New Delhi, (IndiaPRwire.com), The report questions the logic of having sugar as an essential commodity,. As a result today regulations influence almost the entire value chain including land demarcation, sugarcane price, sugarcane procurement, sugar production and sale of sugar by mills in domestic and international markets. A study conducted by AC Nielsen has clearly brought out that more than 61.5% of free sale sugar is consumed by industrial and small business segments, while high income households (monthly income more than Rs. 5000) account for approximately 12.8% of total consumption. This leaves a mere 25.7% in the lower income group, which approximately consumes a paltry 2-3 kg per month per household. Says Arvind Mahajan, Executive Director, KPMG Advisory Services, “Even in terms of price sensitivity, in this lower income group, a 10% increase in Sugar price has less than 1% increase in monthly food expense”. Hence, this a strong need to examine whether sugar should continue to be considered as an essential commodity.
The KPMG report also draws on the findings of an independent report by the Madras School of Economics on the rationale for inclusion and weightage for commodities in the Wholesale Price Index (WPI), which makes a strong case for a significant reduction in the weightage for sugar in the WPI..
The report also discusses the impact on the sugar industry of induced cyclicality and makes a strong case for better cyclicality management. On the one hand, the miller has to live with an inflexible cane price derived from state and central regulations, while on the other, the sugar prices are highly volatile, leading to a debilitating effect on the their economics when prices are low. This in turn impacts farmers in the form of delayed payments and induces cyclicality. Mercurial agro-climatic conditions, which can seriously impact farm productivity, can aggravate the situation, through large variances in sugar production and inventories,. An analysis of large listed sugar companies over the last 10 years shows that on average they have struggled to even cover cost of capital except in the year 2006.
Inherent potential of the industry
Further the study talks about the inherent potential of the industry for the various stake holders and the key initiatives required to transform the industry. By products, productivity improvements and product innovations combined with price risk management tools and international trade would help improve industry profitability and reduce cyclicity.
Apart from catering to the largest sugar consuming population in the world, the industry can emerge as a significant source of electric power through co-generation as well as of fuel ethanol for blending with petrol through the E5 program and beyond. “The co-generation opportunity can add 9700 MW power capacity to meet almost 6% of additional power requirement by 2017 and generate almost 48 million carbon credits.” says Mr. Arvind Mahajan.
Given the scarcity of additional fertile land, increase in farm productivity will be critical for sustaining the future growth of the industry. The study evaluates key drivers for increasing farm productivity and identifies the policy modifications needed for achieving the same, including further strengthening the farmer-miller relationship, and greater linkages between research institutions and the sugar industry for development of better seed varieties and adoption of improved farm practices including water management.
Other transformational opportunities include better price risk management. The total value of sugar inventory at risk has been estimated in excess of Rs 3000 crores. A greater adoption of hedging instruments available on commodity exchanges can help mills mitigate this risk.
Policy changes required
The ability of the industry to tap these opportunities would depend on a conducive policy environment. The study analyses the transformational growth of other Indian industries to identify key learnings for sugar. The study also assesses the policy environment of other sugar producing geographies globally to evaluate various regulatory options for India. The key regulatory modifications suggested by the study include alignment of cane and sugar prices across the country using a structured formula and continuation of command area for cane supply. The study also suggests that the minimum distance separation between mills should account for regional variations, with a national minimum benchmark of 25 km.
A key recommendation of the study is to create a strategic stock for sugar that would enable the government to intervene as a market participant, rather than through the monthly release mechanism. The operation of the strategic stock, KPMG recommends, could be done by an independent expert agency and will be aimed at maintaining the sugar price in a sustainable band. Another key recommendation is creation of an independent regulator for the industry for centralized implementation of the various regulatory provisions.
Short term measures for industry survival
While the roadmap would enable the sector to achieve its shared vision over the next ten years, its implementation would be dependent on the sugar industry recovering from the current state of unsustainable low prices. The study goes on to recommend immediate action steps that could help achieve this.
