Sugarcane Pricing in Uttar Pradesh

Deepak Sethia
Indian Institute of Management, Indore

Sugar sector is one of the few industrial sectors that have directly contributed to rural
economy by being located in rural areas and utilizing rural resources. However, Indian sugar
industry, particularly in Uttar Pradesh (UP), has been facing multiple issues over the years.
Uttar Pradesh (UP) state government has been directed by the Allahabad High Court to
ensure that sugar mills pay Rs 4000 Crores by the end of July 2013 for the arrears due
towards sugarcane farmers.1 UP Sugar Mills Association (UPSMA) has asked the chief
minister Shri Akhliesh Yadav for financial assistance to the sugar mills for paying cane
arrears to the farmers.2 Current ex-mill sugar prices at Rs 30/kg is lower than Rs 34.5/kg
prevailing in the last year, hurting revenues of sugar mills and their ability to pay farmers.3
While sugar prices are decided through the market demand and supply, sugarcane prices are
fixed by the state government as state advised prices (SAP), which mills are required to pay
to the farmers. Given the fall in prices, sugar mills have also requested the chief minister to
reduce the state advised prices (SAP) for sugarcane from Rs 280/qtl to Rs 225/qtl.4 On the
other hand, sugarcane farmers are arguing to raise the SAP to Rs 300/qtl due to increase in
cost of cultivation of the crop.

Loksabha (lower house of Indian parliament) elections are scheduled to take place
during early 2014; and nearly 29 lakhs5 sugarcane farmers and their families form strong
political lobby in the state. Not increasing SAP for sugarcane may provide an opportunity to
the opposition parties for attracting support of sugarcane lobby. Previous chief minister had
increased the SAP by 96% in her five years tenure.6 Also, in the past 5 years, sugarcane
farmers have twice attempted parliament gherao to force central government for increasing
support price declared for sugarcane. The chief minister would certainly not like to recreate
the same scenario in his own state. Although, deciding on SAP is a state level issue, but all
producing states compete for the consumers across the country. Hence, higher sugarcane
price in the individual state can hamper its competitiveness in the national market. Immediate
government action before the ensuing sugar season (October to September) has become
necessary for the chief minister while taking both political and economic considerations in
account.

1
 1. Sugar production and market prices

India is the second largest producer of sugarcane and sugar after Brazil. Also, India is
the largest consumer of sugar. In 2011, Indian sugar consumption was 27.13 million tonnes,
with global production of 171.1 million tonnes. However, Indian per capita annual sugar
consumption at 18.9 kg was lower than the global per capita consumption of 23.7 kg per
year.7 Bulk consumers like bakeries, candy, soft drink manufactures, and local sweets shops
account for more than 60 percent of the total sugar demand.8 Another major use of sugarcane
is as an input for jaggery/gur and khandsari production. Sugar mills need to compete for
sugarcane with cottage industry producing gur/khandsari. However, with changing
consumption preferences, share of sugarcane used by sugar mills has increased from 33% in
1970-71 to 78% in 2010-11.9

Sugarcane production in India is distributed across various states in tropical and

subtropical parts of the country (Exhibit 1). Uttar Pradesh is the largest producer of sugarcane
in the country followed by Maharashtra and Tamil Nadu. However, Maharashtra is the largest
sugar producer state followed by Uttar Pradesh. This difference in ranking is mainly because
of two reasons. Firstly, the recovery ratio (kg of sugar produced per quintal of sugarcane) in
UP is 9.2% compared to 11.3% in Maharashtra. Hence, UP produces lesser sugar from the
same quantity of sugarcane. Secondly, compared to other states, sugar mills in UP faces
higher competition from the gur/khandsari units. India produces around 7 million tonnes of
gur annually with UP alone contributing 40% of it.10 Sugarcane takes nearly one year to
grow, which is more than double the time required to grow either rice or wheat. However,
crop duration differ across the states, depending upon the climatic factors. Crop duration is 9-
10 months in the sub-tropical states of UP, Punjab, and Haryana, compared to 13 months in
the tropical states such as Karnataka, Tamil Nadu, and Andhra Pradesh. To compensate for
the longer duration of the crop, tropical states also have higher yield of sugarcane in per
hectare compared to the subtropical region (Exhibit 1). For example, sugarcane yield in UP
was 60 tonnes/hectare compared to 103 tonnes/hectare in Tamil Nadu in 2011-12.

Sugarcane production in India shows cyclical patterns based on market signals

coming from the previous crop. High cane production in one season reduces sugar prices.
Although, farmers are guaranteed to receive fixed sugarcane prices in terms SAP or FRP
(section 2), yet mills are unable to make timely payments.11 Due to the issue of cane arrears,
2
farmers tend to shift to other crops in the next cropping season. Low cultivation and
production in current season lead to higher prices and incentivizes farmers to again plant cane
in subsequent season. Usually this famous ‘Indian Sugar Cycle’ spans over 6 to 8 years
where 3-4 years of high production is followed by 2-3 years of low production (Exhibit 2).
As shown in Exhibit 2, the period of 2003-05 was a trough period followed by peak during
2005-08. Interestingly, such a significant cyclical production has been observed only in the
case of sugarcane among major crops. For example, year 2008-09 was not a draught year for
India, and both wheat and rice production were at historic high production of 80.58 and 99.15
MT respectively (DES, 2013). Yet sugar production was at the trough of the cycle, leading to
nearly doubling of the domestic prices (Exhibit 2). Clearly, sugar cycle is a human creation
rather than impact of climatic variables. Some of the years of low production can be
especially painful from both economic and political perspective. The Loksabha election of
2009 forced the government to take immediate action to control domestic prices by
augmenting supplies. However, Indian import led to doubling of the world prices (Section 5).
Being a large nation, Indian import and export decisions have always led the world prices for
most agricultural commodities in a direction unfavorable to India.

2. Regulatory environment

Indian sugar industry is heavily influenced by government regulations. Sugar is

notified as an essential commodity under the Essential Commodities Act, 1955. Some of the
important regulations regarding procurement of sugarcane and sale of sugar are:

a) Cane reservation area and minimum distance criteria: Sugar mills are
obligated to purchase all the sugarcane supplied by the farmers within their cane
reservation area. This obligation is mutual, where farmers are also not allowed to
sell sugarcane to any sugar mill except the designated mill.12 To ensure sufficient
raw material supply for the mills, central government has prescribed a minimum
distance of 15 km between any two sugar mills. This distance has been allowed to
increase upto 25 km in Punjab, Haryana, and Maharashtra, based on the request
from the respective state government.13
b) Procurement prices: To ensure provision of fair prices to cane growers, central
government announces fair and remunerative prices (FRP) based on the
recommendation of commission on agricultural cost and prices (CACP). While
3
 recommending the FRP, the CACP takes in account factors such as cost of
cultivation, intercrop parity (section 4), domestic and international market
scenario, etc. Accordingly, central government fixes FRP as the minimum price
which sugar mills are required to pay to the farmers. However, most of the state
governments also fix state advised prices (SAP) which sugar mills in the
respective states are obliged to pay to the farmers. SAP for the states has been
invariantly higher than the FRP.
c) Trade Policy: Given that Indian sugar production is prone to cyclical fluctuations,
central government has attempted smoothening of domestic supply through
international trade. Indian entry and exit in the international markets have been
largely policy regulated. During the high production years, sugar mills are allowed
to export sugar, and duties are levied on the sugar import. On other hand, during
low production years, export is banned and import duties are reduced or
eliminated.

As per the recent announcement14 (April 2013) by central government, states are
allowed to take decision on cane reservation area, minimum distance criteria, and SAP. While
the issue of trade policy and determination of FRP remains under the domain of central
government. Before April 2013, central government also procured 10% of the sugar
production in form of levy sugar from each mills to ensure low cost supply for PDS system.
This procurement used to be made at a price which was calculated based on FRP. Since the
FRP was much lower than SAP, this policy resulted in sizable cross subsidy. For example, in
2012, the levy price was Rs 18 only while the market prices were above Rs 30 (GoI, 2012).
At 2.8 million tonnes offtake in form of levy sugar, cross subsidy was over Rs 3000 Crores.
Further, central government controlled mill-wise monthly release of the remaining 90% of
the sugar to ensure year around supply. Exhibit 3 provides details of these two regulations,
which central government has relaxed for a period of two years. Other minor regulations
include requirement for sugar mills to pack sugar in jute bags only. This policy is designed to
support jute farmers.

3. Issues related to price support system

Sugarcane is a bulky raw material which needs to be quickly processed after

harvesting to avoid loss of sugar content. System of cane reservation area and minimum
4
distance criteria, mentioned previously, ensure purchase of sugarcane produced by farmers.
Also, from the mills perspective, policy is designed to ensure sufficient supply of raw
material and protection from unhealthy competition by earmarking area for drawl of cane.
However, this system inherently creates a problem of local monopsony. Prior to 2009-10
sugar season, the central government used to fix Statutory Minimum Price (SMP) of
sugarcane based on the recommendations of CACP. Further, farmers were also entitled to
share in profits of sugar mills on 50:50 basis.15 However, due to delays in announcement of
profits by the mills, profit sharing mechanism remained virtually unimplemented. From
2009-10 onward, the concept of FRP emerged which intended to provide ‘reasonable margins
for growers of sugarcane on account of risks and profit’. However, in practice, there was little
difference between FRP and the erstwhile SMP.

While the policy of sharing mills’ profits with farmers over and above SMP was not
implemented in spirit, the system of SAP has partly filled this gap in somewhat imperfect
manner by providing higher prices to farmers. Most of the state governments, under pressure
of cane growers lobby, announce a separate sate advised price (SAP) which is always higher
than FRP and binding on sugar mills. One of the virtue or vice related to existing price
support system is independence of sugarcane prices from sugar prices. Even if sugar prices
are very low, farmers are protected and legally ensured to receive FRP or SAP. However, this
system leads to excessive dependence on supply side factors, and delink sugar production
from pricing signals arising from demand side.

In most of the sugar producing countries, sugarcane prices are directly linked with the
sugar prices (Exhibit 4). Similar, recommendations were also made by the Rangarajan
Committee which argued for payment to farmers at two stages. Firstly, farmers should
receive a fixed component at the time of supplying cane to mills so as to largely cover their
production cost. At the second stage, farmers and sugar mills should share the profits in
proportion to their costs. On this rational, revenues from sale of sugar should be shared
between farmers and sugar mills in 75:25 proportions.16 Incidentally, under SAP or
negotiated price system, farmers received between 72 percent (in UP) and 75 percent (in
Maharashtra) of the ex-mill sugar prices on an average during 2004-05 to 2011-12. However,
as shown in the Exhibit 5, this share has shown great variations over the years. In the years
with low sugar prices, SAP accounted as high as 96 percent of sugar prices. In such a

5
scenario, mills were unable to make required payment to sugarcane farmers which led to
creation of sugar arrears. In the years with high sugar prices, remuneration share to farmers
through SAP could be below 50 percent of the sugar revenues.

Current crisis of UP sugar industry is related to declining share of the mills in

revenues generated from sugar sales. Share of farmers has gone upto 86.4% in 2012-13.
Taking sugar recovery ratio of 9.2% observed in 2012-13, mills were able to produce
9.2kg/qtl of sugarcane. With ex-mill sugar prices at Rs 34.5 and SAP at Rs 280/qtl sugarcane,
farmers received nearly 88% of the sugar revenues. However, sugar prices are currently
ruling at Rs 30/kg only. Hence, any increment in the SAP would make it very difficult for the
sugar mills to make payments to the farmers and meeting operating expenses. Over and
above these expenses, mills are also required to make payment for transportation cost of
sugarcane and various taxes to the central and state governments. Other states such as Punjab,
Haryana, Uttarakhand, and Tamil Nadu also announce SAP for sugarcane, but their SAPs are
much lower compared to Uttar Pradesh, along with higher recovery rates of sugar (Exhibit 6).
On other hand, Maharashtra and Karnataka have linked the cane payments with FRP
(declared by center) for the first installment, and second installment is linked to the recovery
ratio and sugar revenues.17 Hence, UP is in peculiar situation where sugarcane prices are
already high, and government is facing pressure to raise it further.

4. Inter-crop parity

Sugarcane is basically grown on well irrigated land which can also produce crops
such as paddy, wheat, etc. Return on alternative crops is one of the most important factors
which can influence the choice of farmers in growing sugarcane instead of other crops. For
example, over a 9 month period required for sugarcane cultivation in UP, farmers can also
produce wheat and rice crops as well. Similarly, over 12-13 months required for sugarcane
cultivation in Tamil Nadu, competing choice could be 3 crops of rice on the same land.
Hence, changing patterns of intercrop parity and support prices (Exhibit 6) can play a major
role in influencing cropped area under sugarcane.

Exhibit 7 provides details of cost of cultivation of major crops in the sugarcane

producing states. Similar to sugarcane, wheat is also largely cultivated on the irrigated land.18
However, tropical states do not produce wheat, and state level cost of cultivation data for

6
paddy includes both irrigated and unirrigated land. Hence, cost of cultivation data for paddy
and wheat for Haryana could be more suitable for the irrigated land under these crops under
other states. Accordingly, these data have been also added in the Exhibit 7.

Water is another concern which policymakers need to take in account while considering
inter-crop parity. Although, yield/ha in UP is lower compared to other states; it takes only
half the amount of water required in Maharashtra to produce same quantity of sugar (CACP,
2012). Given that sugarcane accounts for only 3% of the cropped area in Maharashtra but
consume 60% of the irrigation water (Ibid), there is a potential to improve water utilization
through crops diversification and trade between the Indian states. Given that irrigation is a
state subject under Indian constitution, there is need for coordination among the agricultural
policies across states to optimize water utilization through trade.

5. International trade and linkages with ethanol market

Exhibit 8 provides data on country wise production, consumption, and international trade
of sugar. In 2011, total global production of sugar was 171.1 million tonnes of which nearly
55 million tonnes was traded globally. Brazil is the largest producer of sugar followed by
India, and European Union. With tropical climate, good rainfall, and abundant land resources,
Brazil is the lowest cost producer, exporting nearly half of the international trade. However,
European Union levy heavy import duties and quantitative restrictions to protect its sugar
industry based on sugarbeet. Sugar industry in the Europe has its origin in the Napoleonic
wars during the 19th century, when Britain stopped sugar supply to the continental Europe
from its American colonies. France supported the infant sugar industry based on sugar beet
through heavy subsidies, a trend which spread to other European countries also (Exhibit 9).
With the help of huge subsidies, European Union was the second largest exporter of sugar
prior to 2006. Subsequent restrictions by WTO on dumping made the EU net importer of
sugar, still there are huge tariff and quantitative restrictions on import. As a result, domestic
prices in the EU have been usually twice the international market prices.19 Indian government
also intervenes in international trade through occasional export bans (when domestic prices
are high) coupled with low/zero import duty. During the years of high domestic production,
government allows export and levy import duties which can vary over the years. Being the
largest consumer of sugar, Indian export and import decisions heavily influences global sugar
prices. For example, in 2007-08 and 2008-09, Indian net sugar export was 4.6 and 2.9 million
7
tonnes respectively. Subsequent Indian import of 2 million tonnes in 2009-10 led to doubling
of international prices; at a time when wheat and rice prices were stable or falling (Exhibit
10).

Debate on climate change and oil scarcity has increased the focus on biofuels. Brazil has
been using sugarcane based ethanol for more than 30 years for transportation. Sugarcane can
be either used for sugar production or ethanol production. Accordingly, international trade of
sugar cannot be discussed without considering its linkages with the oil market. Although,
Brazil produces nearly double the sugarcane compared to India, nearly 50 percent of its
sugarcane is directly used as raw material for ethanol production. In contrast, considering the
land and water resource constraints, India allows only use of molasses (a byproduct of sugar
production) for ethanol production.20 On July 11 2008, crude oil reached to its peak at $ 147
per barrel which declined significantly thanks to the global slowdown. While considering
policies on international trade, government also needs to factor in the implication of energy
market on sugar market. High oil prices can promote diversion of sugarcane from sugar to
ethanol production, leading to higher sugar prices.

From the raw material perspective, around 100 kg of sugar can be produced per tonne of
sugarcane assuming recovery rate of 10 percent. Additionally, 40 kg of molasses/tonne of
cane is also produced as a byproduct which can be used to produce 10 liters of ethanol.
Instead of sugar production, direct conversion of sugarcane to ethanol would provide 70 liters
of ethanol per tonne of cane (Exhibit 11). Rangarajan Commission estimated the share of
sugarcane and the processing cost at 75:25 proportions.21 Since India does not allow direct
conversion of sugarcane to ethanol, cost of conversion data in Indian context are unavailable.
However, using Brazilian data, cost of converting sugarcane into ethanol can be estimated at
around Rs 10/liter.22 Similar to the sugarcane sector, crude oil constitutes larger share of the
final product, with refining cost of 1 barrel of oil (159 liters) at around $18.23 Although both
petrol and ethanol can be used as a fuel in the vehicles with suitable adjustment in the
machines, due to differences in the chemical composition, ethanol gives only 70 percent of
mileage compared to 1 liter of petrol.

Ethanol market in India can be categorized into three demand segments, namely, potable
industry (45% share), chemical industry (40%), and other purposes including oil marketing
companies (15%).24 As mentioned earlier, India does not allow direct conversion of
8
sugarcane to ethanol. Hence, for all practical purposes, molasses is used as the basic raw
material for production of alcohol/ethanol. Potable alcohol industry is one of the major
revenue source for the Uttar Pradesh government, with excise duty on alcohol production
alone providing revenues of Rs 9,782 Crores in 2012-13.25 In addition to this, sales tax and
license/permit fee from liquor shops is also dependent upon alcohol production and
consumption.

6. Policy problem

Considering the crisis of sugar mills and pressures from the cane growers, the state
government needs to quickly address issue of sugarcane pricing. Although, immediate trigger
of the crisis is low sugar prices in the market, yet any response from the state would also have
bearing on subsequent trends of the Indian sugar cycle. Raising sugarcane prices would hurt
the industry, while reducing sugarcane prices/maintaining at current level may create political
issues and hardship for the farmers. A possible middle path could be to fill the gap between
demands from two stakeholders through subsidies from state exchequer. However, this may
lead to a permanent burden on the state finances. Accordingly, chief minister needs to take a
decision which could address the short term crisis while improving the future prospects of the
rural economy and sugar industry.

9
Endnotes
1. http://www.business-standard.com/article/politics/crisis-in-sugarland-113091301104_1.html last
accessed on December 1, 2013
2. http://articles.timesofindia.indiatimes.com/2013-07-12/lucknow/40535937_1_upsma-c-b-patodia-
abinash-verma last accessed on December 1, 2013
3. http://www.thehindubusinessline.com/opinion/columns/harish-damodaran/when-cane-tastes-
bitter/article5207192.ece last accessed on October 10, 2013 last accessed on December 1, 2013
4. http://www.business-standard.com/article/politics/crisis-in-sugarland-113091301104_1.html last
accessed on December 1, 2013. One qtl (quintal) is equal to 100 kg.
5. http://indiagovernance.gov.in/files/SIS-final.pdf last accessed on December 1, 2013
6. http://articles.economictimes.indiatimes.com/2013-08-30/news/41619019_1_up-sugar-industry-upsma-
abinash-verma last accessed on December 1, 2013
7. International Sugar Organization (2012). Sugar Year Book-2011. Retrieved on November 13, 2013
from http://www.isosugar.org/Publications/PFD%20files/SYB%20Introduction.pdf on March 4, 2013
8. Report of Commission of Agricultural Costs and Prices (CACP, 2012)
9. Calculated based on data from Sugarcane Breeding Institute, Coimbatore retrieved from
www.sugarcane.res.in/index.php/mis/sugarcane-statistics on October 10, 2013.
10. Bhardwaj & Singh, (2013). Diversion of Sugarcane to Jaggery/Gur & Khandsari Units in UP in 2012-
13, Indian Sugar Mills Association, Delhi.
11. Although, mills are legally required to make payment within 14 days of procurement, this law is
usually not followed http://www.thehindubusinessline.com/opinion/columns/harish-damodaran/when-
cane-tastes-bitter/article5207192.ece last accessed on December 1, 2013
12. In case of Uttar Pradesh, state government holds meeting with the millers and growers for earmarking
cane areas to individual factories prior to the beginning of crushing season. After this consultation
process, the Cane Commissioner issues ‘reservation orders’. As per the UP Sugarcane (Regulation of
Purchase and Supply) Act, 1953, farmers are required to supply cane to the particular mill to which
their area has been exclusively assigned under ‘reservation orders’. http://www.business-
standard.com/article/markets/up-sugarcane-area-reservation-on-108100801022_1.html last accessed on
December 1, 2013. However, farmers are free to sell sugarcane to gur/khandsari industry.
13. Report of Commission of Agricultural Costs and Prices (CACP, 2012)
14. Cabinet Committee on Economic Affairs (CCEA) approves sugar decontrol , PIB Release ID: 94507
Date 5.4.13, http://pib.nic.in/newsite/erelease.aspx last accessed on December 1, 2013
15. Report of Commission of Agricultural Costs and Prices (CACP, 2013)
16. This 75:25 proportion is based on share of farmers and sugar mills in the cost of sugar production, after
accounting for the value of by-products such as molasses, bagasse, etc. (CACP, 2013).
17. http://wap.business-standard.com/wapnew/storypage.php?id=5&autono=113090300767 last accessed
on December 1, 2013
18. Irrigated land account for more than 90% of the cultivated area under both the crops.
19. http://www.ft.com/cms/s/0/f666d362-c50a-11e1-b6fd-00144feabdc0.html#axzz2hXgR34V0 last
accessed on December 1, 2013
20. Brazil has 340 million hectares agricultural land with 200 million land devoted to pastures and 63
million hectares devoted to crop production. Of 63 million hectares, Soybean accounts for 22 million
hectares and sugarcane accounts for only 7 million hectares of land.
21. Share of mills at 25% is inclusive of taxes and transport cost paid by mills and net revenues from
bagasse and molasses.
22. Crago et al (2010). Estimated at exchange rate of Rs 27/Brazilian real. Brazilian cost of conversion can
be taken as a proxy to hypothetical Indian cost, with reasonable assumption that production
technologies and scale is replicable. Given the share of sugarcane farmers in Brazil (Exhibit 4) and
recognizing that Indian farmers gets higher share of the final product, it can also safely be assumed that
in Indian context, sugarcane would account for 65-70% of the cost of ethanol.
23. Energy Information Administration-EIA (2013). Gasoline and diesel fuel update. Retrieved from
http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp last accessed on December 1, 2013
24. Ray et al (2011)
25. http://www.upexcise.in/NewForm/RRPreviousYear.aspx?YRID=19&Year=2012-2013 last accessed on
December 1, 2013

10
References

Crago, C. L., Khanna, M., Barton, J., Giuliani, E. & Amaral, W. (2010). Competitiveness of Brazilian
Sugarcane Ethanol Compared to US Corn Ethanol, presented at the Agricultural & Applied
Economics Association 2010, AAEA, CAES, & WAEA Joint Annual Meeting, Denver,
Colorado, July 25-27, 2010

CACP (2013). Reports of the Commission for Agricultural Costs and Prices (Various years),
Department of Economics & Statistics, Ministry of Agriculture.

DES (2013). Agricultural Statistics at a Glance (various years), Department of Economics &
Statistics, Ministry of Agriculture.

GoI (2012). Report of the Committee on the Regulation of Sugar Sector in India: The Way Forward.

Planning Commission (2003). Report of the committee on development of biofuels. Government of

India

Ray, S., Goldar, A., & Miglani, S. (2011). Ethanol Blending Policy: Issues Related to Pricing,
ICRIER Policy Series, December 2011.

11
 Exhibit 1

State-wise area (million hectares), production (million tonnes), and yield (tonnes/hectare) of sugarcane

2007-08 2008-09 2009-10 2010-11 2011-12

State Area Production Yield Area Production Yield Area Production Yield Area Production Yield Area Production Yield
Uttar Pradesh 2.18 124.67 57.21 2.08 109.05 52.33 1.98 117.14 59.25 2.13 120.55 56.73 2.16 128.82 59.58
Maharashtra 1.09 88.44 80.91 0.77 60.65 78.97 0.76 64.16 84.87 0.97 81.90 84.87 1.02 81.86 80.10
Tamil Nadu 0.35 38.07 107.48 0.31 32.80 106.20 0.29 29.75 101.45 0.32 34.25 108.39 0.38 39.28 102.84
Karnataka 0.31 26.24 85.75 0.28 23.33 83.02 0.34 30.44 90.34 0.42 39.66 93.75 0.43 38.81 90.25
Gujarat 0.21 15.19 71.99 0.22 15.51 70.18 0.15 12.40 80.52 0.19 13.76 72.42 0.20 14.18 70.18
Andhra
Pradesh 0.25 20.30 82.17 0.20 15.38 78.47 0.16 11.71 74.10 0.19 14.96 77.94 0.20 16.73 82.00
Haryana 0.14 8.86 63.29 0.09 5.13 57.00 0.07 5.34 72.10 0.09 6.04 71.08 0.10 6.96 73.25
Uttarakhand 0.12 7.69 61.98 0.11 5.59 52.24 0.10 5.84 60.85 0.11 6.50 60.90 0.11 6.60 61.07
Bihar 0.11 3.85 35.50 0.11 4.96 44.32 0.12 5.03 43.42 0.25 12.76 51.47 0.23 12.07 51.46
Punjab 0.11 6.69 60.82 0.08 4.67 57.65 0.06 3.70 61.67 0.07 4.17 59.57 0.08 4.67 58.38
Madhya
Pradesh 0.08 3.18 42.29 0.07 2.98 42.20 0.06 2.54 40.82 0.07 2.67 40.97 0.07 2.68 38.69
West Bengal 0.02 1.27 75.27 0.02 1.64 93.09 0.01 1.00 72.52 0.02 1.13 75.61 0.02 1.18 72.98
Assam 0.03 0.98 37.69 0.03 1.10 38.45 0.03 1.06 39.08 0.03 1.08 36.20 0.03 0.97 38.60
Orissa 0.02 1.10 55.36 0.01 0.65 59.83 0.01 0.49 61.24 0.01 0.90 68.91 0.01 0.88 61.01
All India 5.06 348.19 68.88 4.42 285.03 64.55 4.17 292.30 70.02 4.88 342.38 70.09 5.09 357.67 70.32
Source: Based on data from Agricultural Statistics at a Glance (Various years)

12
 Exhibit 2

Table 2.1: Annual trends of sugar production and prices

Ex. Mill Prices

Sugar Season
(Rs./ Qtl)
Area (Million Hectares) Production (Million Tonnes)
2000-01 4.32 295.96 1347.52
2001-02 4.41 297.21 1310.88
2002-03 4.52 287.38 1182.45
2003-04 3.93 233.86 1365.28
2004-05 3.66 237.08 1678.7
2005-06 4.20 281.17 1749.88
2006-07 5.15 355.52 1363.44
2007-08 5.06 348.19 1397.74
2008-09 4.42 285.03 2127.86
2009-10* 4.17 292.30 2981.63
2010-11 4.88 342.38 2653.92
2011-12 5.09 357.67 2762.62
Source: CACP (2012)

Figure 2.1: Annual trends of sugar production and prices

240

220

200

180

160
Area
140

120 Producti
on
100
Ex. Mill
80 Prices
60

Compiled from data in Table 2.1

13
 Exhibit 3

Recent reforms in sugar sector

To address the issues related to sugar sector, Government of India constituted a committee
under chairmanship of Dr. C. Rangarajan, which submitted its report in October 2012. The
committee comprehensively explored issues related to regulation of the sugar sector. In April
2013, Government of India accepted some the recommendations made by the committee.
Two important recommendations implemented by the government were:

a) Abolishing the levy sugar procurement: Sugar is one of the various commodities
provided by central government through public distribution system (PDS). To ensure
sufficient supply of sugar for PDS system at low prices, central government used to
procure sugar (termed as levy sugar) from sugar mills at a price which was generally
below the cost of production. However, there has been significant decontrol on this
front during the early part of last decade. The compulsory levy obligation of the
sugar factories was reduced from 40% in 1999 to 10% in 2001. Price for levy sugar
was calculated based on the sugarcane procurement prices at FRP. Since sugar mills
are required to pay farmers SAP which is always higher than FRP, production cost
of sugar is usually higher than paid by central government. For example, levy price
in 2012 was Rs 18/kg only, while the average cost ex-mill price was more than Rs
30/kg. By supplying 2.8 million tons of sugar to feed the PDS system, sugar mills
subsidized the PDS system by Rs 3000 crores (GoI, 2012). Such policies reduce
transparency in the budgetary process as well as lead to implicit taxation of both
producers and consumers in the sugar sector. Based on the recommendations of the
committee, government waived the levy obligation for next two years. Accordingly,
central government has asked the state governments to buy sugar for PDS from
sugar mills. Central government would provide the required subsidy to the states
while capping the maximum ex-mill procurement price at Rs 32.
b) Freedom to sale in open market: Even for the non-levy sugar, central government
used to issue release order to control the sugar supply in open market. Sugar
production takes place usually from October to March only (during the crushing
season). Controlled release of the sugar is intended to smoothen the market supply
over entire year. However, this policy did not yield the desired results and also
forced sugar mills to retain sugar stocks at a time when they were facing cash crunch
and unable to pay to the farmers.

Source: Based on Cabinet Committee on Economic Affairs (CCEA) approves sugar decontrol , PIB Release ID:
94507 Date 5.4.13, http://pib.nic.in/newsite/erelease.aspx last accessed on December 1, 2013

14
 Exhibit 4

Country practices of price support to sugarcane farmers

Country Cane payment system Industry revenues to be shared Grower's revenue share
Australia Revenue share (Variable) Raw sugar (Millers retain molasses) 62-67%
Brazil Revenue share (Variable) Sugar and ethanol 56-61%
Fiji Revenue share (fixed) Sugar, molasses, and other by-products 70%+
India Fixed price Varies by states Fixed price
Mexico Revenue share (fixed) Standard sugar, millers retain molasses 57%
South
Africa Revenue share (fixed) Raw/refined sugar and molasses 62-63%
Thailand Revenue share (fixed) Raw/white/refined sugar and by products 70% Plus
Source: CACP (2012)

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 Exhibit 5: Actual prices received by farmers as % of ex-mill sugar prices

SMP/ FRP at state specific Actual cane prices paid to farmers Actual cane Prices as % of ex-mill
Ex. mill prices (Rs./qtl)
Sugar recovery rate (Rs/qtl) sugar prices
season

Maharashtra UP Maharashtra UP Maharashtra UP Maharashtra UP

2004-05 1601.66 1674.7 99.83 85.81 130.07 104.5 81.21 48.49

2005-06 1820.42 1692.29 103 83.83 140.62 112.5 77.25 66.48
2006-07 1452.29 1296.75 101.56 84.62 93.92 125 64.67 96.39
2007-08 1317.08 1492.71 106.44 83.89 93.41 125 70.92 83.74
2008-09 2082.29 2161.08 103.91 81.18 158.05 140 75.9 64.78
2009-10 3121.67 2889.58 157.31 129.84 214.69 165 68.77 57.1
2010-11 2806.67 2592.96 165.77 139.12 205 205 73.04 79.06
2011-12 2720 2950 172.78 145 235 240 86.4 81.36
74.77 72.18
Source: CACP (2012)

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 Exhibit 6: Support prices for paddy, wheat, and sugarcane (Rs/qtl)

Sugarcane

Year Paddy Common Wheat Centre UP Punjab Tamil Nadu

2004-05 560 640 74.5

2005-06 570 700 79.5

2006-07 610 850 80.25

2007-08 745 1000 81.18

2008-09 850 1080 81.18 140 165 110

2009-10 950 1100 129.84 165 175 153.74

2010-11 1000 1170 139.12 205 200 190

2011-12 1080 1285 145 240 225

2012-13 1250 1350 170 280 240 225

2013-14 210
In case of sugarcane, centre refers to FRP/SMP, while for state SAP data have been provided.

Source: Economic Survey for Paddy and Wheat. For sugarcane, Unstarred Loksabha question 1438 answered
on 28-8-12 and various newspaper reports.

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 Exhibit 7.1: Cost of cultivation of sugarcane (Rs/hectare)

Maharashtra Tamil Nadu Uttar Pradesh

Cost Items
2007-08 2008-09 2009 -10 2010 -11 2007-08 2008-09 2009 -10 2010 -11 2007-08 2008-09 2009 -10 2010 -11
Operational cost 54729 56521 72976 85901 61527 65421 71681 88195 22729 23683 27571 37220
Human Labour 19995 19755 29483 35243 41761 44882 50545 64985 12128 12144 14705 17306
Bullock Labour 3571 3100 3483 3858 162 301 579 597 638 1165 1034 2199
Machine Labour 7712 6342 6217 11271 1496 1387 1280 1136 868 964 1059 1428
Seed 4637 2757 5903 7530 4087 3876 4494 5206 3136 3452 3725 8427
Fertilizers and Manure 8270 11889 12611 12357 7013 7178 7411 7386 2665 2687 2771 3293
Insecticides 103 94 108 172 212 506 372 448 218 93 111 128
Irrigation charges 7580 9669 11457 11095 3610 3958 3443 4038 2109 2222 3070 2830
Interest on Working Capital 2861 2916 3713 4375 3176 3333 3538 4398 968 956 1096 1610
Miscellaneous 0 0 0 0 12 0 20 0 0 0 0 0
Fixed cost 18328 29281 54329 43096 21555 23604 25655 24864 18115 21556 28712 29579
Rental Value of owned Land 11934 16135 36701 31169 16079 17159 18792 18277 15250 17428 24165 24283
Rent Paid for Leased – in Land 0 0 0 0 0 93 78 749 0 15 0 61
Land Revenue, Cesses & Taxes 207 186 193 219 216 144 115 12 24 27 26 27
Depreciation on Implements and 792 986 1053 995 512 676 554 628 524 813 801 1019
Interest on fixed Capital 5394 11994 16382 10713 4748 5531 6117 5198 2318 3273 3721 4189
Total Cost 73057 85802 127305 128997 83082 89025 97336 113059 40844 45240 56284 66799
6079 6475 7721 9038 2295 2542 2596 2690 3463 4562 5247 5631
Value of by Products
Yield 875.36 744.01 1013.81 986.81 1109.07 1015.45 958.01 1008.79 523.37 488.89 512.54 509.35
Physical Inputs
Fertiliser (Kg of nutrients) 546.38 612.66 668.43 724.82 486.05 500.43 490.74 496.18 182.06 204.06 205.06 212.07
Human labour (Man Hours) 2010.59 1677.37 2075.21 2039.23 2631.84 2256.69 2156.59 2299.61 1362.91 1177.38 1289.62 1223.25
CACP Reports (Various Years)

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 Exhibit 7.2: Cost of cultivation of wheat (Rs/hectare)

Haryana Uttar Pradesh Maharashtra (Cotton)

Cost Items
2007-08 2008-09 2009-10 2010-11 2007-08 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11
Operational cost 17295.06 19648.4 22028.69 22563.7 16600.12 18315.9 19642.09 21287.69 22877.35 25664.06 37489.84
Human Labour 5507.37 6846.83 8430.36 8188.39 4892.91 5440.19 5866.95 6562.82 7425.92 9819.59 18739.85
Bullock Labour 185.79 189.93 221.44 212.24 503.85 652.28 843.79 616.3 6402.95 5956 6337.59
Machine Labour 4839.71 4911.31 5350.03 5713.86 3855 4097.13 4327.36 5027.68 1006.72 1275.95 1523.15
Seed 1442.83 1536.1 1722.09 1825.32 1829.5 1929.81 2181.19 2217.91 2214.73 2396.52 2753.7
Fertilizers and Manure 2565.25 2582.05 2452 2731.91 2135.62 2453.58 2560.31 2731.45 3264.37 3574.41 5014.62
Insecticides 538.45 721.08 698.73 673.82 28.29 52.2 94.42 40.3 955.55 1089.14 1449.27
Irrigation charges 1804.32 2369.66 2628.65 2636.34 2945.36 3244.65 3289.54 3570.11 966.05 841.06 703.79
Interest on Working Capital 411.34 476.64 493.64 536.07 409.59 441.82 478.23 521.08 609.1 671.6 932.92
Miscellaneous 0 14.79 31.75 45.75 0 4.2 0.3 0.04 31.96 39.79 34.95
Fixed cost 15085.39 17802.4 19664.22 19759.37 8929.03 13586.9 13932.61 14696.75 10239.47 10158.01 15093.71
Rental Value of owned Land 12298.24 14417 15468.88 16206.28 6712.36 9520.28 10017.23 10861.05 5909.47 6737.32 10591.34
Rent Paid for Leased – in Land 312.81 87.64 28.98 47.49 274.25 54.92 584.45 408.35 70.75 0 0
Land Revenue, Cesses & Taxes 0 0 0 0 5.3 8.21 7.42 6.47 36.93 40.21 42.02
Depreciation on Implements and 265.19 327.28 325.1 332.77 449.34 600.38 542.29 604.46 726.41 703.28 827.44
Interest on fixed Capital 2209.15 2970.4 3841.26 3172.83 1487.78 3403.09 2781.22 2816.42 3495.91 2677.2 3632.91
Total Cost 32380.45 37450.8 41692.91 42323.07 25529.15 31902.7 33574.7 35984.44 33116.82 35822.07 52583.55
Value of by product 6094.67 7113.46 10047.29 10955.09 5919.26 6470.47 6782.91 8574.98 957.96 661.33 850.48
Yield 41.99 45.46 40.91 45.4 33.29 34.99 33.68 36.81 12.69 13.19 14.4
Implicit Price (Rs/Qtl) 999.81 1079.49 1094.85 1166.5 999.64 1003.02 1019.85 1073.88 2730.45 3013.99 4543.12
Physical Inputs
Fertiliser (Kg of nutrients) 207.42 205.75 199.41 202.95 158.85 178.88 181.63 182.19 135.19 155.32 218.17
Human labour (Man Hours) 295.16 286.23 337.17 283.58 511.01 467.67 466.57 440.28 833.6 828.07 1067.47
CACP Reports (Various Years). Maharashtra is not a large producer of wheat due to its tropical climate. Here cotton can be taken as the major competition of the sugarcane.

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 Exhibit 7.3: Cost of cultivation of paddy (Rs/hectare)

Punjab Maharashtra Tamil Nadu Uttar Pradesh

Cost Items
2009-10 2010-11 2007-08 2008-09 2009-10 2010-11 2007-08 2008-09 2009-10 2010-11 2007-08 2008-09 2009-10 2010-11
Operational cost 23979 23916 23825 27670 33111 38408 25965 27744 34017 37227 15087 16460 20898 20808
Human Labour 10048 10486 9392 12264 16686 19239 12015 12593 15195 17585 6889 7607 9694 10069
Bullock Labour 224 110 5927 5581 6087 4632 498 381 454 375 1459 736 628 844
Machine Labour 4943 4569 2413 3246 1791 4688 4801 5006 6759 6952 1467 2499 2713 2738
Seed 1109 1264 1043 1752 2273 2311 2516 3109 4221 4782 1496 1604 1899 2036
Fertilizers and Manure 2901 3097 4336 3734 5016 5650 3841 4241 4320 4544 1999 2242 2758 2599
Insecticides 2105 2280 59 56 206 260 438 718 974 947 85 244 179 207
Irrigation charges 1996 1452 62 326 278 642 1182 964 1219 1078 1357 1154 2564 1845
Interest on Working Capital 613 625 593 711 774 985 672 717 854 938 332 373 463 457
Miscellaneous 41 33 0 0 0 0 3 15 21 25 1 2 0 13
Fixed cost 26672 27363 6572 7536 9658 10491 11218 12498 12942 13405 7214 11684 11429 11491
Rental Value of owned Land 18556 17564 4423 4179 6082 6396 8164 8584 8785 9620 5553 8608 8659 9286
Rent Paid for Leased – in
Land 4677 6587 134 0 0 0 507 656 426 506 20 45 12 64
Land Revenue, Cesses &
Taxes 0 0 21 44 36 43 121 118 91 8 5 6 5 6
Depreciation on Implements 376 290 483 686 702 607 556 362 288 291 353 510 421 404
Interest on fixed Capital 3062 2922 1511 2627 2839 3445 1871 2778 3352 2979 1284 2514 2332 1732
Total Cost 50650 51279 30397 35206 42769 48899 37183 40242 46960 50632 22301 28145 32328 32299
Value of by Products 872.23 879.2 2713.8 2986.23 3491.42 4798.69 2951.5 2987.29 3588.04 3143.2 1576.49 1656.55 2128.47 2442.43
Yield 64.7 60.49 30.6 21.74 27.45 27.76 49.36 42 48.94 50.32 35 36.61 37.58 37.51
Physical Inputs
Fertiliser (Kg of nutrients)206.28 204.99 139.3 137.56 118.03 130.14 238.8 230.8 247.35 240.1 158.56 158.56 182.7 175.02
Human labour (Man Hours) 439.46 390.95 1188.93 1220.51 1385.36 1313.98 788.68 788.68 721.14 771.44 757.1 757.1 853.12 795.06
CACP Reports (Various Years)

20
 Exhibit 8: Production, consumption, and international trade of sugar

Source: International Sugar Organization (2012). Sugar Year Book-2011. Retrieved from
http://www.isosugar.org/Publications/PFD%20files/SYB%20Introduction.pdf on March 4, 2013

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 Exhibit 9: British media reaction of French support for sugarbeet industry

Source: Kochar, S. L. (2012). Economic Botany in the Tropics 4 Edition, M Macmillan Publisher

22
 Exhibit 10: International prices of wheat, rice, sugar ($/tonne), and Indian exchange rate

Year Wheat Rice Sugar Exchange rate (Rs/$)

2005 135.9 290.5 218.3 44.10
2006 158.2 311.2 325.2 45.31
2007 234.8 334.5 222.0 41.35
2008 268.6 697.5 282.0 43.50
2009 185.5 583.5 396.8 48.40
2010 228.0 520.0 469.8 45.73
2011 286.8 566.2 572.1 46.67
2012 294.4 590.4 485.2 53.44
Source: For International prices: FAO
http://www.fao.org/economic/est/statistical-data/est-cpd/en/
For exchange rate: RBI’s Handbook of Statistics on Indian Economy

23
 Exhibit 11: Production process of sugar and ethanol from sugarcane

Sugarcane (1000 kg)

Bagasse and Pulp

Juice extraction and

concentration

Process 1 Process 2

Ethanol (70 Liters)

Sugar (100 Kg) Molasses (40 kg)

Ethanol (10 Liters)

Note: 1. Dashed line shows the flow of byproducts.

2. After juice extraction either of the two processes can be followed, but they are mutually exclusive.
Source: Author’s compilation based on data from Planning Commission (2003)

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