How can the sugar economy improve?

V Shunmugam

The Economic Times, Sep 18, 2007
(http://economictimes.indiatimes.com/Debate/How_can_the_sugar_economy_improve/articleshow/2378694.cms)

While everyone sees sugar in terms of its most obvious function as a ‘sweetener’, very few would see it as an easily storable and usable energy provider for living beings and as a source of energy for man’s own creations to make his life easier. Of the very few, only a handful would know that sugar, through sugarcane, is a water-intensive converter of energy from sun, water, and mineral sources into a user-friendly form of energy (with alternative uses) and hence leading to environmental stress such as over-exploitation of ground and surface water and related problems of salinity, leaching of nutrients, etc.
On the other hand, the value of the crop in India is getting decided by the traditional method of cost of cultivation rather than by the market-determined prices, which often leads to a clash of interests of the sugarcane growers and the millers whose returns are decided by the market. This often results in adjustments in the value chain, in terms of their profit realisation and hence we can see both the situations wherein sugar millers run into huge losses (often having not covered their risks) and the cane producers sometimes see no demand for what they have produced and hence had to burn the crops in the field as they are not able to even pay for their removal.
This cyclical trend can be better reversed if all the segments in the value chain are exposed to market forces at all points in time, with no market-related policy interventions from the government and with dynamic information flow into the sugar economy regarding the fundamentals. This could only happen if both the end products and the raw material prices are linked to the market and an effective risk management mechanism is built upon it. Also, this would leave the burden of a wrong decision of a player in the value chain on himself, which if shared by the government would lead to the players in the sugar economy continuing to commit such mistakes and get away with it.
In the present scenario, the plausible solution would be that the players in the sugar market should also look at value addition through vertical integration so that they can offset losses in one with another. Further, the value-added products being globally linked, it would create a good case for the raw material (sugar) market as well to be globalised. It augurs particularly well in the light of sugar being increasingly seen as an energy resource than as an essential item of human consumption at the global level, and that the energy market, especially in terms of crude oil and its derivatives, is linked to the global signals.
This would substantiate the need for efficient spot and futures markets for sugar and ethanol (of course with minimum policy interventions) in the country as is the case with Brazil, which might in turn could lead to a reduction in the forex outgo for the crude imports (accounting for about 70% of our total consumption) and would reduce external energy dependency to some extent.
The existence of transparent spot and futures markets would ensure that there is appropriate information flow into the market for the players in the sugar economy to take informed decision and yet hedge themselves against any unfavourable developments in the market. In the light of increasing use of alternative sweeteners due to lifestyle-related problems (obesity and diabetes), it is time that policy makers stopped looking at sugar in terms of its traditional function as a ‘sweetener’ for the common man and change the mindset of the larger public to look at sugar as an alternative energy source, besides reducing the stress on one of the precious resources of our economy, that is, water.