Funds, infrastructure shortage to hit strategic sugar buffer
The all-year round strategic sugar buffer, the viability of which is one of the issues before the Kelkar committee, appears unviable until 2010.
By Prabha Jagannathan, TNN |
NEW DELHI: The all-year round strategic sugar buffer, the viability of which is one of the issues before the Kelkar committee, appears unviable until 2010.
Projections by the sugar industry are that the current spell of heavy glut in sugar production could carry on up to 2009-10, notching up another mammoth 30 million tonnes (mt) in output. That would make it the third consecutive year of bumper crop, impacting directly any big loans to the sector.
Among the primary reasons for its unviability would be the estimated initial investment, pegged at an impressive Rs 10,000 crore-odd. Industry observers point out that ways to raise the funding would mainly involve loans from banks, none of which are likely to be keen on extending advances of that size to the sugar sector.
“In the event of repeated production gluts affecting its financial health and ability to repay promptly, it is extremely unlikely that any bank or financial institution will extend the huge loans needed to cover the massive funding for building storage logistics for the excess sugar,” sources said.
The sugar sector has now started a second year of estimated glut in production (30 mt, after producing nearly 29 mt last sugar year), a development that spelt relief measures that ran into thousands for the government after it banned sugar exports fearing an inflation spike. The closing stock for sugar season ended September 30, 2008 was around 11.9 mt, enough to meet domestic demand for more than seven months.
To partly resolve the problem plunging sugar prices and huge stocks as well as pending cane arrears to farmers, consulting major KPMG had suggested in July this year the establishment of a strategic stock of sugar to help maintain a sustainable price band. It also called for an independent regulator for the sugar industry which is facing a glut in the current marketing season.
A strategic stock for sugar would enable the government to intervene as a market participant, it held, rather than through the monthly release mechanism under which it forces sugar mills to sell a quota to the government. At present, the government has set up a 5mt temporary buffer.
Sugarcane farming has been by and large cyclical in nature but for every two years of glut and plunging prices, the area under cane and output went down in the third year. If industry apprehensions materialise, this would be one of the few occasions when the glut cycle has lasted three consecutive years.
Observers also contend the storage logistics for the strategic buffer — built on the lines of the one in China, and maintained at government expense — would be complex and cumbersome. Currently, sugar mills are statutorily obliged to store levy sugar for the government and receive a subsidy for this service. But the strategic buffer would involve longer term storage and in much bigger quantities, making it unviable for mills to find the storage space.
The third roadblock for the strategic sugar buffer could well be the slow pace of the Centre’s Ethanol Blending Programme (EBP) for petrol. Even taking into account the permission to distill ethanol directly from low grade sugar, 5% doping of petrol will only account for a small quantum of what could be produced at the end of this bumper sugar year or next.
“All the EBP rhetoric is unlikely to impact the glut-struck industry noticeably until such time as a mandatory 10% petrol-doping is implemented countrywide,” a food ministry official acknowledged.
Projections by the sugar industry are that the current spell of heavy glut in sugar production could carry on up to 2009-10, notching up another mammoth 30 million tonnes (mt) in output. That would make it the third consecutive year of bumper crop, impacting directly any big loans to the sector.
Among the primary reasons for its unviability would be the estimated initial investment, pegged at an impressive Rs 10,000 crore-odd. Industry observers point out that ways to raise the funding would mainly involve loans from banks, none of which are likely to be keen on extending advances of that size to the sugar sector.
“In the event of repeated production gluts affecting its financial health and ability to repay promptly, it is extremely unlikely that any bank or financial institution will extend the huge loans needed to cover the massive funding for building storage logistics for the excess sugar,” sources said.
The sugar sector has now started a second year of estimated glut in production (30 mt, after producing nearly 29 mt last sugar year), a development that spelt relief measures that ran into thousands for the government after it banned sugar exports fearing an inflation spike. The closing stock for sugar season ended September 30, 2008 was around 11.9 mt, enough to meet domestic demand for more than seven months.
To partly resolve the problem plunging sugar prices and huge stocks as well as pending cane arrears to farmers, consulting major KPMG had suggested in July this year the establishment of a strategic stock of sugar to help maintain a sustainable price band. It also called for an independent regulator for the sugar industry which is facing a glut in the current marketing season.
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A strategic stock for sugar would enable the government to intervene as a market participant, it held, rather than through the monthly release mechanism under which it forces sugar mills to sell a quota to the government. At present, the government has set up a 5mt temporary buffer.
Sugarcane farming has been by and large cyclical in nature but for every two years of glut and plunging prices, the area under cane and output went down in the third year. If industry apprehensions materialise, this would be one of the few occasions when the glut cycle has lasted three consecutive years.
Observers also contend the storage logistics for the strategic buffer — built on the lines of the one in China, and maintained at government expense — would be complex and cumbersome. Currently, sugar mills are statutorily obliged to store levy sugar for the government and receive a subsidy for this service. But the strategic buffer would involve longer term storage and in much bigger quantities, making it unviable for mills to find the storage space.
The third roadblock for the strategic sugar buffer could well be the slow pace of the Centre’s Ethanol Blending Programme (EBP) for petrol. Even taking into account the permission to distill ethanol directly from low grade sugar, 5% doping of petrol will only account for a small quantum of what could be produced at the end of this bumper sugar year or next.
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“All the EBP rhetoric is unlikely to impact the glut-struck industry noticeably until such time as a mandatory 10% petrol-doping is implemented countrywide,” a food ministry official acknowledged.
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