A Cure for the Sugar Market Ills

 0   455 times read   17 min 41 sec to read
A Cure for the Sugar Market Ills

While it has been long overdue, it is now time for the government to put the proper policies in place to set the sugar market right.
 
--BY TEAM NEWBIZ
 
Nepal’s sugar market is in dire need of a complete overhaul. All the major aspects of this essential commodity including the pricing of sugarcane, production and local market pricing of sugar as well as its import are fraught with problems and malpractice. The yearly short supply of sugar in the market, payment disputes between sugarcane farmers and sugar mill owners and the halt of production by local mills occur on such a regular basis that they end up leaving a bitter taste in the mouth. 
 
The anomalies in the sugar market have become even more pronounced after the government’s move in September 2018 to impose quantitative restrictions on the import of sugar. The government set a quota to limit the import of sugar to 100,000 metric tonnes in the current fiscal year. However, its decision to reduce the import of sugar as per the demand of the mill owners did not bring stability to the domestic sugar market. The market price of sugar which had averaged Rs 48 per kg before the implementation of the quota restriction increased up to Rs 105 per kg making a dent in consumer pockets. 
 
In early April, a remark by Prime Minister KP Sharma Oli made headlines. Speaking at the inaugural ceremony of the 16th annual general meeting of the Confederation of Nepalese Industries (CNI) on April 8, he accused sugar mill owners of betraying him. “The government imposed quantitative restrictions according to their request. But the mill owners raised the price of sugar exorbitantly after the government took the policy measure,” he said, adding, “The owners of mills had urged that they would not be able to clear their large stocks of sugar even by next year if the imports are not checked.” Despite the Prime Minister’s expression of dissatisfaction over the activity of mill owners, it was surprising to see the government in late April extending the quantitative restrictions till the end of the current fiscal year leading to a general feeling that the pressure from the sugar industry lobby was too high for the government to bear. 
 
 
Basically, FY2017/2018 was regarded as a good year for sugar production. It saw a worldwide decline in sugar prices with an increase in production. In Nepal, sugar production in FY2017/18 was 55,893 metric tonnes (MT) more than that of FY2016/17. The rise in production led to the average price of sugar coming down to Rs 48 per kg from Rs 97 a year earlier. However, this market scenario began to worsen after the quantitative restriction was imposed. In spite of the policy support, mill owners still claim they are not able to sell the produced sugar resulting in their inability to make payments to sugarcane farmers. “Sugar imported from other countries continues to distort the market despite the customs duty hike in 2017 May and the quantitative restriction. This has contributed to the increasing losses experienced by Nepali mills,” says Sashi Kant Agrawal, president of Nepal Sugar Mills Association (NSMA).  In April, NSMA published a report claiming that the domestic sugar mills lost a total of Rs 2.25 billion in the first nine months of the current fiscal year. 
 
 
Demand, Supply and Production
Estimates put the country’s current annual consumption of sugar at around 250,000 MT. The demand is being fulfilled by the average annual domestic production of 120, 000 MT, and the remainder is imported. After the imposition of a quota last September, there is now a shortfall of 30,000 MT. According to official statistics, Nepal imported 106,200 MT of sugar worth Rs 5.72 billion in FY2017/18 which was 56,100 MT (worth Rs 3.68 billion) in FY2016/17. Also, it is generally acknowledged that about 20,000 MT of sugar enters the country illegally. The state-owned Salt Trading Corporation Limited (STCL) is the largest importer of sugar annually importing 50,000 MT from India at a subsidised customs tariff of one percent. After the imposition of quota system on import of sugar last September, the government was criticised of stopping STCL to sell its stock of sugar to the consumers. 
 
Data published by the Department of Customs shows Nepal’s sugar import totaled 306,460 MT worth Rs 16.72 billion from FY2012/13 to the first seven months of the current fiscal year. The statistics show that Nepal transacted with 149 countries across the world for sugar. Over the course of 68 months, significant variations in the price of sugar were observed in the local market in a single import year. “The price difference is particularly due to the fact that same quality of sugar hasn’t been imported,” says Ram Wagle, spokesperson at the Department of Customs. During the period, the country also exported 4,854 MT of sugar.
 
Till date, 29 sugar mills are registered at the Department of Industry (DoI).  Among the factories that are in operation currently, 14 crush sugarcane to produce sugar while a few mills process Muscovado (Khandsari), a partially refined or unrefined sugar with high molasses content mainly used in confectionary/food and certain types of alcohol (rum) production. According to NSMA, the 14 mills have collectively produced 782,000 MT of sugar over the last five years. 
 
Besides the rise in imports, last year’s oversupply of sugar in the market is also attributed to the overproduction of Nepali mills. For example, the Mahottari-based Everest Sugar and Chemical Industries in FY2017/18 produced 384,000 MT of sugar, as per DoI data. The mill’s registered production capacity is 28,800 MT. Similarly, the production of Indu Shankar Chini Udhyog at Harion, Sarlahi with a capacity of 32,400 MT produced 355,000 MT in the last fiscal year. 
 
According to NSMA, the total stock of domestically produced sugar stands at 276,000 MT which includes 76,542 MT in old stock, the production of the first nine months of the current fiscal year (162,250 MT) and an estimated 28,250 MT produced in the current crushing season. NSPA has estimated that after selling 77,000 MT of sugar by mid-April the remaining stock will be 190,000 MT.  Agrawal says that the total stock of 14 domestic sugar mills will come down to 20,000MT after 170,000 MT is consumed by mid-December. 
 
 
Dispute between Farmers and Millers
For years, issues such as the price of sugarcane and sugar, timely availability of seeds and fertilizers, and imports have remained hot topics of discussion in the meetings of the Federal Parliament and several parliamentary panels. Yet, the problems have been rarely resolved. As the government and the lawmakers struggle to find solutions, malpractice in the market continues to thrive.
 
There have been suspicions that domestic mills aren’t properly utilising sugarcane produced by Nepali farmers and that they buy comparatively cheaper Indian sugarcane which enters Nepal in large quantities due to the porous Nepal-India border, despite the prohibition on imports of the agricultural commodity.
 
Last year, it was reported that some mills in Kapilvastu and Nawalparasi bought smuggled sugarcane at Rs 300-350 per quintal when Nepali farmers were selling their produce at Rs 440-450 per quintal. 
 
The fluctuating sugar production in the last five years despite the increase in sugarcane indicates this. As per NSPA, the 14 mills collectively produced 122,000 MT of sugar in FY2016/17 which increased to 177,000 MT in FY2017/18. In the first nine months of the current fiscal year, the production was 162,000 MT which is the total amount for this year as all mills close by the third week of April with the end of the sugarcane crushing season. In Nepal, the sugar production season lasts for six months, starting from the first week of September and ending in the second week of April. But NSMA President Agrawal maintains that Nepali mills have been buying all their sugarcane from Nepali farmers. “The high import of sugar over the last few years created large stocks. As a result, sales of domestically produced sugar slowed causing a fluctuation in the market,” he claims. 
 
Though sugarcane is grown across most of the Terai region, Jhapa, Morang, Sunsari, Mahottari, Sarlahi, Rautahat, Bara, Kapilvastu, Nawalparasi are considered as Nepal’s major hubs for the cultivation of this cash crop where an estimated 60,000 families of farmers are said to be directly engaged in farming the crop. The area of land being used for sugarcane farming is expanding across the country and the number of sugar mills has also gone up. However, per hectare productivity of the crop has not increased. Over the last 10 years, the area of land for sugarcane cultivation has expanded by 20,000 hectares, but per hectare productivity has not increased even by a mere 5 MT. In FY2008/09, when 58,000 hectares of land was cultivated, per hectare productivity was at 40.58 percent; in FY2017/18, such productivity was 45.3 percent when 78,000 hectares of land across the country was cultivated. A decade ago, the total production of sugarcane in Nepal was 2.33million MT which reached 3.55 million MT in FY2017/18.  
 
 
In some districts, sugarcane production has even decreased. In Nawalparasi, for instance, the figure stood at 580,000 MT in FY2002/2003 which came down to 140,000 MT in FY2016/17. The decline is because of farmers who have limited their engagement in the farming of the crop due to pricing and payment disputes with the mill owners. It has become a regular occurrence over the past several years that large overdue sums of money in payments by mill owners to farmers supplying sugarcane, accumulates every year. The amount is growing even larger as it is added to the overdue payments of previous years.  Nepal Sugarcane Producers’ Federation, the umbrella organisation of Nepali sugarcane farmers, has estimated that mills owe about Rs eight billion in payments to farmers across the country. This situation has led to people starting to refer to sugarcane as a ‘credit crop’ instead of cash crop. 
 
Every year the price of sugarcane fixed by the government before the start of the harvesting/crushing season, becomes a matter for dispute as neither farmers nor mill owners are satisfied with the support price of the crop. Generally, farmers complain that the per metric tonne price of sugarcane barely meets their cost of cultivation. On the other hand, mill owners state that the support price of sugarcane is ‘exorbitantly high’. Support price (or the minimum price that the government guarantees to farmers) of sugarcane for the current fiscal year has been fixed at Rs 536.65 per quintal which includes Rs 65.28 in subsidy. As per the arrangement, sugar mills are required to pay Rs 471.28 per quintal to the farmers for the purchase of sugarcane while the government deposits the subsidy amount directly to the bank accounts of the farmers. The subsidy was launched in 2018 to lessen the difficulties being faced by the farmers in receiving payments from sugar mills. Nonetheless, in absence of a price mechanism, the sugarcane subsidy programme hasn’t proven to be that effective as farmers and mill owners continue to lock horns over the payments. The government is yet to introduce a reference price of major crops including sugarcane though such a promise was announced in the Budget for FY2018/19. 
 
Currently, the recovery rate of mills (production of sugar per quintal of sugarcane) in Nepal is said to be about 10 kg. Though this rate has risen from 6-7 years ago when it used to hover around 8 kg, significant increments in the recovery of sugar still seem to be far off because many old mills haven’t been upgraded with new production technologies.  Many sugar producing nations including India, Pakistan, Brazil and Thailand are seeing recovery rates of their mills going up to 15 kg with the use of improved technology and sugarcane varieties.  
 
Utilising By-products
Sugar mills also produce several types of by-products such as molasses, bagasse, press mud and ethanol that have a multitude of industrial and commercial uses.
 
The mills also produce electricity by burning bagasse, a fibrous sugarcane leftover after the extraction of juice. However, the utilisation of the by-products is not satisfactory as the government has not formulated an effective policy in this regard. Also known as black treacle, molasses is the main raw material for producing several types of spirits including rum and is also used widely in bakery and different food items. However, Nepali distilleries and food makers have to mostly rely on molasses imported from India.  In Nepal, there is no policy in place for the mandatory use of this important sugar industry by-product like in India where alcohol producers and manufacturers of food items are required to buy molasses produced by domestic sugar mills only. 
 
Similarly, no step has been taken so far to harness the potential to produce ethanol, which can be mixed in petrol and diesel, thus enabling Nepal to save some money it uses to import fuel. The government is yet to implement a decision it made a couple of years ago to permit the blending of ethanol in petroleum fuel. It has been recommended that mixing 10 percent of ethanol in the total volume of petrol or diesel will cause no harm to the vehicles and environment.
 
India has already implemented this recommendation. If the government’s announcement of blending ethanol in petroleum can come into effect, the country can lower its petrol and diesel imports by 10 percent each. 
 
A 2015 government announcement to start using bagasse for producing bio-energy is yet to see the light of the day. Though the Department of Electricity Development (DoED) in September 2017 and a year later, the Nepal Electricity Authority (NEA) signed power purchase agreements (PPAs) with Indu Shanker Sugar Mill (3 MW), Reliance Sugar Mills (15 MW) and Everest Sugar and Chemical Industries (3 MW), the mills have not been able to generate and supply electricity to the national grid. It has been estimated that Nepali mills have a combined electricity generating capacity of 80 MW. Likewise, bagasse is also used as a raw material in producing paper. Meanwhile, harnessing the potential in utilising press mud as fertilizer can bring positive changes in the agriculture sector. 
 
 
The Way Forward
The government needs to have clear policy arrangements to tackle the sugar market related issues. At present, there is no distributive justice in the sense that if the production of sugarcane (and thereby of sugar) increases, neither the farmers nor the consumers benefit. Income of farmers does not increase as the price comes down. Also the consumers of sugar continue paying the same price or even higher. Thus, all the benefits of increased production goes to unregistered middlemen in the market. As a result pricing and supply of sugarcane and sugar often become subjects of dispute among the stakeholders and lack of effective regulations has allowed anomalies to prevail in the market for a long time.
 
Nepali policymakers can take reference from several sugar producing nations in this regard. For instance, India, which became the world’s largest producer of sugar in 2019 surpassing Brazil, has been regulating the market through the Sugarcane Control Order since the mid-1960s.
 
As per the arrangements, there is a mechanism to determine the price of sugarcane in both federal and provincial levels of the country. Brazil, which is currently the world’s second largest sugar producer, regulates the market focusing on the production of ethanol.
 
The Latin American country in 1975 introduced a policy to encourage ethanol production by making the mixing of ethanol in petrol mandatory. This move of the Brazilian government came as a response to the depressed global demand for sugar which impacted the export of the major Brazilian agricultural commodity in the mid-1970s. After nearly four and a half decades, Brazil is now the world’s second largest producer of ethanol which has had a big impact on the country’s energy security. 
 
The world’s fourth largest sugar producer Thailand has been exercising an effective system of revenue sharing between sugar mill owners and cane farmers since the mid-1980s. The Thai Cane and Sugar Corp, which comprises representatives from the government, sugar industry and farmers, is the regulatory authority to determine the price of sugarcane, quantity of sugar production and monitoring of the market.
 
In recent years, consumers, sugarcane farmers as well as mill owners have been urging the government to form an authority (some have suggested establishing a Sugar Development Board) to overcome the problems in the Nepali sugar market. Nonetheless, the suggestions lack clarity on how such a body would function and regulate the market. Forming a ‘sugar fund’ can be an important step in this respect whereby an effective regulatory system can be started. Such a body can play an important role in minimising disputes between farmers and mill owners as it can fix the price of sugarcane all or surplus and buy sugar from the mills and keep it in the stock or release in the market as needed.
 
Similarly, having this fund can be instrumental in determining and forecasting the local market price of sugar by analysing different factors such as domestic production and import levels, and price fluctuations in the international market. Likewise, it can also formulate a system in utilising the by-products of sugar production in order to help the mills boost their income. However, the success of such a regulatory authority is only possible if it is fully independent from the bureaucratic control and the stakeholders are ready to work in a highly regulated environment. 
 
The country has the potential not only to become self-reliant but also to export sugar and earn foreign currency to narrow its fast widening international trade gap.  Lack of policy attention has obstructed Nepal from harnessing the lucrative opportunities in the sugar trade. Now the time has come to set things right. 
 

No comments yet. Be the first one to comment.
"