Price Policy for. Sugarcane RKETING SUGAR SEASON. Commission for Agricultural Costs and Prices. Ñf"k] lgdkfjrk,oa fdlku dy;k.

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3 RKETING Commission for Agricultural Costs and Prices Ñf"k] lgdkfjrk,oa fdlku dy;k.k fohkkx Department of Agriculture, Cooperation and Farmers Welfare Ñf"k,oa fdlku dy;k.k ea=ky; Ministry of Agriculture and Farmers Welfare Hkkjr ljdkj Government of India ubz fnyyh New Delhi vxlr] 2017 August, 2017

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5 Vijay Paul Sharma Chairman Tel: Fax: Commission for Agricultural Costs and Prices Department of Agriculture, Cooperation and Farmers Welfare Ministry of Agriculture and Farmers Welfare Krishi Bhawan, New Delhi Preface and Acknowledgements It is a great honour and privilege for me to submit the report of Price Policy for : The Sugar Season. The report contains recommendations of Fair and Remunerative Price (FRP) of sugarcane and other non-price factors. While making FRP recommendation, the Commission has taken into account various factors such as cost of production, demand-supply and prices situation in domestic and world markets, margins for sugarcane growers on account of risk and profits, realization made from primary by-products, inter-crop price parity, terms of trade and likely impact of FRP on general price level and resource use efficiency. I hope these recommendations will serve the interests of cane growers, sugar mills, and consumers, and incentivise farmers to adopt new technologies to promote efficiency and competitiveness of the Indian cane and sugar sector. Preparation of this report required the concerted efforts of a number of individuals and institutions. First and foremost, I would like to express my sincere thanks to sugarcane farmers, senior officers from Central and State Governments, sugar industry representatives, and other stakeholders for providing valuable insights and information during the meetings and for preparation of this report. I would like to extend my special thanks to the Government of Uttar Pradesh and Karnataka for organizing stakeholder consultations with sugarcane farmers, government officials, sugar mills and other stakeholders. Special thanks to the Directorate of Economics and Statistics, Ministry of Agriculture & Farmers Welfare for providing data on cost estimates for sugarcane production. I would like to express my sincere appreciation to the officers and staff of the Commission, who contributed to this report. Special thanks to Dr. Shailja Sharma, Member Secretary for her invaluable contribution and support in preparation of this report. I want to thank and acknowledge the contributions of advisers Ms. Nutan Raj, Mr. K. M. M. Alimalmigothi and Mr. D. K. Pandey. The report would not have been possible without active support and contribution of Mr. Raj Kumar, Mr. Anand Krishan, Dr. S. K. Gupta, Dr. Harish Kumar Kallega, Mr. Amit Sahu, Mr. Manish Bindal, Mr. Sube Singh, Mr. Byasadev Naik, Ms. Reeta Yadav, Dr. Surendra Singh, Dr. Bhavik Lukka, Mr. Mohd Shoeb, Mr. S. K. Srivastava, Mr. A. K. Pandey, Ms. Meenakshi Choudhary, Mr. Md. Abdul Aleem, Mr. Chandra Kumar, and Mr. Vedprakash Meena and for that I want to give them special thanks. August 2017 (Vijay Paul Sharma) iii

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7 Contents SI. No. Description Page No. Acronyms xi-xiii Summary Recommendations xiv Price Policy Recommendations xiv Sugar Recovery Rate xiv Pricing of and Distortionary SAP xv Revenue Sharing Formula and Price Stabilisation Fund xv Non-Price Policy Recommendations xv Harvesting and Transportation xv Weighment of Cane and Measurement of Sucrose xvi Micro-irrigation in Cultivation xvi Overview 1 Introduction 1 Production and Consumption 1 Rationalization of Sugar Subsidy 3 Pricing of 3 Revenue Sharing Formula (RSF) 4 Ex-Mill Price of Sugar 4 1 Key Issues in Cultivation and Sugar Industry 4 Recovery Rate of Sugar 4 Labour Shortage and Farm Mechanization 5 Harvesting and Transportation 6 Crop-Water Productivity 6 Cane Weighment and Measurement of Sucrose 6 as an Alternative Energy Source 7 International Trade in Sugar 7 Structure of the Report 8 Contents v

8 Contents SI. No. Description Page No. Demand-Supply and Pricing Policy 9 Demand and Supply 10 Stock-to-Use Ratio 11 State Advised Price (SAP) : Distortionary Policy 12 Cane Arrears 13 2 Removal of Levy Sugar 14 Price Stabilisation Fund (PSF) 14 Interest Payment on Arrears 15 Reservation of Area and Minimum Distance Criteria 16 Base Sugar Recovery for Determining FRP 16 Recapitulation 18 Productivity of 19 Productivity Growth Trends 20 Annual Growth in Area, Production and Productivity 23 3 Productivity in the Major Producing States 23 District-Level Productivity of 24 Installed Capacity and Capacity Utilisation 26 Recapitulation 26 Trade Competitiveness of Indian Sugar 27 Global Scenario: Production and Trade in Sugar 27 4 India s Trade in Sugar 30 Domestic and World Price Dynamics 31 Trade Policy 32 Global Outlook 34 Costs and Returns 36 Costs and Returns of during to Changes in Agricultural Wages and Input Prices 38 Cost Projections for Sugar Season Relative Profitability 43 Recapitulation 43 vi

9 SI. No. Description Page No. Considerations and Recommendations 45 Pricing of and Distortionary SAP 45 Revenue Sharing Formula 45 Price Stabilisation Fund (PSF) 46 Collection of Ex-Mill Sugar Price 46 6 Reservation of Area and Minimum Distance Criteria 46 Cane Weighment and Measurement of Sucrose 47 Interest Payment on Arrears 47 Promote Farm Mechanization 47 Micro-irrigation in Cultivation 47 Base Sugar Recovery for Determining FRP 48 Cost of Production and FRP of 48 Contents vii

10 Price Policy for List of Tables List of Tables Table No. viii Topic Page No. Table 2.1 Stock to Use Ratio of Sugar (Sugar Season: October to September) 11 Table 2.2 World Sugar Balance Sheet 12 Table 2.3 Cane Price Payable to Farmers as Percentage of Value of Sugar in Uttar Pradesh 13 Table 2.4 FRP and RSF payable during to Table 2.5 Distribution of Cane Purchased by Factories 17 Table 2.6 State-wise Sugar Yield TE Table 3.1 Compound Annual Growth Rate and Coefficient of Variation of 21 Table 3.2 Annual Growth Rate of, to Table 3.3 District-level Productivity Trends of 25 Table 3.4 State-wise Annual Installed Capacity (IC) and Utilized Capacity (UC) 26 Table 5.1 Gross and Net Returns of (TE ) 37 Table 5.2 Annual Average Growth in Wages of Agricultural Labour 38 Table 5.3 Projected Cost of Production of, Sugar Season Table 5.4 Relative Returns (Average of to ) 43

11 Price Policy for Chart No. Chart 1.1 Chart 1.2 Chart 2.1 Chart 2.2 Chart 2.3 Chart 3.1 Topic Page No. Trends in Production of, Sugar and Consumption of Sugar Volume of Exports and Imports of Sugar by India Share of Major Producers in Production of and Sugar, TE and TE Cane Price Arrears, to (as on 3rd August 2017) Trends in Sugar Recovery Rate and Sugar Cane Yield in India Productivity of in Major Producing Countries in the World Trends in Productivity and Instability of in India 19 Chart 3.3 All India Area, Production and Productivity of to Chart 3.4 State-wise Productivity of in India 24 Chart 4.1 Major Producers of Sugar in the World 28 Chart 4.2 Exports as Percentage of Total Sugar Production: TE Chart Chart 4.4 Chart 4.5 Changing Structure of Sugar Export and Import Demand: TE and TE India s Exports of Sugar, to India s Imports of Sugar, to Chart 4.6 Chart 4.7 Chart 4.8 Chart 5.1 Trends in Sugar Prices in the US, EU and World Markets International and Domestic Wholesale Prices of Sugar Trends in Daily World Market Prices of Sugar: January-July 2017 Gross and Net Returns of, TE Chart Chart 5.4 Average Daily Wages of Agricultural Labour and Growth in Wages in over Movements in Prices of Farm Inputs (March to May, 2017 over March to May, 2016) Share of Inputs in Total Cost of Production (C2), TE Chart 5.5 Supply Curve and Projected Costs, Sugar Season Chart 3.2 Chart List of Charts List of Charts 40 ix

12 List of Annex Tables Table No. Topic Page No. Annex Table 1.1 : Area, Production and Yield 51 Annex Table 1.2 State-wise Production of Sugar 53 List of Annex Tables Annex Table 1.3 State-wise Sugar Recovery 54 Annex Table 2.1 Annex Table 2.2 Cane Prices Payable to Farmers as a Percentage of Value of Sugar Comparative Statement of Fair and Remunerative Price (FRP)/ State Advised Price (SAP) Annex Table 4.1 World Sugar Projections 59 Annex Table 5.1 Month-wise and State-wise Average Daily Wage Rates for Agricultural Labour (Man) Annex Table 5.2 Farm Inputs - Wholesale Price Index (Base =100) 63 Annex Table Break-up of Cost of Cultivation x

13 Acronyms A 2 A 2 +FL AAY AE Actual Paid out Cost Actual Paid out Cost plus Imputed Value of Family Labour Antyodaya Anna Yojana Advance Estimates APEDA C 2 CAP CACP Agricultural and Processed Food Products Export Development Authority Comprehensive Cost including Imputed Rent on Owned Land and Interest on Value of Owned Capital Common Agricultural Policy Commission for Agricultural Costs and Prices Acronyms CAGR CIPI CoC CoP CS cts/lb CV BPL DAC&FW DES Compound Annual Growth Rates Composite Input Price Index Cost of Cultivation Cost of Production Comprehensive Scheme Cents per Pound Coefficient of Variation Below Poverty Line Department of Agriculture, Cooperation & Farmers Welfare Directorate of Economics and Statistics xi

14 DFPD DGCIS EBP EC EU FAI FAO FRP GST GVO Department of Food and Public Distribution Directorate General of Commercial Intelligence and Statistics Ethanol Blending Programme Essential Commodity European Union Fertilizer Association of India Food and Agriculture Organization Fair and Remunerative Price Goods and Services Tax Gross Value of Output Acronyms HSD IC ISGIEIC ISO High Speed Diesel Installed Capacity Indian Sugar and General Industry Export Import Corporation Ltd. International Organization for Standardization ISO LIFFE MoA&FW MT OEA OECD OGL OMCs PDS PSF International Sugar Organisation London International Financial Futures and Options Exchange Ministry of Agriculture and Farmers Welfare Metric Tonne Office of the Economic Adviser Organization for Economic Co-operation and Development Open General License Oil Marketing Companies Public Distribution System Price Stabilization Fund xii

15 PMKSY RCAC RSF SAP SEFASU SMP STC t/ha TPDS TE Pradhan Mantri Krishi Sinchyee Yojana Registration-cum-Allocation Certificate Revenue Sharing Formula State Advised Price Scheme for Extending Financial Assistance to Sugar Undertaking Statutory Minimum Price State Trading Corporation Tonnes per hectare Targeted Public Distribution System Triennium Ending TRQ UAE UC USA Tariff Rate Quota United Arab Emirates Utilized Capacity United States of America Acronyms USDA VSI WPI WTO United States Department of Agriculture Vasantdada Sugar Institute Wholesale Price Index World Trade Organization xiii

16 Price Policy for Summary of Recommendations Summary of Recommendations Price Policy Recommendations S.1. The Commission recommends a Fair and Remunerative Price (FRP) for sugarcane to be `275/qtl at 10.0 percent recovery level for sugar season. With every increase in recovery by 0.1 percentage point, the FRP will increase by `2.75/qtl. All-India average recovery rate being percent, the FRP recommended would work out to `289/qtl. The projected A2+FL cost of production of sugarcane is `155/ qtl and cost C2 (inclusive of cost of transportation and insurance premium) is `244/ qtl corresponding to 10.0 percent recovery level for sugar season. Sugar Recovery Rate S.2. Recovery rate of sugar depends on sucrose content in sugarcane, cane supply arrangements, agro-climatic conditions, production practices and on the technology and operation of the sugar mill. For development of sugar sector it is important to improve cane crop yield, sucrose content and sugar recovery. The sugar recovery rate has improved significantly during the last five years, from in to in The all-india sugar recovery was the highest at percent during and Uttar Pradesh, the largest producer of sugar, witnessed a significant increase in sugar recovery during the last two years. In view of significant improvement in recovery rate, the Commission recommends revision in basic recovery rate from 9.5 percent to 10 percent. S.3. In order to incentivize efficiency in terms of higher sugar recoveries, the FRP is linked to a basic recovery rate of sugar, with a premium payable to farmers for higher sugar recovery. However, this system does not disincentivize lower sugar recovery rate as FRP is same for 9.5 percent and below. The Commission recommends that FRP paid to cane farmers should be discounted proportionately for recovery rate below 9.5 percent. This would encourage sugar mills, cane growers and research and development institutions to improve sugar recovery. xiv

17 Pricing of and Distortionary SAP S.4. Some state governments announce the SAP, which is much higher than the FRP. This creates a distortion in the industry because SAP is neither linked to sugar recovery nor it takes in to account domestic and global prices and other relevant parameters. As a result, when sugar prices are low, mill owners are unable to pay to farmers resulting in delayed payment, huge cane arrears and trust deficit between farmers and millers. Therefore, FRP must be implemented in all states and announcement of SAP by states should be stopped immediately. In case, where the state governments decide to continue with SAP, the difference between SAP and FRP should be paid by the state government directly to farmers. Revenue Sharing Formula and Price Stabilisation Fund S.5. The Commission recommends implementation of the Rangarajan Committee (2012) recommendation on cane pricing based on a combination of Fair and Remunerative Price (a minimum guaranteed price) and a revenue sharing formula. However, when the sugar prices are low and FRP is higher than RSF payment, it would be difficult for the sugar mills to pay FRP. In order to protect farmers against volatile sugar prices, the government should create a Price Stabilization Fund (PSF) for payment to farmers when sugar prices are depressed. After implementation of GST, cess on sugar which was levied in pursuance of the Sugar Cess Act 1982 and the Sugar Development Fund Act 1982 has been abolished. There is, therefore, a need to find ways for generating resources for PSF, which has to be a self-financing mechanism. One of the options could be to set the minimum market price of sugar for consumers and when market prices fall below this set level, certain amount of cess can be collected for creating the PSF. In addition, during high sugar prices, part of surplus generated under the RSF can be retained and deposited in the PSF. Since the levy sugar obligation on mills has been discontinued, sugar industry should also contribute towards the PSF. The commission recommends that a Committee should be constituted to explore possibilities of creating and managing PSF. Non-Price Policy Recommendations Harvesting and Transportation S.6. Harvesting of sugarcane at a proper time by adopting right technique and transporting it in the shortest possible time to the mill are necessary to realize maximum sugar recovery with least possible field losses under the given environment. In states like Maharashtra, Gujarat and parts of Karnataka, where mills take care of harvesting and transportation of sugarcane, average recovery rate is higher as the time gap between harvest and milling is the minimum. It is, therefore, important that a proper scheduling of harvesting and transportation along with right mix of early- and mid- Summary of Recommendations xv

18 late varieties should be promoted in the cane growing areas. Sugar mills and state governments can play an important role in this. Weighment of Cane and Measurement of Sucrose Summary of Recommendations S.7. During Commission s interactions with stakeholders, farmers complained about lack of transparency in the existing weighing procedures and measurement of sugar recovery. The sugar mills need to design a transparent and effective mechanism of weighing sugarcane and measuring sucrose levels. The Commission recommends that electronic weighing of cane should introduced in all sugar mills in a time bound manner to benefit the farmers and to improve trust and transparency between farmers and sugar processors. An automatic Direct Cane Sampling and Analysis System (cane sampler) developed by a private company under the guidance of Vasantdada Sugar Institute (VSI), Pune can be used for cane payment based on quality aspects. With introduction of such machine, farmers will get payment based on quality of cane and encourage them to produce quality cane with higher sucrose content and mills will also benefit from quality cane. Micro-irrigation in Cultivation S.8. is water-intensive crop and hence the challenge is to produce more crop with less water. growing regions in the country have experienced adverse impact of the two successive droughts. In view of this, the Commission strongly recommends promotion of drip irrigation in sugarcane cultivation on a much larger scale in order to conserve scarce water resources and improve productivity. Under Pradhan Mantri Krishi Sinchai Yojana s (PMKSY) Per Drop More Crop component subsidy is given to farmers and the allocation for micro irrigation has been increased from `1000 crores in to `2500 crores in Hence, concerted efforts are needed by the state Governments and sugar mills to create awareness about water saving technologies and promote micro-irrigation in sugarcane cultivation. ***** xvi

19 Price Policy for Chapter 1 Overview 1.1. is an important cash crop in India and grown on an area of about 4.5 million ha, which is around 3.7 percent of the net area sown in the country. contributes about 4.6 percent of total value of output from agriculture and supports rural livelihood of about 50 million sugarcane farmers and around 5 lakh workers are directly employed in sugar mills. India is the largest producer of sugarcane, second largest producer of sugar after Brazil and the largest consumer of sugar in the world. However, productivity level in India is much lower compared with other major producing countries like Thailand and China. There were 731 sugar mills in the country, out of which about two-third (485) were in operation during Out of total 731 mills, 328 are in cooperative sector, 44 state owned and 359 in private sector. The share of closed mills was the highest (75 percent) in public sector, followed by cooperatives (36.6 percent) and the lowest in private sector (25.9 percent). Average capacity utilization of sugar industry was about 75 percent during Chapter 1 Introduction Production and Consumption 1.2. The declining trend of sugarcane production continued during as it fell from 348 million tonnes in to 306 million tonnes in (Chart 1.1). However, production is forecast to rebound in due to an expected increase in area under sugarcane and better yields due to expected favourable weather conditions. The area under sugarcane cultivation declined by about 9 percent, from 4.95 million ha in to about 4.5 million ha in , while yield declined by 4.4 percent. Production of sugarcane in the country increased at compound annual growth rate of 1.9 percent during to , from million tonnes in Triennium Ending (TE) to million tonnes in TE Area expansion was the major contributor (62 percent) to increased production while yield contributed about 38 percent. 1

20 1.3. As per the third Advance Estimates (AE), Maharashtra, a leading sugarcane producer, registered the largest decline in production (-32.6 percent), followed by Andhra Pradesh (-20.1 percent) and Tamil Nadu (-12.2 percent) in Haryana showed a significant increase (22.7 percent) in production, followed by Gujarat (10.5 percent). State-wise area, production and yield of sugarcane during to are given in Annex Table 1.1 and state-wise production of sugar is given in Annex Table Sugar production in the country was 28.5 million tonnes in but due to two consecutive drought years, sugar production fell by more than 13.3 percent in and reached at 20.3 million tonnes during , even below the consumption for the first time in the last seven years. and sugar production are subject to volatile production cycles while consumption has been rising steadily (Chart 1.1). Growing consumption combined with volatile production causes large swings in prices of sugar and poses a real challenge both for market participants and for policymakers to deal with its instability. Chart 1.1: Trends in Production of, Sugar and Consumption of Sugar Overview Sugar Prod. & Consumption (milion tonnes) Sugar Prod Sugar Cons Prod Prod. (million tonnes) Source: DES, Ministry of Agriculture and Farmers Welfare and Directorate of Sugar, DFPD 1.5. As per USDA, global sugar production for is estimated to increase by 9 million tonnes to a record 180 million tonnes on projected gains in production from Brazil, China, European Union, India and Thailand. Restrictions on sugar production and export in the EU will be lifted from Marketing Year as part of the Common Agricultural Policy (CAP) reform. As the EU and world sugar markets enter a new era, market volatility is likely to increase for the next few years. Production and exports 2

21 in the European Union are forecast to expand while imports and consumption are projected down. Brazil s production and exports are projected to a record and more diversion of sugarcane towards sugar production. However, Brazillian government recently lowered the tax on ethanol to make it more competitive against gasoline and so sugar may start to lose out. Thailand s production and exports are forecast to expand as yields are expected to improve. Rationalization of Sugar Subsidy 1.6. Subsidized sugar was distributed to all Below Poverty Line (BPL) population and all the population of the North-Eastern States/special category/hilly states and Island territories under the Targeted Public Distribution System (TPDS) for which the Government of India was paying a subsidy of `18.50 per kg of sugar distributed. The Central Government rationalized the sugar subsidy scheme in May 2017 and decided to provide one kg of subsidized sugar per family per month through PDS to 2.5 crores Antyodaya Anna Yojana (AAY) families. The current level of subsidy at `18.50 per kg provided by the Central Government to States/UTs for distribution of sugar through PDS will be continued for the AAY population. This decision will reduce subsidy burden of the Government of India by about ` 4000 crores. Pricing of 1.7. Pricing of sugarcane is governed by the statutory provisions of the (Control) Order, 1966 issued under the EC Act, Prior to sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were also entitled to share profits of a sugar mill on 50:50 basis. The sharing provision was introduced to empower farmers to equally share the dividends of the mills. However, this sharing provision was not implemented due to the delay in announcement of profits by the mills. The (Control) Order, 1966 was amended w.e.f and the concept of Statutory Minimum Price (SMP) of sugarcane was replaced with the Fair and Remunerative Price (FRP) of sugarcane from A new item reasonable margins to growers of sugarcane on account of risk and profits was introduced in Clause 3(1) and Clause 5A relating to sharing of profits was deleted. Overview 1.8. Some state governments such as Bihar, Haryana, Punjab, Tamil Nadu, Uttarakhand and Uttar Pradesh announce the State Advised Price (SAP), which is much higher than the FRP, many a times creating a situation where mills are not able to pay the price, mainly when market prices are low. This results in mounting arrears to the cane farmers and trust deficit between farmers and millers. Other problems with SAP are that such a price is not linked to the sugar recovery, thereby, not promoting efficiency and lacks transparency in determination. Therefore, the Commission recommends that FRP must be implemented in all states and announcement of SAP by states should be stopped immediately. 3

22 Revenue Sharing Formula (RSF) Overview 1.9. To review existing regulations and policies related to sugar sector and price sharing formula for sugarcane to promote efficiency and investments, Government of India constituted a Committee in 2012 under the chairmanship of Dr. C Rangarajan. The committee recommended Revenue Sharing Formula (RSF) based on revenue generated from sugar and three primary by-products, namely, bagasse, molasses and press mud and FRP as a floor price. The Commission has been suggesting to shift from FRP to RSF as this pricing approach will bring more stability in the sector and encourage coordination linkages between farmers and sugar mills. Under the RSF approach, farmers realization from the sugarcane would be higher when sugar and by-product prices are high but during low prices of sugar and its by-products, the cane price to be paid to farmers may be lower than the FRP. Since farmers would receive an initial payment based on FRP (minimum guaranteed price), the mills will incur losses and may not be able to pay farmers and result in mounting arrears as it happened during and In order to avoid such a situation, Price Stabilization Fund (PSF) should be created. Since, the Sugar Cess Act 1982, the Sugar Development Fund Act 1982 Cess on Sugar has been abolished after implementation of GST, there is a need to find ways for generating resources for PSF. The PSF has to be a self-financing mechanism to ensure FRP to farmers during the period of low sugar prices. Ex-Mill Price of Sugar One of the important pillars of RSF is reliable and timely availability of data on ex-mill price of sugar and its by products. Therefore, there is a need to create an efficient and transparent mechanism for collection of ex-mill prices of sugar and its primary by-products. The Commission recommends that the Directorate of Sugar, Ministry of Consumer Affairs, Food and Public Distribution should regularly collect state-wise ex-mills prices of sugar and by-products. Key Issues in Cultivation and Sugar Industry There are certain key issues faced by cane and sugar sector which need urgent attention for making the sector more efficient and for enhancing sugarcane and sugar production. These include promoting efficiency in sugarcane and sugar production, breaking cycles of sugarcane and sugar production, reducing cost of cultivation, improving sugar content and recovery rate, mechanization of sugarcane farming, improving water use efficiency and promoting sugar sector as an energy hub by encouraging co-generation and ethanol production. Recovery Rate of Sugar growers and sugar processors are economically interdependent and both can influence the value of output since the volume and sugar content of sugarcane 4

23 is affected by input use and production practices followed by farmers, and the recovery of sugar from cane is dependent on the technology and operations of the sugar factory. Therefore, it is important to improve crop yield, sugar content and recovery of sugar from sugarcane. The recovery rate of sugar, which was hovering around 10.2 percent for a long time, has improved significantly during the last five years, from percent in to percent in The all-india sugar recovery was the highest at percent during and The state-wise average recovery from sugar is given in Annex Table Among major sugar producing states, Maharashtra recorded a significant decline in sugar recovery during and while Uttar Pradesh, the largest producer of sugar, witnessed a significant increase in sugar recovery during last two years. Sugar recovery (10.96 percent) in Karnataka improved during after two consecutive years of decline during and However, consistently low recovery rate in states like Andhra Pradesh, Bihar and Tamil Nadu is a matter of great concern and needs greater attention to address the problem Recovery rate of sugar depends on sucrose content in sugarcane, its supply arrangements, agro-climatic conditions, production practices, technology and operations of the sugar mill. Except for agro-climatic conditions other factors can be influenced by appropriate technological, institutional and other policy interventions to improve recovery rate In order to incentivize efficiency in terms of higher sugar recovery, the FRP is linked to a basic recovery rate of sugar (9.5 percent), with a premium payable to farmers for higher recovery of sugar from sugarcane. However, this system does not disincentivize lower sugar recovery rate as FRP is same for 9.5 percent and below. Therefore, the Commission suggests that FRP paid to cane farmers should be discounted proportionately for lower recovery. The Commission is of the firm view that it would encourage sugar mills, cane growers and research and development organisations to improve sugar recovery. Labour Shortage and Farm Mechanization cultivation is labour-intensive and human labour accounts for about one-third of total cost of cultivation. farmers are facing serious shortage of labour as well as high-cost of labour. The labour shortage and high wages have reinforced need and interest in on-farm labour saving mechanisation technologies. However, non-availability of appropriate machinery and high costs are major impediments for farm mechanization in sugarcane. There is a need to develop and promote appropriate agricultural machinery and other mechanization technologies particularly for planting and harvesting of sugarcane. The Commission reiterates its recommendation of developing suitable sugarcane planter, harvester and other machines. During stakeholders consultation, it was reported that with introduction Overview 5

24 of sugarcane harvesters, the level of trash/non-cane material in the cane supplied to the mills has increased, which needs to be addressed. Harvesting and Transportation Harvesting of sugarcane at a proper time by adopting right technique and transporting it in the shortest possible time to the mill are necessary to realize maximum sugar recovery with least possible field losses under the given environment. In states like Maharashtra, Gujarat and parts of Karnataka, where mills take care of harvesting and transportation of sugarcane, average recovery rate is higher as the time gap between harvesting and milling is the minimum. It is, therefore, important that a proper scheduling of harvesting and transportation along with right mix of early, mid and late varieties should be promoted in cane growing areas. Sugar mills and state governments can play an important role in this. Crop-Water Productivity Overview With increasing water scarcity, there is a growing need and interest in improving crop water productivity in order to meet the rising demand with the limited freshwater resources. is water-intensive crop and the challenge is, therefore, to produce more crop with less water. India s sugarcane growing regions grappled with the adverse impacts of the two successive droughts. In view of this, the Commission has been strongly recommending drip irrigation in sugarcane cultivation on a much larger scale in order to conserve scarce water resources and improve productivity. Under Pradhan Mantri Krishi Sinchai Yojana s (PMKSY) More Crop Per Drop component subsidy is given to farmers and the allocation for micro irrigation under PMKSY has been increased from `1000 crore in to ` 2500 crore in During field visits to states like Uttar Pradesh and Haryana, it was found that sugarcane farmers are mainly using traditional methods of irrigation such as flood irrigation and use of micro irrigation was not common in the region while farmers in southern and western states were more receptive to drip irrigation. Hence, wide publicity needs to be given to promote micro-irrigation by the State Governments and sugar mills to create awareness about water saving technologies. Cane Weighment and Measurement of Sucrose During Commission s interactions with stakeholders, farmers complained about the lack of transparency in the existing weighing methods and measurement of sugar recovery. The sugar industry needs to develop transparent and effective mechanism of weighing sugarcane and measuring sucrose levels. The Commission recommends that electronic weighing scales should be installed in a time bound manner to benefit the farmers and to improve trust and transparency between farmers and sugar processors. 6

25 1.20. Accurate measurement of the recovery of sugar is very important. During the course of discussions with the state government officials, farmers and mills, CACP was informed that a machine called cane sampler has been developed by a private company under the guidance of Vasantdada Sugar Institute (VSI), Pune. With introduction of such machine, farmers will get payment based on quality of cane and encourage them to produce quality cane with higher sucrose content and mills will also benefit from quality cane. as an Alternative Energy Source The sugar industry is diversifying into multiple by-products to enhance value addition for every metric tonne of cane crushed. Bagasse based cogeneration for power and ethanol from molasses are emerging trends in the Indian sugar industry. However, the realization from ethanol is dependent on the government mandated price, which is paid by the oil marketing companies and from power is dependent on the long term power purchase agreements with government and power companies. In order to tap its full potential, molasses need to be fully freed from movement restrictions or reserved allocations for potable alcohol. The Central Government has increased blending targets from 5 percent to 10 percent under the Ethanol Blended Petrol Programme (EBP) and to facilitate achieving of new blending targets, a grid which networks distilleries to OMC depots and specifies quantities to be supplied has been worked out. It may be noted that excise duty was waived on ethanol supplies to OMCs for EBP by sugar mills during (upto 10 th August, 2016). The results have been quite encouraging and ethanol supplied for blending increased from `38 crore litres in to `111 crore litres in Out of the 485 operational sugar mills, 201 have distillation capacities and 128 units manufactured ethanol during There are 210 mills which have co-generation facility. Overview International Trade in Sugar The international sugar market is one of the most highly distorted agricultural commodity markets and is generally characterized by various domestic support and trade distorting policies, such as guaranteed minimum payments to producers, production and marketing controls (quotas), state-regulated retail prices, tariffs, import quotas and export subsidies. The major producers of sugar in the world are also the leading exporters, and are highly dependent on the world trade. Australia and Thailand export more than 75 percent of its production, while Brazil exports around 70 percent. India is unique as it is the largest consumer in the world but its dependence on trade is marginal. India has used the world trade to manage its surplus and deficit. During the last ten years, India has been a net exporter of sugar except in (Chart 1.2). Surplus production over domestic consumption between and had led to subdued sugar prices, thereby creating liquidity problem for the industry and build up cane price arrears. 7

26 Government provided various incentives to cane growers and sugar mills. India was the third largest exporter of sugar in the world in but exports fell during due to lower domestic production and high prices. In order to check rising domestic prices, government imposed 20 percent export duty on sugar on 16 th June 2016 and also stock limits and turnover limits on dealers on 29 th April 2016 for six months which was further extended for another six months and then up to 28 th October To ensure availability of sugar at reasonable price, duty free import of 5 lakh tonnes of raw sugar was allowed in In order to protect interest of cane growers and sugar processors under declining world prices, government increased import duty on sugar to 50 percent on 10 th July India s sugar trade policy is mainly driven by domestic demand-supply situation and main consideration for the government is to maintain domestic prices. Chart 1.2: Volume of Exports and Imports of Sugar by India Overview Quantity (lakh tonnes) Surplus/Deficit Exports Imports Source: Directorate General of Commercial Intelligence and Statistics, Kolkata Structure of the Report Chapter 2 of the Report analyses the demand-supply situation of sugar and the existing price policy for cane. Growth in productivity, efficiency and capacity utilization of mills is presented in Chapter 3. Chapter 4 provides an overview of domestic prices in relation to international prices and trade policy with a view to build a globally competitive sugar sector. Chapter 5 analyses costs and returns on sugarcane and discusses intercrop price parity. Finally, major highlights of all the Chapters leading to the key price and non-price policy recommendations are presented in Chapter 6. ***** 8

27 Price Policy for Chapter is produced primarily for production of sugar, which is consumed by household sector, confectioneries, beverage industry, etc. India is the world s largest sugar consumer and one of the fastest growing markets for non-household sectors such as confectionery and soft drinks which are key drivers of consumption. Sugar production has witnessed growth with substantial cyclical fluctuations. While demand for sugar continues to grow steadily due to increase in population and rising incomes., which is a primary source of sugar in India, has witnessed a declining trend in the last two years and production fell from 362 million tonnes in to 348 million tonnes in and 306 million tonnes in , due to decline in production in all major producing states but Maharashtra and Karnataka in particular on account of two successive droughts. As a result, production of sugar declined from 25.1 million tonnes in to 20.3 million tonnes in Maharashtra recorded the highest decline (50.8 percent), from 8.5 million tonnes in to 4.2 million tonnes in Chart 2.1 shows the changing shares of major producers in total sugarcane and sugar production between TE and TE During TE , Uttar Pradesh was the largest producer of sugarcane but due to better sugar recovery rate, Maharashtra ranked first in sugar production. Maharashtra, Karnataka and Bihar have increased their share in total sugarcane production between TE and TE and top three producers, namely, Uttar Pradesh, Maharashtra and Karnataka contributed 72.3 percent of total production during TE While in case of sugar production, the share of Maharashtra, Uttar Pradesh and Karnataka has increased from 74 percent to 84.6 percent during the corresponding period. Despite decline in share of Uttar Pradesh in sugarcane production, its share in sugar production has increased mainly due to significant improvement in sugar recovery during the last two years. Chapter 2 Demand-Supply and Price Policy 9

28 Demand and Supply Demand-Supply and Price Policy 2.3. Sugar is the primary product of sugarcane crop and demand-supply dynamics of sugar has a major impact on production of the crop. The demand for sugar shows a positive trend as it increases with rising population and increase in income whereas the supply of sugar is more erratic and depends on climatic conditions and profitability of sugarcane vis-a-vis other competing crops. As per 68 th round of NSSO, , monthly per capita consumption of sugar was 716 grams in rural areas and 816 grams in urban areas in the country, which works out to about 12.1 million tonnes per year for household sector. About 2.8 million tonnes of sugar was distributed through Public Distribution System (PDS) to Below Poverty Line (BPL) households but the scheme has been reviewed and supply of subsidised sugar (one kg per family per month) through PDS has been restricted to AAY families, which works out to about 3 lakh tonnes per year. This decision might have some adverse impact on consumption of sugar in the coming season. Chart 2.1: Share of Major Producers in Production of and Sugar, TE and TE TE % 9.5% 3.9% 5.1% 2.6% 1.6% 6.3% 7.5% 11.3% 11.4% (a) 7.0% 9.9% TE % 20.5% 40.5% 43.3% UP MH Kar TN AP Bih Guj Others TE % 10.8% 16.5% 10.2% 6.2% (b) Sugar 4.6% 3.2% 2.0% 7.8% 1.3% TE % 34.0% 29.7% 34.4% MH UP Kar TN Guj AP Others Source: DES and Directorate of Sugar (DFPD) 2.4. In order to ensure adequate supply and stocks of sugar, duty-free imports of 5 lakh tonnes of raw sugar were allowed in April 2017 to be imported till 30 th June, 2017 under the Tariff Rate Quota (TRQ). The government also imposed 20 percent basic customs duty on export of sugar and empowered state governments to impose stockholding limits on traders to ensure availability of sugar at reasonable prices in June However, due to sharp decline in international prices in the last few months and fear of cheap imports, import duty on sugar was increased from 40 percent to 50 percent on 10 th July,

29 Stock-to-Use Ratio 2.5. Low production due to severe drought in many sugarcane growing regions has led to a steep decline in stock-to-use ratio (Table 2.1). The stock-to-use ratio fell from 33.1 percent in to 29.2 percent in and reached a low level of 17.8 percent in The estimated closing stock for the year is projected to be 4.3 million tonnes, the lowest level in the last ten years. However, with forecast of normal monsoon in and increase in area under sugarcane (about 9 percent increase as on 4 th August 2017), sugarcane production is likely to be higher and improve the sugar availability next year. In view of crop outlook projections and international scenario, stock-to-use ratio in the country may improve marginally in the coming year. Table 2.1: Stock to Use Ratio of Sugar (Sugar Season: October to September) S.No. Particulars Provisional (lakh tonnes) Projected 1 Net Opening Stock * Export allowed during the previous season but physically exported during the current sugar season 3 Net Adjusted opening stock (Row 1 - Row 2) Production of Sugar Imports Estimated Total Availability (Row 3 + Row 4 + Row 5) Estimated Releases for Internal Consumption Export against ALS/AAS obligation and OGL / bilateral agreement with Maldives Total Estimated Releases (Row 7 + Row 8) Estimated Closing Stock on (Row 6 - Row 9) * Stock to Use ratio (%) {(Row 10/ Row 9)*100} Demand-Supply and Price Policy Note: *Opening balance in is different from closing balance of to account for damaged/wet sugar and sugar sold under court orders. Source: Directorate of Sugar, DFPD and DGCIS Table 2.2 shows the world balance sheet for sugar for the current and last three sugar seasons. Ending stocks encompass both supply and demand and is an indicator of the fundamental economic situation of the market. It is evident that there are large variations in the ending stock positions reported by OECD-FAO, USDA and ISO. As per OECD-FAO and USDA projections, the ending stocks are forecast to be lower in 11

30 compared with while ISO estimates show a marginal increase in ending stocks. Table 2.2: World Sugar Balance Sheet (Million tonnes) Demand-Supply and Price Policy Year Prod. OECD-FAO* USDA ISO Cons Ending Stocks 70.4 (40.4) 74.5 (44.7) 72.8 (43.3) 67.1 (38.5) Prod. Cons Ending Stocks 48.8 (29.1) 43.9 (25.9) 38.8 (22.6) 38.3 (22.3) Prod. Cons Note: Figures in parentheses show ending stocks as percentage of consumption. *OECD-FAO data for , and for Triennium Ending and figures for are projected. Ending Stocks 96 (57.5) 89 (52.4) 82 (47.7) 85 (48.6) 2.7. Domestic sugar prices have shown an upward movement whereas international prices recorded a declining trend but moved up in July Domestic prices have increased from `3475 per quintal in April 2016 to `3980 per quintal in April The increase in import duty on sugar from 40 percent to 50 percent in order to discourage cheaper imports is a welcome step taken by the Government and this would help in improving viability of mills and ensure timely payment to cane farmers as well as clear old cane arrears. However, there is a need to closely monitor domestic and world prices of sugar and take appropriate decision on import tariff. State Advised Price (SAP): Distortionary Policy 2.8. States of Uttar Pradesh, Punjab, Haryana, Bihar, Tamil Nadu and Uttarakhand announce SAP for sugarcane, which is much higher than FRP announced by the Central Government. SAP creates distortions in the industry because SAP is neither linked to sugar recovery nor it takes in to account domestic and global prices and other relevant parameters. As a result, when sugar prices are low, mill owners are unable to pay to farmers, resulting in huge cane arrears. A comparison of SAP, FRP and cane price payable to farmers under Revenue Sharing Formula over the years in Uttar Pradesh is given in Table 2.3. Similar analysis for other states is given in Annex Table 2.1. It is quite evident from the Table that there is a wide gap between SAP announced by the state government and FRP fixed by the government/rsf recommended by Rangarajan Committee on Sugar. For example, in , SAP was 22.7 percent higher than FRP and 9.6 percent higher compared with RSF payment. However, difference between FRP and SAP has narrowed down in the recent years, 12

31 mainly due to increase in sugar recovery and no change in SAP during and The Commission recommends that RSF/FRP must be implemented in all states and announcement of SAP by states should be stopped immediately. Table 2.3: Cane Price Payable to Farmers as Percentage of Value of Sugar in Uttar Pradesh Sugar Season Ex-Mill Sugar Prices (Rs/qtl) Cane Price Paid to Farmers SAP (Rs/qtl) FRP (Rs/qtl) State Recovery Rate (%) Total Sugar Value from 1 qtl of Cane (Rs/qtl) at Recovery Rate 9.5% or > 9.5 % (Rs/qtl) Cane Price Payable to Farmers under RSF at Recovery Rate 9.5% or > 9.5 % (Rs/qtl) (1) (2) (3) (4) (5) (6)=(2)*9.5 (7) = (6)* Source: CACP Calculations using Directorate of Sugar (DFPD) data In case, where the state governments, decide to continue with SAP, the difference between SAP and FRP/RSF should be paid by the state government directly to farmers and this may solve the problem of cane arrears to a large extent. Some state governments have already paid from the state budgets to farmers. For example Uttar Pradesh government paid `1060 crores in and `2979 crores in in the form of exemption of purchase tax, relaxation in society commission, additional direct payment to farmers account, etc. Cane Arrears Demand-Supply and Price Policy The year-wise cane arrears from to are given in Chart 2.2. The cane price arrears of the earlier years have been cleared due to various interventions by the government such as production subsidy, Scheme for Extending Financial Assistance to Sugar Undertaking (SEFASU), soft loans to sugar mills given by the government and significant increase in market price of sugar during the last year. The clearance of arrears reached 99.3 percent for sugar season and 98.5 percent for sugar season. Cane price arrears for the sugar season are the lowest as compared to last five years of the corresponding period. Total cane price arrears in (as on 3 rd August 2017) were `4646 crores, about 8.2 percent of total cane dues payable. The share of arrears in total dues payable 13