any shortfall in rainfall in terms of late arrival or progress causes farmers to switch crops, as has happened this year, which finally impacts the production of sugarcane and sugar.
The solution is evidently to improve productivity, and policies on sugar. Enhanced productivity is possible only in the medium run. While sugar is partly decontrolled, it is the only industry which faces regulation at both the raw material and final product ends. In the case of wheat and rice, the MSP helps the farmer and the government through the FCI which is the main buyer, but in case of cane, the price is fixed and the private mills have to pay this price and have no alternative. While the free market price is theoretically free, as mentioned earlier, its distribution is subject to the releases announced by the government thus making it a controlled product. This does not happen for any other product—there is just too much intervention in the production and distribution cycle.
Looking ahead, the government should take a stance on whether sugar is as critical as rice or wheat for food security. While one view is that the market should take care of the dynamics, the other believes that sugar is too critical to be left to the market as it is a mass consumption item. If this is to be the stance then the government should consider the creation of a buffer stock, just as in rice and wheat. More importantly, at a broader ideological level, we do need to seriously look at the extent to which the government should be intervening in price stabilisation of all products that are consumed by people. We began with rice and wheat and now have made sugar and edible oils targets of government price intervention. Should the same stretch to vegetables and milk which are also essentials, and affect the common man? Surely not. That will createmore problems than solutions ...