The sugar industry has been struggling fundamentally for the past five-six years and so have been the investors in sugar stocks. Sugar companies have been able to push their revenues year on year but the profitability has constantly fallen due to the tussle between the government and producers regarding price control, minimum support price of sugarcane and export restrictions. This means that the industry's cost, revenues and the market - all are regulated.

We wanted to understand the reasons for the lingering problems of the sugar sector and find out if there are any chances of their being resolved. Recently, the All India Ganna Utpadak Sangathan (AIGUS) and All India Chini Utpadak Sangathan (AICUS) came up with their view on the sugar sector's problems through media advertorials, which give us a very interesting insight into the industry.

Indian sugar industry
India is world's largest consumer of sugar and consumes all the sugar produced domestically, with an annual consumption of about 24.8 million tonnes and per capita consumption of around 20 kg. In the domestic market 62-65 per cent of sugar is consumed directly by bulk users and the rest by households. There are around 600 sugar factories, five crore sugarcane farmers and 250 distilleries in India.

What's the problem?
The price for sugarcane is fixed by the Government of India. It is called the fair and remunerative price (FRP) and it becomes the minimum price for cane. Five state governments fix another price for cane over and above the FRP, which then becomes the minimum price for cane in those states. AIGUS and AIGUC allege that there is no logic or economic consideration in interference by the states except for the politics involved.

The cane area is reserved for each sugar factory, which has to crush compulsorily all the cane available, even at a loss. While recommending the FRP for 2013-14 of ₹220 per quintal of cane, the Commission for Agricultural Costs and Prices (CACP) assumed sugar price of ₹3,200 to ₹3,400 per quintal, whereas it is presently ₹2,200 per quintal. The current sugar price does not cover even the cost of cane. Most sugar companies are making losses and many sugar companies, like Mawana, have been referred to the BIFR. Due to their weak financial condition, they are not able to pay sugarcane farmers, who are committing suicides, and cane price arrears have touched ₹21,000 crore.

In spite of surplus sugar for last five years, imports were allowed in the garb of advance licence, which further flooded sugar in the domestic market. Retail sugar price, which was ₹40 per kg in September 2012, is now ₹26 per kg, i.e., reduction of 35 per cent, whereas costs of all food commodities have increased by at least 25 per cent in last three years.

No end in sight
The sugar industry is facing a unique dilemma wherein it is not able to control its input costs due to the MSP of sugarcane. It cannot raise prices either as they are also regulated by the government. The respite for sugarcane producers and sugar companies is still not visible.

Sources: All India Ganna Utpadak Sangathan, All India Chini Utpadak Sangathan, Business Standard