Link price to sugarcane FRP, not petrol costs
Given the new ethanol blending programme will give great relief to sugar mills across the country, it is not surprising that sugar company stocks have risen in the manner they have. Between Wednesday and Friday last week, the stock price of Simbhaoli Sugar, Rajshree Sugar and Balrampur Chini has gone up by 6%, 2.4% and 2.3%, respectively. The R48.50 per litre of ethanol that PSU oil-marketing companies will have to pick up from sugar mills will translate into an assured earning of R5,600 crore per year for the industry—115 crore litres are to be bought, the bulk of which will be supplied by a few big mills, the ones whose stocks have risen the most. What makes the price so attractive is that, with the commodity prices falling, prices of alcohol—a by-product of sugarcane—is around R42 or so (on an equivalent basis); also, with the prices of sugar at around R26 per kg, the ethanol equivalent of this is also around the same (1 kg of sugar equals 0.6 litres of ethanol). Which means that, with assured off-take of ethanol, sugar mills can, if they like, produce more ethanol. And unlike in the past, when ethanol prices were determined by oil-marketing companies, and were a constant source of dispute with the sugar mills, the official press release suggests the price will now be determined by the food ministry. Given how the entire industry’s profits are determined by the price at which cane is to be procured, it makes sense to formally link the price of ethanol to the Fair and Remunerative Price (FRP) fixed every year. Of course, for the system to work, sugar mills need to be made legally accountable for the supply of ethanol. In 2013, the official release says, the oil marketing companies got offers for just 45% of their total requirement. What normally happens is that, as prices of alcohol rise, sugar mills find it more profitable to sell alcohol instead of ethanol to oil PSUs.
While the government is still working on the subsidy for the export of raw sugar—the funds will come from the sugar development fund got from putting a cess on sales of sugar—in the longer run, raising ethanol prices is only a partial solution since 85% of all sugar mill sales come from the sale of sugar. States like Uttar Pradesh which account for a fourth of the country’s sugar production simply have to adopt the Rangarajan formula. At the current State Advised Price (SAP), which is much higher than the price that cane realised from the sale of sugar and various by-products, it is simply not viable for mills in the state.