Crushed by the cane lobby

In a move that marks the reversal of a decision made on October 4, the Maharashtra State government has decided to start the sugar cane crushing season from November 5 instead of December 1 as proposed earlier. The decision was made taking into account apprehensions of weight loss due to late harvesting and of ‘poaching’ by millers of neighbouring Karnataka especially from the sugar cane-rich Kolhapur and Sangli belt of western Maharashtra.

Rumblings in the sugar sector

Maharashtra is the >largest producer of sugar in India , contributing almost 37 per cent of the total national output. The 2016-17 sugar season is distinctly different for three reasons. First, this year marks the completion of a decade since major reforms were introduced in the Sugarcane Control (Order), 1966 via reduction of the aerial distance limit between two sugar units to 15 km from 50 km and the dropping of provision 5B, also known as “Bhargava formula”; the provision had enabled limited profit sharing out of excessive realisation from the sale of free sugar, in case of erratic cane supply, with cane farmers of the mill. Second, the estimated availability of sugar cane this year stands at 445 lakh tons, implying that the State will produce just 5 million tons (MT) of sugar as against 8.5 MT last season. With just 90 days of crushing, a large number of mills will remain shut resulting in idle machinery, extra manpower cost, and a likely default on term-loan repayment leading to non-performing assets. Third, the Raju Shetti-led Swabhimani Shetkari Sanghatana, championing the cause of sugar cane farmers for the past 15 years, is agitating for an increased cane price.

Cooperative sugar mills have contributed largely to the development of rural Maharashtra by providing consistent farm income to large shareholding members. But the ownership profile of sugar factories in the State has undergone a major change in the past decade with the amendment to Section 6A of the Sugarcane Control (Order), 1966. The change has also been accentuated by the questionable practice of lending banks, especially the Maharashtra State Cooperative Bank, taking over assets under the provisions of the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002. Data indicate that altogether 68 cooperative units were liquidated and sold later to the private sector, to entities floated by cooperative barons themselves, with a few exceptions.

The bigwigs of the sugar cooperatives, including former State cooperative ministers, floated private sugar units, in a way sowing the seeds of doubt on the working and efficacy of the cooperative model. The number of private sugar factories in Maharashtra has consistently increased from 2006-07. Almost 154 private sugar units have obtained Industrial Entrepreneur Memorandum (IEM); at present there are 78 operational private sugar mills with total crushing capacity of 2.48 lakh tons of cane per day (TCD) as against a mere 12 private units a decade ago. In comparison the number of operational cooperative units stands at 102 with a capacity of 3.52 lakh TCD. Private sector capacity gradually increased from 10 per cent of the total sugar production in the State to 45 per cent.

Cooperatives vs private mills

The natural question that arises is how the increase in private sector participation impacted the sugar cane payment and sugar recovery per ton of sugarcane crushed. The change in ownership pattern has impacted the cane price payment to the growers in the State (see graphs). To understand the payment dynamics, it is essential to understand the process of Fair and Remunerative Price (FRP), a payment model unique to Maharashtra. Unlike other cane-producing States where the farmer brings his produce to the factory for crushing, in Maharashtra it is picked up by sugar millers from the farmers’ fields to ensure uninterrupted cane supply and smooth operations.

The harvesting and transportation (H&T) cost thus incurred by millers is, however, ultimately deducted from the FRP paid to the farmers. A year-on-year analysis of H&T costs incurred by cooperative and private millers illustrates the larger impact. The private units have incurred Rs.57.07, Rs.48.58 and Rs.83.14 per ton on H&T more than cooperative units in 2013-14, 2014-15 and 2015-16 respectively, implying thereby that the cane farmers are burdened by an additional Rs.477.20 crore. Likewise, the cooperative sector sugar recovery rate, which is directly linked to the FRP paid to farmers, has always been higher than that of the private sector over the same period.

The difference between cooperative and private sector in recovery when monetised, calculating on the basis of FRP fixed by the Government of India, comes to Rs.1076.10 crore. Shockingly, in some cases cooperative sugar units reported less H&T expenditure and better recovery before management was taken over by the private sector. If both H&T and recovery are put together in monetary terms, the ultimate loss is borne by sugar cane farmers due to dwindling payments under private mills.

The common belief is that the private sector is competitive, efficient and professionally managed when compared to the cooperative sector. Ironically, the private sugar sector in Maharashtra doesn’t stand the test of data. How can such differences between cooperative and private sector in sugar recovery and H&T cost — which are directly related to cane payment — be explained?

Cooperative society members, with easy access to management, meetings of the board of directors and vigilance on the factory premises during and after crushing, bring in effective stakeholder participation in the overall working of mills. As a result there is better sugar recovery and considerable reduction in cost of H&T, thus financially benefitting the cane farmers. Given this backdrop, the recent trend of cooperative sugar barons opting to set up private sugar units despite overwhelming support of shareholders for the cooperative model is alarming. This, when the entire country is looking to emulate the Maharashtra sugar cooperatives’ model.

Steps to control retail sugar prices — such as like putting stock limits on millers and wholesale traders, capping of retail prices, increased cess and non-payment of export incentives — succeed in providing relief to consumers even though they impact the earnings of millers. In a similar manner, identifying and effectively implementing steps to protect farmers’ interests is the need of the hour. The provisions of the Maharashtra Regulation of Sugarcane Price (Supplied to Factories) Act, 2013, enacted on the recommendation of the C. Rangarajan committee, may provide an effective instrument for the administration to limit H&T cost per ton of sugar cane and dwindling sugar recovery rate of the private sector in the State.

Rajagopal Devara is serving Secretary, Government of Maharashtra, and former Sugar Commissioner, Maharashtra. Views expressed are personal.

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Printable version | Sep 15, 2021 3:21:41 PM |

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