Hefty hikes in cane prices and low crop recoveries have bled sugar mills in Uttar Pradesh, compared with states like Maharashtra and Karnataka, in recent years. Although operating margins — which denote the proportion of revenue after paying for costs of production — of major companies in these states were in the range of 10-13.5% in 2011-12, analysts say mills in UP are more vulnerable to losses in case of any danger to their business.

This is because sugar prices in UP are already among the country’s highest, thanks to high cane prices set by the state, which has squeezed mills’ ability to raise prices and improve profitability. This has raised the clamour for loosening the government’s grip over the sugar sector by linking the price of cane to its by-products, as recommended by the Rangarajan panel. The government had recently relaxed controls over the country’s R80,000-crore sugar sector by doing away with the levy sugar system. However, mills have sought a rationalisation of cane pricing, especially in Uttar Pradesh, as a necessary step to revive the industry.

Mills owe R10,694 crore to farmers as of February 15, out of which UP alone accounts for 55%, although the state’s share of national sugar production is roughly 30%. The reason: Cane price fixed by the state (state-advised price or SAP) is the highest in the country, roughly 20% higher than in central Maharashtra, while its recovery rate is among the lowest at around 9% compared with 11% in Maharashtra. The recovery rate refers to the percentage of sugar production out of the cane crushed. Cane price accounts for around 65-70% of the cost of producing sugar.

“High cane price coupled with low recovery rate drive up the cost of production and make it unviable for mills if prices of sugar and other cane by-products don’t rise accordingly. This is precisely why we seek a linkage between the price of cane and its by-products, and this is what almost all committees set up by the Centre to study the decontrol of the sector have broadly recommended,” said Ajit S Shriram, deputy managing director of DCM Shriram Consolidated and vice-president of the Indian Sugar Mills Association. In 2010, a committee headed by former food as well as agriculture secretary T Nanda Kumar had suggested sugarcane price be fixed at 67% of sugar prices if the average recovery rate is slightly lower at 9.5%.

Analysts said Maharashtra and Karnataka are better places to set up sugar plants than Uttar Pradesh, which often uses cane price as a tool to woo vote bases in its farming community.

“Apart from the high recovery rate, a mill gets better realisation from its sale of electricity generated through bagasse in Karnataka than in Uttar Pradesh,” said Mukesh Kumar, executive director of Vishwaraj Sugar. The Karnataka-based company is planning to double its crushing capacity to 11,000 tonnes per day to boost revenue and to tap capital markets to fund expansion, he added.

Similarly, Dalmia Bharat Sugar and Industries, which has three mills in Uttar Pradesh, will double crushing capacity at its sole plant in Maharashtra to 5,000 tonnes a day and also set up a power unit to produce 23 MW power there, said director and chief executive BB Mehta. The company is also looking at acquiring a new plant — either stressed assets or a running plant — in Maharashtra or Karnataka to boost revenue, he said. However, the company has no plans as of now to expand in Uttar Pradesh.

With the partial decontrol of sugar sector initiated by the Centre, pressure now mounts on Uttar Pradesh to rationalise its cane rate factoring in the low recovery rate, until the Centre and producing states agree on a pricing mechanism. Any failure to rationalise pricing policy in Uttar Pradesh may see investors shying away from the state and setting up bases or expanding in Karnataka or Maharashtra, analysts said.

“Unless cane price is aligned with the value of sugar and its first stage by-products, it is neither good for the industry nor for farmers in the medium to long run. In the short term, if cane price is higher than what is warranted by the value of sugar and its by-products, it is likely to lead to higher cane arrears, as is the case today, and will bring greater uncertainty to the sugar sector. This will adversely affect the growth of this sector,” said Ashok Gulati, chairman of the Commission For Agricultural Costs and Prices.

The Rangarajan panel had suggested linking cane price to that of its byproducts, and recommended that 70% of ex-mill prices of sugar and each of its three major by-products – bagasse, molasses and press mud – be paid to farmers for cane supplies. The benchmark price fixed by the Centre – also called the fair and remunerative price (FRP) – be the minimum price for cane purchases, it added. Currently, Maharashtra follows a roughly similar model by paying farmers the FRP in the first tranche and the rest subsequently. However, since Maharashtra mainly has sugar co-operatives where farmers play the key role in deciding the cane price, such a model can be replicated in Uttar Pradesh only if the government desists from announcing prices that are significantly higher than the FRP.