India is one of the largest consumers and producers of sugar, with sugar-cane farming generating livelihood for at least 45 million farm families. The sugar-cane cycle, however, remains a major stumbling block in improving their livelihood. In fact, every four to six years, the sector slips into a crisis with either a shortfall or bumper production creating uncertainties in the market, making matters difficult for policymakers.
Photograph: Hemant Mishra / Mint
At times of glut, the losses incurred by sugar mills force them to delay payments, creating disincentives for farmers to subsequently take up cane growing. In spite of this, the government always acts to clear the mess by allowing exports, and by that time existing prices change. This has made our policymakers announce WTO-compliant subsidies for sugar exports. Notwithstanding WTO-compliant export promotion, in 2007 the government had to bear carry-over costs of sugar mills, besides easing the working capital requirements of the mills to make them healthy. Logically, neither of these measures seems to be a long-term solution.
With ethanol—a by-product of the industry—there is a new avenue for its profitability, especially at a time of volatile energy prices.
In India, ethanol is mainly derived from molasses, a by-product of the crushing industry due to statutory requirements. The ministry of consumer affairs, food and public distribution issued an order in December 2007 allowing sugar mills to directly produce ethanol from sugar cane in a move to diversify their product portfolio and to provide them income stability, especially during industry downturns, to protect margins. The policy was also to help the government achieve its target of 10% ethanol blending with petrol by October 2008.
Though the Centre mandated 5% ethanol blending from October 2006 across the country, industry estimates put average blending at not more than 2%. This has mainly been attributed to infrastructure constraints at the marketing companies’ end, lack of a transparent and mutually agreed upon pricing formula and oil marketing companies in some states (such as Tamil Nadu and West Bengal) facing unattractive ethanol prices due to high state levies, among others. Despite the commercial possibilities of ethanol blending in most states, oil marketing companies continued to underperform in meeting this mandatory requirement. Hence, the logical first step would be to ensure duty parity for ethanol across the country, allowing its free movement. This revision is crucial if the government is to achieve its target of 10% ethanol blending.
The second step would be to come up with a mutually accepted and transparent pricing formula that would help promote blending. With the fall in acreage of sugar cane this year cane availability will be reduced. However, ethanol produced from molasses faces competition mainly from two other industries, as alcohol derived from molasses is used by the liquor and chemicals industry. At a fixed price of Rs21.5 per litre, it may not appeal to an ethanol manufacturer whose raw material (molasses) price fluctuates by two to five times between peak and off-peak seasons.
Given this situation, the fall in acreage during the current sowing season and a rebound in domestic sugar prices will incline millers towards producing sugar instead of crushing for ethanol. Hence, in the current price scenario, the co-generation model of making sugar, ethanol and generating power will be profitable for crushers instead of the direct cane-to-ethanol model. This year, if pricing is not linked to market conditions, it will make it impossible to reach the current blending target of 10%.
It is evident that given the current targets for ethanol blending, it would be quite impossible to achieve them in view of current sugar prices. They favour co-generation and not mere sugar to ethanol conversion. This should not be a reason to discard these goals, as 5% or 10% ethanol blending can help India save large sums of foreign exchange by reducing the oil import bill.
With deregulation of the sugar industry still a far cry, the government should adopt a two-pronged agenda to effectively achieve the current target of 10% ethanol blending. First, the government should come up with a transparent floating price formula linked to factors such as raw material prices, alternative demand and global fundamentals. Alternatively, an exchange-traded ethanol contract would help in benchmarking ethanol prices for blending purposes to be paid by the oil marketing companies. Second, fixing a trigger price for international trade in sugar and ethanol would take care of the interests of sugar consumers and oil marketing companies. The trigger could be pulled at both the upper and lower end of the price band that would be reviewed by the government from time to time. When there is a sugar glut, mills would have more avenues to divert cane for its best possible use, and during a shortfall the international markets could be tapped to augment domestic supplies. This will help the Indian sugar industry achieve sustainable growth and improve the livelihoods of farmers, besides tapping alternative business opportunities.
V. Shunmugam and Nazir A. Moulvi are chief economist and senior analyst, respectively, at the Multi Commodity Exchange of India Ltd, Mumbai. Comment at firstname.lastname@example.org