Why sugar prices will keep rising in India
by Mahipatrao Phadtare, a sugarcane farmer*
For generations my family have been farmers in Sangli district, Maharashtra. In 1972, after graduating in Political Science from Wilson College, Mumbai, I took up farming, unlike many of my male Maratha relatives who became police or army officers. I enjoy dealing with the uncertainties of climate, rainfall, crop production and price swings, which farmers face, and also like being my own boss.
We are lucky that much of our land is irrigated by waters from the Krishna river. This is because in 1972, during one of the worst droughts in Maharashtra, I got a lift irrigation system installed. Today my farm is equipped with a fertigation system, which automatically combines drip-irrigation with fertilizer input. This avoids water wastage as well as controls the supply of moisture and nutrients to the crops, based on weather forecasts.
Sugarcane is a less risky cash crop
Due to the huge Koyna dam nearby, my farm has water available all through the year. So, I can grow vegetables and fruits, including grapes, which can be very profitable. But my farm is about 250 Kilometres from the nearest big city Pune and 370 kms from Mumbai. It is hence very expensive to use refrigerated trucks and storage to be able to sell these highly perishable foods in Pune or Mumbai.
In 1972, I started farming sugarcane. It is a sturdy plant which is harvested in about twelve months. With adequate water, fertilizers and some pesticides, you can expect a decent cane crop. So, at least for me, farming cane is less labor intensive and risky than growing other cash crops, including fruits and vegetables.
I farm my own land as well as lease from neighboring landowners. I send my cane to the Shetkari and Rajaram Bapu sugar co-operatives. They are both in Sangli district, about 20 kms from my farm. I have been a member of these co-operatives since 1972.
Co-operatives in Maharashtra boost sugar production
In 1950, the first factory owned cooperatively by farmers in India began crushing cane in Pravaranagar, Ahmednagar district, Maharashtra. That year, 139 mills, all but one privately owned, produced 1.1 million tons of sugar in the country. In the 1981-82 harvest year, India produced 8.2 MT of sugar, the largest in the world. At that time, roughly 60% of India’s output came from co-operatives, mainly from 69 operating in Maharashtra. The rest of the sugar was produced by privately owned mills, mainly in Uttar Pradesh.
Today there are about 750 sugar mills in India, about half of them co-operatives and the rest mostly private; a few loss-making ones are run by the government. They process cane from sugar farmers, who together with their families number about 50 million. The mills directly employ about 500,000 workers. There are 195 mills in Maharashtra, including about 171 co-operatives and the rest private or government-run. In the 2019-20 season, about 145 of them were in operation in the state, producing about six MT of sugar. Sugar mills in Uttar Pradesh, which are mostly privately owned, produced a roughly similar amount of sugar.
High prices lead to a glut in cane output
According to regulations, the prices paid to farmer members of a co-operative mill for the sugarcane they supply ought to comprise of two parts: a minimum, or floor, price set by the Government of India; and a share of the mill’s profit, if there is one.
But members of loss-making co-operatives may not receive even the minimum price, especially when there is a surplus of cane supplies. Many of these mills operate in regions that do not have good irrigation and soil or compete with better managed co-operative mills nearby.
Typically, cane prices received by members of well managed cooperatives, at least in Maharashtra, are higher than the government-set minimum price as well as the prices paid by private mills.
Prices received by farmers, including by members of co-operatives, are highly cyclical. They depend on the volume of cane supplies and the price of sugar in India as well as in the global market. Last year the minimum price set by the Government of India was Rs.2,750 ($37) per ton of cane, more than double that of 2010-11.
This year, 2020-21, due to the higher prices paid to cane growers during the previous year and the good monsoon rains, sugarcane has been planted on about 3 million acres in Maharashtra. This acreage is nearly 50% higher than last year.
India’s sugar output this year is forecast to be about 34 MT, up 17% from last year. Maharashtra and Uttar Pradesh are each forecast to produce about 20% of the country’s sugar. Global production is estimated to be about 188 MT, up from about 160 mt last year. Brazil will be the largest producer, with about 40 mt.
Traders & retailers benefit when sugar prices drop
Given the sharp jump in sugar output this year, wholesale prices of sugar in India, and in the World markets, will likely drop this year - and next year too, unless there is a severe drought in major cane growing areas. As a result, sugar mills in India, with weak finances due to accumulated losses, will likely face more losses.
When prices drop, sugar traders, retailers and other intermediaries buy from the mills at the lower wholesale price. But typically, they do not pass on the price reductions to consumers, buying in the open market, and thus make bigger profits. Currently, the wholesale price of sugar is about Rs. 32 ($0.43) per kg while the retail price is about Rs. 40 ($0.53) per kg.
Sugarcane farmers in India, especially those supplying to loss-making mills and private mills, will likely see a sharp drop in the prices they get for their crop this year and likely next year too. Over the next two to three years, hurt by the price declines, many farmers will plant less sugarcane, and some may not plant the crop at all, especially if they sell to private or loss-making mills. Depending on soil, climate and prices, farmers may switch to planting other crops requiring irrigation like beans or rice.
Rising sugar consumption in India
While sugar production in India is cyclical, its consumption keeps rising due to population growth as well as greater demand for sweets and beverages, resulting from an expanding middle class with higher income. Consumption this year is expected to be about 29 MT, up about 50% from 2011.
In India, it is important for the ruling party to prevent a sharp rise in the price of sugar. Politically it is the second most important commodity, after onions. They are both a key part of the daily diet of Indians. Sugar, for instance, is added to sweeten tea. When their prices have risen steeply just before an election, angry consumers have voted to defeat the ruling party.
This is part of the reason for the political clout of sugar industry. The other, and perhaps more important factor, is that sugar has generated considerable wealth for mill owners, traders and farmers in India just as it has all over the world.
Sugar imports to keep voters happy
In 2016-17, during the previous trough in the production cycle, India’s sugar output fell to 20 MT, down from a previous high of about 28 MT two years earlier. In 2017, domestic consumption was about 26 mt, and given the production drop, wholesale prices shot up by a third to about Rs.40 ($0.53) per kg. So, during 2017-18, to avoid a further spike in prices, the ruling party lifted tariffs to allow net imports of about 670,000 MT of sugar.
This year India is expected to export about five MT of sugar. But these sales will take place when global prices are low. Anticipating a record global output this year, currently the world wholesale price of sugar is about Rs.18 ($0.26) per kg, roughly half of its 2017 high. The world wholesale price is also about 40% lower than the price in India. The government of India though re-imposed tariffs on imports to protect the domestic cane farmers and sugar mills.
Based on past cycles, it is very likely that sugar output in India – as well as the global production - will fall sharply in about three years. Then, due to reduced supplies and rising consumption, prices in India will likely rise sharply. The ruling party, in order to try to contain the price rise, may lift tariffs and India will again be a net importer of sugar. Such imports could occur when world prices are likely to be at record highs, due to a drop in global supplies.