Sugaronline Guest Editorial - ISMA’s Aggressive Advocacy May Soon Lead to Partial Decontrol by Padma Nagappan
Published: 12/23/2011, 11:55:00 AM
Don't crack the champagne quite yet, boys.
Lobbying for reform works sometimes, especially if it’s accompanied by proactive measures and solid facts that back up the industry’s demands.
At the 77th annual general meeting of the Indian Sugar Mills Association in New Delhi this week, ISMA president and CEO of Shree Renuka Sugars, Narendra Murkumbi, left no stone unturned in highlighting the constraints shackling the industry and calling for decontrol and a level playing field.
While the sugar organisation has been pushing for reform, decontrol and increased exports for a while now, it has ramped up its efforts recently and in his speech Wednesday Murkumbi turned the heat up on the government and its representative, chief guest K.V. Thomas, the Food Minister.
Thomas has in the past stymied efforts to increase exports because he goes by more conservative production estimates, but is considered an industry supporter since he has made some concessions such as releasing 1 million metric tonnes for exports instead of smaller tranches, and he has agreed to consider phased decontrol soon.
Murkumbi pointed out that the biggest challenges have been “rigid regulations constraining us and the cyclicality in production. Both these problems are interlinked. The lack of freedom to make decisions on a sound commercial basis is amplifying the financial distress in the industry.”
The financial burdens have in turn led to sharp swings in sugar production he said, such as a drop of 11 million tonnes between 2007/08 and 2008/09.
While bad weather plays a role in shrinking production, Murkumbi pointed out that the predominant factor has been delay in paying an adequate price for cane, which has led farmers to switch crops or reduce cane acreage and get careless with the crop, which then resulted in poor yields and sugar recovery.
Production in the past few years has been a pattern with a two-year cycle of highs followed by a two-year cycle of lows. During surplus years, farmers did not get paid enough or on time. When supply shrunk, it impacted consumers who had to fork out higher prices.
“Our other great challenge is the lack of freedom to operate on a normal commercial basis like every other industry in the country,” Murkumbi told Thomas.
He highlighted the government’s control over pricing, monthly sales release mechanism, levy obligations, jute packaging requirements, restricted exports and arbitrary state advised prices fixed by some states at odds with the industry’s economics.
“These constraints have collectively made the industry weak and poorly capitalised. We are also seen by investors and banks as lacking the ability to have significant impact on our own well-being and future prospects and more subject to rigid controls,” Murkumbi said.
This is why the industry has ramped up its advocacy efforts in recent times, Sanjay Banerjee, communications head at ISMA, told Sugaronline.
“Sugar is the only industry in the country which is under strict government policy. We want the government to explain the rationale behind keeping us under such a strict leash,” Banerjee said.
Decontrol would increase competitiveness and efficiency, enable better access to capital and investments in agricultural and technical development.
At the meeting, Murkumbi recapped ISMA’s call for a phased decontrol, starting with doing away the levy sugar obligation where mills are required to provide 10% of their output at discounted prices to the government’s public distribution scheme (PDS), and the monthly regulated release mechanism where mills are told how much sugar they can sell each month.
Collectively, the industry supplies 2.6 million tonnes of sugar each year for the PDS at a price that accounts for just 60% of its production cost, resulting in a loss of revenue of INR30 billion annually.
This impacts the mills, which in turn affects cane payments to farmers as well as the price of sugar sold in the open market.
Murkumbi raised a key point in asking why the government underwrites the cost of wheat and rice for the PDS but expects the sugar industry to bear the cost of discounting for the scheme.
“Why are we being forced to supply levy sugar below cost when we are making losses even though, under the direct procurement route, the additional burden that the Government will have to bear will be just about 3% of its annual food subsidy bill?”
He also emphasized how the regulated monthly sales release has not served its purpose of controlling sugar price, according to the Food Ministry’s own note to the government and how this has blocked mills from planning for their cash flow and increased their inventory costs.
Murkumbi pushed for increased early exports, explaining at length how the industry has proved its reliability by building and boosting refining capacity and ensured sugar supply during the lean years.
He said the industry hopes to pay cane farmers on time this year, especially if sugar price is more than the production cost and early exports are allowed.
Between December and March, 6 million tonnes are produced but domestic demand ranges around 1.8 million tonnes. The 4 million tonnes that pile up in inventory lock up INR110 billion to INR120 billion in potential revenues each month. It also increases production costs because of high interest rates on working capital, while delaying cane payments.
Asked if pushing for exports would continue to be worthwhile, given the fall in prices in the international market and the lack of interest from buyers and shrinking export margins, ISMA’s Banerjee told Sugaronline additional immediate exports are imperative.
“Export prices have fallen from the range of US$700 to US$800 prevalent in the last two quarters and are currently bid at around US$600 per tonne FOB. It is important to point out that bulk of the exports should be allowed before March so that the industry meets its cash flows during the crushing season when the fund requirement to pay the farmers is the highest,” Banerjee said.
At the meeting Wednesday, Murkumbi also made a strong case for pricing ethanol on par with international prices and pegging it with petrol, and to put in practice the mandate for 5% ethanol blending, so that surplus molasses is not exported at throw away prices but instead used as a substitute for petrol.
He wrapped up by pointing out that several industry projects were held up because loans needed to be sanctioned under the sugar development fund but were delayed.
In his rebuttal, Food Minister K.V. Thomas agreed that cyclical production and state advised prices (SAP) needed to be dealt with so that things improved for the industry. He called on the state governments to consider the millers’ economic situation while fixing the SAP.
He stressed that sugar price had to be at affordable levels for the consumer and that while considerably higher SAP may inflate production costs, he put the onus on the industry to come up with better recovery rates and more efficient technology.
Thomas pointed out that for its part, the government had lowered the levy obligation and removed stock holding limits.
As far as ethanol blending was concerned, Thomas agreed with its benefits but pointed to the need for reliable cane development before the blending can be enforced across the country.
“The industry has to seriously look at long-term perspectives and take up cane development as a core activity. For ethanol to be an additional source of revenue, adequate supply of sugarcane on a sustained basis is imperative,” Thomas said.
Thomas hoped the industry would supply cane production reports in a timely fashion with its satellite mapping technology, so estimates would be accurate and appropriate policy could be formulated.
Speaking to members of the press after the event, Thomas mentioned that sugar decontrol would be next on his agenda, after the current session of parliament.
“The minister’s speech at the AGM is very positive for us. He said that after the Food Security Bill is dealt with, sugar decontrol will be his priority. That is encouraging for us. We are in discussion with the Food Ministry about it,” Banerjee told Sugaronline.
The long road to sugar decontrol and reform is about to reach its initial destination, with the first phase around the corner in 2012.
The market reacted strongly to news that partial decontrol could be imminent, with sugar stocks spiking.
Stocks of Shree Renuka Sugars, Dhampur Sugar, Balrampur Chini, Baja Hindusthan and Triveni Engineering, Sakthi Sugars and Dwarikesh Sugars surged on the Mumbai Stock Exchange, with some gaining up to 13% on upbeat market sentiments.