THE glut in global sugar production and the consequent sharp fall in international prices may come as good news for consumers in India — the world’s largest consumer of the sweetener. But sugar mills here are worried that their losses will mount with growing imports.

World sugar production is expected to surge to an all-time high of 181.7 million tonnes this year on the back of record production in Brazil, the world’s largest producer, Mexico and the US, according to the International Sugar Organisation (ISO). This will be 10 million tonnes more than last year’s consumption, leading to nearly 56 million tonnes of sugar being available for exports globally.

The sugar surplus has led to a steep fall in international prices to the lowest level in nearly three years. India is expected to import almost 1.5 million tonnes of sugar during the year, including about 500,000 tonnes for domestic consumption (the balance of raw sugar will be processed by refiners and re-exported).

The sugar industry has sounded the alarm bell and demanded a hike in import duty on sugar. According to Vinay Kumar, managing director, National Federation of Cooperative Sugar Factories, inventories could jump by 9.7 million tonnes. This could leave an exportable surplus of nearly four million tonnes, though India’s sugar exports have declined sharply in recent years.

The sugar industry is demanding a stiff hike in tariffs from 10 per cent to 40 per cent. There is disagreement even within the United Progressive Alliance (UPA) government on the sugar issue. While agriculture minister Sharad Pawar of the Nationalist Congress Party (NCP), which has close ties to cane growers in western Maharashtra, has sought a hike in duty, finance minister P. Chidambaram and food minister K.V. Thomas are opposed to such a move.

Pawar recently wrote to Chidambaram noting that the arrears of sugar mills to cane growers is mounting and has crossed the Rs100 billion-mark. But the finance minister has refused to hike the duty, arguing that it could lead to a spurt in inflation. The UPA government has managed to curb food price inflation in recent weeks and is wary of another round of price hikes.

The finance ministry wants imports to continue as sugar prices have been decontrolled and if prices start rising it would not be able to intervene. Following the partial decontrol, factories are not obliged to sell sugar to the government’s public distribution system (PDS) at a subsidy. The central government will provide subsidies to state governments to acquire sugar from the open market for the PDS.

INDIA’S sugar production in marketing year 2012-13 (which ends in September) is expected to be around 24.5 million tonnes. Domestic demand is pegged at around 22 million tonnes. Last year’s drought in the two key sugarcane producing states of Maharashtra and Karnataka – which led to lower sowing operations earlier this year – is expected to lead to a slight fall in production.

Though the early onset of the south west monsoon and the copious rains that have been recorded in most states should have resulted in higher production next year, farmers will not be able to take advantage of the rains as the acreage is already lower this year – from 4.68 million hectares last June to 4.2 million hectares at present.

Vidya Murkumbi, chairperson, Shree Renuka Sugars, a leading producer, estimates that sugar production would decline by another ten per cent in marketing year 2013-14, as the area under the crop has fallen drastically in the two states.

Food minister Thomas says the government does not want to hike import duties at least until September, as it does not want prices to surge.

But the industry questions the need to continue with exports. Abinash Verma, director-general, Indian Sugar Mills Association (ISMA), says the duty should be hiked to at least 30 per cent.

For the industry, this has been a bad year with estimates that its losses would mount to over Rs10 billion. According to research agency Crisil, while the average price paid by the mills to cane growers went up by 14 per cent, the price of sugar increased by just three per cent annually during the last three years.

“We expect the industry’s net losses to increase to over Rs10 billion in sugar season 2012-13 due to the widening gap between sugarcane and sugar prices,” says Crisil. “For sugar season 2013-14, the central government has announced a 24 per cent hike in the minimum price payable for sugarcane, whereas as per our estimates, the increase in sugar prices is likely to be only 8-9 per cent. The financial performance of sugar mills will, therefore, deteriorate,” it adds.

Sugar and sugarcane pricing is a very complicated issue in India, and with powerful lobbies backing politicians in different states, there is distortion in pricing. A committee led by C. Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, had suggested that the state-advised price (SAP) for sugarcane be abolished. The committee also recommended that sugarcane prices should be linked to the price of sugar and not the other way round.

But the government has not implemented that part of the report on the decontrol of sugar. And in the politically important states of Uttar Pradesh and Tamil Nadu (which are also major cane growers), the SAP is higher than the Fair and Remunerative Price (FRP) for cane as recommended by the centre.

BUT the partial decontrol of sugar will lead to a more positive operating and investment climate for sugar companies.

“These developments will bring greater freedom for domestic sugar players,” says Asitava Sen, senior director and head of food and agribusiness research and advisory at Rabobank Group, India. “It will allow them to sell more sugar in domestic markets and export at will, leading to increased revenues and improved operating margins.”

But the recent reforms still sidestep the major structural problems in the sugar sector concerning the value chain of key raw materials, such as the procurement price for sugarcane, command area and minimum distance between mills, says Sen. “Overall we project an optimistic, although cautious, outlook for the industry in the wake of these reforms.”

The end of the levy sugar obligation (under which companies were required to sell 10 per cent of their production to the government for supply to the PDS at a discount of approximately 40 per cent) has freed Indian sugar mills from this ‘social responsibility.’

Rabobank expects sugar mills to benefit directly from the lifting of the levy sugar obligation as they will be free to decide the quantity and destination of supply based on market factors of production, demand, inventory and prices.

According to Rabobank, the medium-term outlook for the sugar sector is moderately positive. Partial decontrol of the sector will bring in better demand and supply visibility for sugar mills and improve the overall investment sentiment in the sector. This is expected to drive forward contracts, greater competitiveness and industry consolidation.

The sugar industry is also hoping that the oil ministry will enhance the sourcing of ethanol from domestic producers. Recently, the ministry rejected the bids by international suppliers for its ethanol blending programme (EBP), after it found the prices to be ‘exorbitant.’

Last November, the Indian government had made sale of five per cent ethanol blended petrol mandatory from June 30. State-owned oil companies had floated global and domestic tenders to get the biofuel. But the domestic industry could meet only half of the 1.05 billion litres of ethanol.

Oil minister Veerappa Moily has rejected the global tenders for supply of 800 million litres of ethanol as the prices were exorbitant. “I cannot allow petrol prices to go up because of the EBP,” he says. “We will float fresh tenders and encourage the Indian sugar industry to supply ethanol at much cheaper rates compared to international suppliers.”