Financial Daily from THE HINDU group of publications
Thursday, Jun 20, 2002
Agri-Biz & Commodities
Sugar prices dip to 6-year low ISMA, NFCSF seek to restore monthly quota system
NEW DELHI, June 19
WITH open market sugar prices ruling at a six-year low, pressure is mounting on the Government to restore the earlier monthly free-sale quota release mechanism.
The Indian Sugar Mills Association (ISMA) and the National Federation of Cooperative Sugar Factories Limited (NFCSF) are understood to have formally sought the replacement of the existing quarterly release mechanism with a modified version of the monthly release system prevailing till December 2001.
According to sources, a decision is likely to be taken by the Ministry of Consumer Affairs, Food and Public Distribution at a meeting `very soon', coinciding with the announcement of the free-sale quota releases for the coming July-September quarter.
In the monthly release mechanism, the Government used to allot to each mill a specific quota that it could offload every month as `free-sale' sugar in the open market. But from January 2002, it was decided to introduce a quarterly release system, wherein individual mills would know in advance their free-sale quota not only for a particular month (say, April), but for a whole quarter (April-June).
Previously, if a factory was allotted a monthly free-sale quota of say 40,000 tonnes for April, 50,000 tonnes for May and 60,000 tonnes for June, it could not sell beyond these released quantities in either of the three months. In the new system, the factory is given an aggregate quota of 150,000 tonnes for the entire April-June quarter.
While initially mills were also given the freedom to dispose of their entire three-months free-sale quota during any time of the quarter theoretically, the entire 150,000 tonnes could be sold in April itself it was, however, subsequently decided that no factory can offload more than 50 per cent of its allotted quarterly quota within the first 45 days of the first quarter. By scheduling releases in such a manner, it was hoped that the mills would be restrained from making excessive sales at the start of the quarter itself, curbing undue price volatility.
But according to Mr Vinay Kumar, Managing Director, NFCSF, the breaking up of the quarterly quota for two periods of 45 days each has not helped arrest the continued decline in prices. Earlier, traders had a definite idea of what would be the aggregate supply of free-sale sugar in the market during a particular month.
"Today, they are not certain because the quarterly release system makes the potential quantities to be offloaded more open-ended. And given the unprecedented glut, the traders expect mills to offload the maximum sugar that is permitted in the shortest possible time, leading to pressure on prices,'' he noted.
Mr Kumar said traders were under the impression that sugar prices were going to be fully decontrolled, along with the dismantling of the release mechanism, by July. "The Government should clarify that there is no proposal to withdraw the release mechanism immediately or in the forthcoming future,'' he added.
The joint proposal of ISMA and NFCSF envisages the Government to continue announcing three months' free-sale quotas for each mill in advance, as in the quarterly release mechanism. At the same time, the Government will administer these quotas on a monthly basis, so that no factory can sell more than a specified quantity of sugar per month within the overall quarterly quota.
On Tuesday (June 18), benchmark S-30 sugar was quoting at Rs 1,340-1,400 per quintal in Mumbai, with M-30 grades correspondingly selling at Rs 1,395-1,485 per quintal. At these levels, wholesale sugar prices are ruling at their lowest since 1996 (see Table).
If one nets out excise and transportation cost from the mill to the market, the average ex-factory realisation on free sale sugar works out to as low as Rs 1,150-1,160 per quintal now.
This is below even the Rs 1,175 per quintal rate that mills in Maharashtra are obtaining on the levy sugar they are delivering to the public distribution system (PDS). In other words, it is the PDS that is subsidising the market today!
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