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Sugar cooperatives in India are the perfect example of a sweet dream turned sour.

They have been the


backbone of India's sugar sector. Once upon a time they were raking in money like a Shylock-managed
company. But, thanks to mismanagement and corruption, the cooperatives are on its death bed now.

Take the case of Maharashtra, the land of sugar cooperatives. They contribute 95 per cent of the total
sugar produced in the state, making private sector's presence almost insignificant in the state. The first
sugar cooperative in Maharashtra was formed by Vithalrao Vikhe Patil in 1950 to resist the uncouth
exploitation of farmers by money-lenders and private mill owners. Patil brought together sugarcane
farmers of 44 villages in Ahmednagar district in western Maharashtra and formed Asia's first
cooperative sugar factory.

At that time, extracting sugar from cane was so expensive that most of the farmers preferred to convert
it to jaggery, which resulted in a glut of jaggery in the market. The cooperative changed this situation
by assuring the farmers of off-take of their produce at a reasonable price. The unique aspect of the
cooperative movement was that a farmer with a small landholding is also given the same status of a
shareholder.

Situation has changed down the years. What is ailing the sugar cooperatives now? Ask Prakash
Naiknavare, managing director, Maharashtra State Co-operative Sugar Factories Federation Ltd. He
said: "A major problem being faced by the cooperative sugar sector is unprofessional management,
lack of foresightedness and absence of decision-making process.

The decision-making is delayed because of the high number of people involved in the process. Another
issue is that of vagaries of nature. Sugar industry is grossly governed by natural vagaries and the
infamous sugar cycle of two years surplus followed by one year of shortage."

Biggest problem the sugar industry facing today is surplus production -- from 10 lakh tonnes in 1950 to
over 200 lakh tonnes at present. While consumption of sugar is increasing at a steady pace of 4 to 5 per
cent per annum, it does not match the increase in production. As a result, prices of sugar have been
steadily sliding this year. In three months' time -- from January to March this year -- sugar prices
crashed from Rs 1,800 to Rs 1,300 per quintal.

"We are facing the problem of plenty. It is unprecedented. Today, the price of cane is more than the
price of sugar and this has never happened before," says S L Jain, director-general of Indian Sugar
Mills Association. The impact of the price crash will ultimately be felt by sugarcane farmers. As mills
run into losses, payment to farmers will be delayed. Then, cane planting will go down and crop patterns
will change. As a result, farmers will be forced to shift to other crops, causing shortage of sugar.

In a bid to rescue the sugar sector, the government recently lifted the ban on exports and decided to
create a buffer stock. But, lifting the ban on exports came at a time when global prices had crashed. So,
despite export subsidy, sugar mills were not able to ship the commodity to other countries at a
competitive price.

While sugar production has increased in the last decade, domestic sugar consumption has grown at a
sluggish pace. This has led to accumulation of stocks with sugar mills which affected prices. This is
one of the main reasons why the margins are under pressure. This is also true to the global sugar
scenario and thus to prevent imports at low global prices, the government has a high tariff protection in
place.

This situation can be rectified if the government encourages exports. While India is the third largest
sugar producing nation in the world, it is only the seventh largest exporter of the commodity for 2005-
06 fiscal. India produces around 20 million tonnes of sugar and exports just one million tonnes. The per
capita consumption stands at 18 kg, much lower than 59 of Brazil [ Images ], which is the largest
producer and exporter of sugar.

"The main reason why we are not able to exploit the export potential is that we mainly produce
plantation white sugar, which is not in much demand in the global market. There is virtually no demand
for our sugar. Many countries have started to export raw sugar and then set up their own refineries to
process it. Thus, we are unable to capture the export market," says Jain.

This year, Maharashtra government announced an export subsidy of Rs 1,000 per tonne, which is over
and above the export subsidy of Rs 1,350 a quintal announced by the Central government. The subsidy
is for exports up to 10 lakh tonnes.

However, the subsidy came at a time when global markets had crashed, causing losses to sugar mills
and farmers. In India, sugar is under the purview of Essential Commodities Act, 1955, which means
that the government controls sugar capacity additions through industrial licensing and determines the
price of sugarcane and the quantity that can be sold in the open market.

Sugar export is governed by Sugar Export Promotion Act, 1958, which stipulates that the government
can use 20 per cent of the country's total production for sale abroad. Import of sugar or export is mainly
resorted to when there is a mismatch in domestic sugar production.

While Brazil also records a high sugar production, the Latin American country is not facing the
problem of carry-over stocks since it is producing biofuel ethanol from sugarcane. Brazil is currently
the largest producer of ethanol (around 45 per cent available in the market).

If you want to learn a lesson from Brazil, biofuel is a growth opportunity for the sugar industry in the
country. Thanks to 'votebank' politics, sugar decontrol has been put on hold for a long time now.

Recently, the Union Cabinet decided to constitute an expert group to look into ways and means to free
the sugar sector. However, sugar sector is already in partial decontrol mode. The government had
announced complete decontrol of the commodity by March 2003, but the decision was deferred to
October 2005. Still, restrictions on the commodity continue.

One of the major hurdles faced by sugar mills today is levy system, which basically means that mills
are expected to surrender 10 per cent of their production to the government at prices below the market
rate. This sugar is used by the public distribution system.

Second restriction is 'free-sale quota'. After surrendering 10 per cent of output as levy, the remaining 90
per cent is sold by mills in a restricted marketing environment. The government releases what is called
monthly free-sale quota to mills to be sold within stipulated time-frame.

Levy system and free sale quota system are believed to be restricting the growth of sugar industry. The
decontrolled environment is likely to help sugar industry record a more robust growth. "We have to
explore new markets for exports. The Union government has to encourage production of ethanol and
other energy-related byproducts of sugar," says Jain.

Crisis in sugar cooperatives

ATUL DEULGAONKAR

The fall in the price of sugar, the dwindling area under sugarcane and
mismanagement of the factories have pushed the sugar cooperatives in
Maharashtra to the brink.

WHEN Vitthalrao Vikhe-Patil and his associates, the economist


Dhanajayrao Gadgil and the cooperative expert Vaikunthbhai Mehta,
started they intended it to be for , who wereThey made agave them aThe
cooperative sugar factory engine for developmentBut in the mid-1970s
the harvests began to turn bitter for a variety of reasons that the pioneers
had probably not foreseen.
ATUL DEULGAONKAR

At a sugar factory in Maharashtra's Osmanabad district.

In the cooperative scheme of things, the factory arranged credit, provided


seeds and fertilizers, and helped harvest and transport the sugarcane. The
farmer only had to water the crop. On its part a 1,500-tonne-a-day-
capacity sugar factory had an average recovery of 10 per cent (10 kg of
sugar from 100 kg of sugarcane), producing three lakh tonnes of sugar in
a 180-day operation. Each factory crystallised the economy of at least a
hundred villages with roads, electricity, education and healthcare and
accelerated rural development. Value addition from the factory was in the
form of by-products such as industrial alcohol, rectified spirit and acetic
acid from molasses and particle board, paper and electricity from bagasse.

Cooperative sugar factories mushroomed in the region with the support of


the Central and State governments, and the area under sugarcane
increased manyfold. Today, Maharashtra has 177 sugar factories and
leads the country in sugar production. According to the statistics put out
by the Maharashtra State Sugar Cooperative Federation, 1.6 million
farmers in the State cultivate sugarcane on 0.7 million hectares,
producing 60 million tonnes of sugarcane.

The sugar belt achieved progress until the mid-1970s when scams
involving chairmen, directors and employees of sugar cooperatives
exposed the corruption within. There was still scope to salvage the
situation, but the cooperative chiefs were in no mood to listen to leaders
like Y.B. Chavan and Annasaheb Shinde, who were the avant-garde of
the cooperative movement.

Time was when directors of sugar cooperatives were considered the true
trustees of public funds, always trying to cut costs. Now, `flow of funds'
seems to be the norm. One of the directives of the Sugar
Commissionerate is that a factory should buy sugarcane from within a 15-
20 sq km radius so that bullock carts can transport it from the fields. But
with enhanced capacity and an increase in the number of factories trucks
are the preferred means of transport despite the higher cost.

Harvesting is a labour-intensive task and almost two lakh labourers come


from the drought-prone areas of Maharashtra and Karnataka. Factory
managements contract them every year by making an advance payment to
their agents, but many fail to turn up or exist only on paper. The gains of
agents, be it in contracting labour or purchasing gunny bags, machinery
parts or sulphur, lime and caustic soda, are in many cases inversely
proportional to the losses of the factories. Sunil Kocheta, a senior auditor
for sugar factories, claims that misappropriation takes various forms. He
alleges that cheques for millions of rupees are not deposited in banks so
as to please traders. "They cannot offer us accounts for several years," he
says.

Such is the state of affairs that 13 of the 177 sugar factories have been
liquidated and 56 are sick, with accumulated losses of over Rs.1,900
crores, according to the office of the Sugar Commissioner.

Matters were not helped by the fall in the price of sugar last year, to
Rs.1,050 a quintal from Rs.1,350. It is now around Rs.1,200. Predictably,
cane prices also fell, plunging factories into a financial crisis. This had a
direct impact on farmers and factory workers. Farmers staged
demonstrations last year and this year demanding an advance payment of
Rs.800 a quintal of cane. Hardly 10 factories can afford to pay such an
amount in the present situation. The procurement price of cane ranges
from Rs.600 to Rs.900 a tonne and the cost of crushing that quantity
varies from Rs.172 to Rs.645, depending on the efficiency of the factory.
Transportation, over-staffing, maintenance and a large inventory add to
the production cost.

It seems to be a no-win situation for the sugar factories as more and more
farmers switch to soybean and cotton, forced by an unremunerative
procurement price and water scarcity. Three successive years of drought
has contributed in no small measure to the decline in the area under
sugarcane. For instance, in Latur district sugarcane was grown on 68,000
hectares in 2001-02, but in the 2003-04 season it came down to 12,000
ha. According to the Vasantdada Sugar Institute, the yield in the 2003-04
season is estimated to be 350 lakh tonnes against the requirement of
682.32 lakh tonnes for the 177 factories. Besides, a massive pest attack
on cane throughout the State is likely to reduce the sugar yield of the
harvested cane by 40 per cent, according to agricultural experts. As a
result, the crushing season is expected to last only about 100 days as
against the normal 180. In such a situation, say agricultural experts, very
few factories will be able to function in the 2004-05 season.

The Central government and the factory managements are responsible for
this situation, says former Chief Minister Vilasrao Deshmukh, whose
Manjara cooperative sugar factory has won many national awards for
excellence. "The Central government unnecessarily imported sugar in
1998 when our stocks were piling up. So the sugar rates came down," he
says. According to him, the criterion for the statutory minimum price
should be the average recovery of sugar produced from sugarcane, but the
Central government norms consider peak recovery, which slashes
sugarcane procurement price.

As for the functioning of the factories, he holds the view that the factory
managements are accountable for both profits and losses and that
financial indiscipline and irregularities should be punished. "In many
cases, there is interest only up to the commissioning of the factory. No
effort is made to ensure its proper functioning. This has crippled the
whole cooperative movement," says Deshmukh.

The sugar factories in the State have a combined turnover of about


Rs.8,000 crores and provide employment, directly or indirectly, to 1.5
crore people. Any crisis affecting the factories is bound to have a
cascading effect on the rural economy. Many sugar experts opine that a
way out would be to decontrol the sugar industry. They claim that
decontrolling the industry will benefit the producer, processor and
consumer just as the decontrol of cement a couple of years ago made it
available freely and at a steady price.

"Reforms will shock the factories for a year or two, but they will
eventually adjust to the situation. Our policy supports sick factories by
giving them subsidy. Instead, we should give incentives in the form of
infrastructure facilities, on merit," says B.B. Thombre, managing director
of Natural & Allied Sugar Industries and a sugar expert.

Some experts believe that sugar factories must diversify to generate


electricity by using bagasse as fuel and sell the extra power to the State.
Each factory can generate at least three megawatts a day. They point out
that in Karnataka and Tamil Nadu, the State governments purchase power
from sugar factories. The issue has been hanging fire in Maharashtra for
the last eight years with no agreement in sight between the factories and
the government.
Sugarcane juice and molasses can also yield ethanol or ethyl alcohol,
which is mixed with petrol. Sorghum can also be processed in the
factories to produce ethanol.
50% cane supply assurance likely to be made a must for factories.

The Maharashtra government is contemplating tightening licensing norms for sugar factories. The move, say
industry experts, may leave 25-30 per cent co-operative mills in the state without work in the coming sugar
season (October 2009-September 2010).

According to a senior industry official, the state government is considering refusal of crushing licences to mills
that have cane supply assurances of less than 50 per cent of their capacity. The mills will have to give an
assurance to the government to this effect.

FACT FILE
Particulars 2007-08 2008-09
Number of factories installed 192.00 193.00
Number of factories licensed for
173.00 144.00
crushing
Cane crushed (million tonnes) 76.19 39.90
Sugar production (million tonnes) 9.06 4.59
Recovery (%) 11.89 11.51

As corporate and contract farming are still to catch up in India, the mills will not be able to grow the crop.
Therefore, experts do not rule out consolidation in sugar industry in Maharashtra, India’s second-largest sugar
producer. A final decision on tightening licensing norms will be taken by the Ministers’ Committee, headed by the
Chief Minister, early next month.

Industry watchers say the proposal may lead to a “price war” due to shortage of cane. Last year, 144 (116 co-
operatives and 28 private) out of 193 registered factories got licence for crushing as against 173 (146 co-
operatives and 20 private) in the previous season. But many of these worked at less than half their capacity. The
mills were forced to declare the end of the crushing season towards the end of February and early March, over
45 days before scheduled, due to shortage of cane.

Sugarcane output almost halved to 39.90 million tonnes in 2008-09 from a record 76.19 million tonnes in the
previous season as farmers shifted to more remunerative crops, including pulses and cotton. As a consequence,
hardly 7.87 lakh hectares were under cane. This is expected to rise to 8 lakh hectares in 2009-10.

The state produced 4.6 million tonnes sugar with an average recovery of 11.51 per cent in the 2008-09 season.
These figures were 9.06 million tonnes and 11.89 per cent in the previous year.

Meanwhile, the output of cane is likely to be affected badly due to the three-week delay in monsoon.

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