ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
-A A +A

What Does It Take to Stabilise India’s Sugar Market?

Deepayan Debnath (debnathd@missouri.edu) is with the Food and Agricultural Policy Research Institute, University of Missouri. Suresh Chandra Babu (S.babu@cgiar.org) is with the International Food Policy Research Institute, Washington, DC.

While growing sugar cane as a commercial crop could be one of the effective tools for doubling farmer income, bold policy alternatives are needed to make it a reality. In this context, this article sheds some light on the consequences of the removal of restriction on direct sugar use as feedstock for ethanol production for overall domestic sugar demand.

The authors would like to thank Patrick Westhoff for providing relevant comments on an earlier version of the article.
 

India’s domestic sugar market is in the doldrums as the price of sugar in the international market has been falling. With the general elections coming up next year, managing sugar markets and balancing the interests of sugar millers as well as the sugar cane producers is a serious policy challenge before the Government of India (GOI). Higher sugar cane production in 2017–18 crop year makes the problem more complex. As with other “political commodities,” such as onion in the past, the fate of the current government may depend on how it handles this policy issue, particularly in the context of increasing instances of sugar cane farmers committing suicide. According to one of the media outlets (Firstpost 2018), in Uttar Pradesh till 18 May 2018,`13,367 crore remained unpaid to the sugar cane farmers. The government has declared a number of resolutions to help sugar mills as well as the cane producers. They are in two broad categories: (i) increasing exports, and (ii) finding alternative markets. However, both these options are complex, as increasing sugar export is not easy when the world sugar prices are sluggish. Diverting significant portion of the current sugar stocks to renewable fuel, mainly ethanol production, also has its own challenges with government restrictions on food-based feedstock use on energy production.

In addition, with stable or slightly declining per capita sugar consumption globally and competition from other technologically advanced major sugar producing countries, including Brazil and Thailand, the Indian sugar exporters would face formidable challenges in the world sugar market. While growing sugar cane as a commercial crop venture could be one of the effective tools for doubling farmer income, bold policy alternatives are needed to make it a reality. In this context, this article sheds some light on the consequences of the removal of restriction on direct sugar use as feedstock for ethanol production on the overall domestic sugar demand.

Fall in Prices

According to the World Bank, world sugar price will hover around $0.37 per kg in 2018, which is 12% below the 2016 peak price. India being the second largest producer of sugar, the domestic sugar mills are also facing the downward pressure in the sugar price as both the international and domestic prices continue to plunge. According to the Department of Consumer Affairs, the domestic retail price of sugar dropped by 14% to`36.88 per kg in May 2018 after reaching the high of`43.48 per kg in September 2017 (Figure 1).

In terms of sugar production, surpassing the previous projections of Indian Sugar Mill Association, the Agriculture Statistics Division is forecasting that in crop year 2017–18 the sugar production will be more than 35 million metric tonne (MT), which is 16% higher than the previous year. With flat domestic consumption, the 2017–18 sugar stocks are projected to be twice the stock of 2016–17. This will certainly result in further glut in the sugar market making it harder for the mill owners to pay the dues to the sugar cane farmers, given that the fair and remunerative price of sugar cane fixed by the GOI is`255 per quintal at the basic recovery rate of 9.5%. In other words, for each kilogram of sugar produced the sugar mill owner must pay`26.84 to the sugar cane producer. At this rate, it is nearly impossible to maintain the margin by selling raw sugar in the domestic market. Understanding the importance of stable sugar price for domestic sugar mill and sugar cane producing farmers, the GOI has imposed reverse stock holding limits on sugar mills to stabilise the sugar price.

Exporting surplus sugar to the deficit region of the world could be an option. In anticipation of future growth in the export market for sugar, the GOI took specific measures such as increasing customs duties on sugar import from 50% to 100% and zero tariffs on sugar exports. The government is also negotiating sugar export to China, which could help sugar exports to go up to 1.5 million MT even with the existing 50% import tariff imposed by the Chinese government. However, this strategy faces problems as Indian sugar producers may face tough competition from competitors such as Brazil and Thailand.

Promise of Ethanol Industry

Understanding the importance of other uses of sugar mainly in the energy sector via ethanol production is another viable strategy for making both the sugar cane producers and sugar mill owners happy. The GOI has initiated programmes to encourage sugar mills to produce ethanol. In May 2018, the GOI announced payment of`5.50 per 100 kg of sugar cane crushed to certain sugar mills which have ethanol production capacity. The sugar mills which have signed the ethanol supplying contracts with oil marketing companies and satisfied 80% of their proposed ethanol supply obligation under the ethanol blending programme (EBP) are eligible for that payment. According to the Press Information Bureau, this assistance programme will cost`1,540 crore and presumably will help millers to pay their dues to the farmers. Thus, if implemented it could be a win-win situation for the sugar cane farmers, the sugar mill owners and of course the final consumers through reduction in the national crude oil imports bill.

As per the GOI, through the EBP, the blending of ethanol with the petroleum fuel would reach 20% by 2020. India has been only able to reach the blending level of 3.3% in 2016, which is significantly below the actual target of 10% ethanol-blending mandate. Therefore, in the upcoming days, the GOI will face major challenges in terms of meeting the EBP targets. In addition, the current restriction on the direct use of sugar juice to ethanol production could make the implementation of the E20 mandate by 2020 even harder. What are the policy options to meet the E20 mandates?

Based on FAPRI–MU1 “International Biofuels Baseline Briefing Book” (2018), India’s E5, E10, and E20 ethanol-blending mandate scenarios are analysed and the results are reported in Table 1.

With the existing policy restriction on the use of sugar cane to ethanol production, only the molasses—a co-product derived during the production of sugar from sugar cane—are allowed to be used for the production of ethanol. The simulation results in Table 1 indicate that an additional 10.26 M ha of land is required to meet the E20 blending mandate in 2020 based on the assumption that 10 L of ethanol is extracted from 1 MT of sugar cane via molasses. That raises the question: Is it plausible to divert around 10 million ha of additional land for sugar cane production in India? Probably not. Yet, in the current format of EBP achieving E5 target is feasible as mills owner can reap the benefits of the government assistance programme and pay their dues to the sugar cane farmers. In the short run, the risk associated with huge increases in sugar cane acreage is avoided as current surplus sugar cane stock can be safely depleted. It should be noted that meeting the E20 mandate by 2020 will require 30 million MT of molasses and this could add 75.7 million MT of extra sugar to the market (Ray et al 2012).2 As shown, the additional supply of sugar because of the domestic ethanol E20 blending mandate policy could result in further drop in sugar price both in the domestic and international markets. Thus, the current format of the EBP could have unintended consequences for the sugar market.

Lessons from Brazil

Being the world’s largest producer of sugar cane for many decades, Brazil had started deriving sugar cane for ethanol as early as 1970, when the spike in the world oil price increased its foreign debt. In order to limit the foreign debt, the then Brazilian government introduced the National Alcohol Program or more popularly known as Proalcool (Pohit et al 2009). In the early stage of the programme, the government offered a significant amount of subsidy to the ethanol producers. Along with enforcing high ethanol blending mandate, currently 27% nationwide, the programme also initiated the availability of E100 (96% pure ethanol and 4% water) or hydrous ethanol at the retail level. But the E100 can only be used in flex-fuel vehicles (FFVs). Therefore, there was tax incentive for consumers in order to purchase FFVs. As E100 contains 70% energy compared to petroleum-based fuel, in order to be price competitive E100 must be cheaper than the conventional E25 at the petrol station. However, since 2000 the Brazilian ethanol market has been restructured with the government playing minimal role, leaving the determination of ethanol price to the market forces. Primarily, prices of three major commodities (i) sugar, (ii) gasoline, and (iii) ethanol drive the domestic ethanol production and utilisation decisions in Brazil. Even though higher mandatory blending gives some buffer to the ethanol producers, the volatility in hydrous ethanol use could create price movements in the ethanol market.

The production system of ethanol in Brazil is also unique. Majority of the sugar mills in Brazil are capable of producing both sugar and ethanol (Cavalett et al 2012). The sugar processing facilities in Brazil are considered as biorefinery, which along with sugar can produce bioethanol and electricity from bagasse. These plants are flexible to either produce more sugar or more ethanol depending on the price premium of one over another. This is also one of the reasons behind the success of the Brazilian ethanol industry.

What if Brazilian sugar cane–ethanol model is replicated in India? If the GOI allows direct use of sugar cane for ethanol production, then at a conventional conversion rate of 1 MT of sugar cane yields 70 L of ethanol, the E20 mandate can be achieved by producing 108 million MT additional sugar cane and with the assumed sugar cane yield of 73.75 MT per ha and only 1.47 million ha of additional land is required. The domestic sugar cane-producing farmers will see renewable-energy feedstock market as an alternative to the traditional sugar market. Sugar mills with ethanol production capacity could switch between sugar and ethanol and remain profitable even if there were to be a fall in the price of one of the commodities. This could further stabilise India’s sugar market as it did for Brazil with the launch of Proalcool, during a period when their sugar industry faced long time low levels of sugar prices and the domestic petroleum prices had increased due to global oil crisis.

Conclusions

The GOI sugar policy geared towards boosting India’s sugar export might face competition from other major international players. Subsidising sugar export may also land India in World Trade Organization disputes with its competitors. If implemented strategically, India’s EBP could be a powerful tool to stabilise sugar price and at the same time to increase farmers’ income. It will further help to reduce the nation’s dependency on foreign crude oil. The government needs to consider seriously and urgently policies and programmes that will support sugar mills to develop ethanol production and capacity. In this case, lessons learned from Brazilian Proalcool might be highly useful. However, the government needs to be careful in sequencing their interventions as initial growth in the ethanol production might need public assistance and as the industry grows further the policies should change to support the transition towards market economy.

Notes

1 Food and Agricultural Policy Research Institute, University of Missouri.

2 We assume 100 kg of sugar and 40 kg of molasses could be extracted from crushing 1 MT sugar cane. This could vary depending on the extraction efficiency of the sugar mills throughout the country.

References

Cavalett, O, T L Junqueira and M O S Dias (2012): “Environmental and Economic Assessment of Sugarcane First Generation Biorefineries in Brazil,” Clean Technological Environmental Policy, 14: 399–410.

Firstpost (2018): “Uttar Pradesh’s Sugarcane Farmers Crippled by Debts, Unproductive Crop as Mills Fail to Clear Outstanding Payments,” https://www.firstpost.com/india/uttar-pradeshs-sugarcane-farmers-cripple....

FAPRI (2018): “International Biofuels Baseline Briefing Book,” https://www.fapri.missouri.edu/wp-content/uploads/2018/05/International-....

Pohit, S, P K Biswas, R Kumar and J Jha (2009): “International Experiences of Ethanol as Transport Fuel: Policy Implications for India,” Energy Policy, 37, pp 4540–48.

Ray, S, A Goldar and S Miglani (2012): “The Ethanol Blending Policy in India,” Economic & Political Weekly, 47(1), pp 23–25.

Comments

(-) Hide

EPW looks forward to your comments. Please note that comments are moderated as per our comments policy. They may take some time to appear. A comment, if suitable, may be selected for publication in the Letters pages of EPW.

Back to Top