To improve the cash flow and bring beleaguered sugar industry out of distress, recently the Centre raised the MSP (Minimum Selling Price) to Rs 3100 a Qntl from Rs 2900. After a hike in MSP, Government claimed it would aid sugar mills to narrow the gap between domestic prices and the cost of production.
In an interview with ChiniMandi.com, Harsh Soni who is the Founder of GreenLeaf Corporations and also an analyst shares the challenges sugar industry has to face in the future, the effect of hike in MSP and many more insights related to the sugar industry.
Q. What is your take on sugar surplus prevailing in the industry?
A.The Sugar surplus has raised challenges not only for the producer and farmers but also for the Government as it has the onus to support both the farmer and miller to remain active in the system and sustain in the current situation. Sugar has always been close to the Govt for the number of families dependent directly or indirectly on the sugar industry and is significant due to which any Government in power cannot ignore the fact.
The sugar surplus has come to a level where India will start the next season with 50% stock in use which means we will have opening stocks equivalent to 6 to 7 month’s consumption, which by any standard is massive. Sugar production has been on the rise even though the western states suffered partial drought last year; the year will end up with record production in the current season 2018-19 as estimates range from 33 to 34 MMT.
Q. What is your view on government assistance to the sugar industry?
A. The Government has been proactive in assisting the industry in every possible way by allowing exports under MIEQ, assistance to compete with other origins in the world market, policy push for higher Ethanol blending, allowing B heavy molasses and sugarcane juice to be used for production of Ethanol, provision of soft loans to the millers, reintroduction of the quota system whereby the Govt allocates quantity to be sold in the domestic market by the millers, fixation of sale price of Sugar to be sold in the domestic market (Minimum Selling Price), etc.
Q. What is your take on the hike on sugar MSP?
A. MSP of Sugar, like any other measure announced by the Govt, has done wonders for the industry as it has stalled the fall in the domestic prices. The announcement of MSP coupled with the fixation of monthly domestic quota has provided the desired support to sugar prices and given financial support to the domestic industry. The domestic prices before the announcement of the MSP in the last season came down to as low as Rs. 2600/Qntl ex-mill. The Govt then came forward and decided to fix the minimum selling price of sugar at Rs.2900 per quintal ex-mill basis, exclusive of taxes and duties. This was a welcome step as it helped the millers improve their financials and enabled them to have funds for both cane payment and working capital.
The banks too came forward to re-price the sugar basis, the MSP as announced by the Government and disbursed loan against stocks basis higher valuation. However, this move was not enough as the millers continued to face cash losses even by selling at the MSP, as the MSP was still below their cost of production. Few lobbied the Government to raise the MSP to Rs.3500 to 3600/Qntl to enable them to overcome their losses but in vain!
Farmer cane payments became the hot topic again as cane arrears kept mounting leading to repeated requests with the Govt to increase the MSP further. After subsequent requests cane and thoughtful deliberation, the Govt increased the MSP from Rs.2900/Qntl to Rs.3100/Qntl ex-mill to assist the industry.
Q. Did hike in MSP help the sugar industry?
A. The hike in the MSP this time too was targeted towards the betterment of the industry and help millers reduce the financial stress by enabling them to clear their cane arrears. The hike has somehow failed or instead has not been as influential as last time and has started haunting the industry back to crisis.
Q. Why do you think the hike in MSP failed?
Millers in the Northern states especially Uttar Pradesh were happy selling its sugar at Rs.3000 to 3050/Qntl when the MSP was at Rs.2900/Qntl. With the hike in the MSP to Rs.3100/Qntl, it gave ammunition to the millers to keep selling their sugar at the new fixed price as they managed to get better realization from the hike. During the era of MSP Rs.2900/Qntl, the millers in Uttar Pradesh were selling their sugar at a premium of Rs.100 to 150/Qntl to Maharashtra and Karnataka which is a norm in the market but with revision of MSP to Rs.3100/Qntl, the price difference has been ignored completely and millers in Uttar Pradesh are selling its sugar at par with Maharashtra and Karnataka making it tough for them to market their sugar.
Even though the Govt fixes the quantity to be sold in the open market through its monthly release mechanism, few sugar millers have been ignoring the directives and selling above the stipulated quantity to fulfill their working capital needs. Those millers especially have got further leverage to push more sugar in the market at the revised MSP and help them get rid of their stocks.
This phenomenon of higher offtake from Uttar Pradesh at a price same as of Maharashtra and Karnataka has taken away the market share from the sugar millers in West to North region.
Higher MSP has allowed the millers to get indifferent to the quality of sugar sold within the region which has helped the consumers. Good quality sugar from the mills is getting preference over the lower or average quality sugar as there is no price difference today between the two.
Q. Can you share your opinion on the effect of the hike on MSP?
A. In a nutshell, the hike in the MSP in the second phase has not been as influential as it was in the first phase. Higher MSP has brought sugar from all the regions at par which has taken away the logistic advantage which used to help keep the sugar prices in the North at elevated levels. Apart from the price difference, the quality premium of one mill against the other has also disappeared helping millers with better quality sugar getting preference of sale.
Thus, in order to make the move effective, the Govt will have to bring a price differential in the MSP of sugar between the Northern and Western regions, which again is a challenge to have differential pricing pattern for different origins. Else, we will soon have a situation whereby the MSP will be breached due to pressure to sell sugar stocks just like the monthly quota system which has been breached by a few sugar millers.
This will eventually lead the whole system to collapse under the burden of the surplus stocks, which is there to stay for some time and continue to haunt the global market.