Refinery manager Karan Singh has a stark outlook for the sugar industry in Uttar Pradesh state, the epicenter of cane farming in India: collapse.
Singh, who manages Simbhaoli Sugars Ltd. (SBSM)’s biggest plant in the state, said his costs exceed factory-gate sugar prices by 16 percent. Simbhaoli embodies the losses manufacturers face in Uttar Pradesh, which fixes cane rates paid to 4 million farmers -- a powerful voting bloc -- and has yet to keep a pledge made last year to curb the payments by linking them to sugar prices.
“If the deadlock isn’t settled, then there’s no option but to wind up the factory,” Singh, 61, said in an interview in his factory office in Simbhaoli, about 85 kilometers (53 miles) east of New Delhi. “There’s no working capital to run the mill. The Uttar Pradesh sugar industry is on the verge of disintegration and closure.”
Mills are threatening to delay crushing for a second year in the state, which accounts for about 30 percent of the output in India, the world’s second-largest sugar maker. Manufacturers such as Simbhaoli and Bajaj Hindusthan Ltd. (BJH), the biggest producer, owe 40.2 billion rupees ($660 million) to farmers for cane supplies in Uttar Pradesh, undermining the policy goal of boosting agrarian incomes.
“Every time the government fixes the price, it’s a distortion,” said Michael McDougall, a senior vice president at Newedge Group in New York who specializes in the sugar industry. “India will need to adhere to a market-based strategy because it will be fair to the farmers as well as the mills. If mills stop crushing, then you really have a problem.”
Singh said his production cost is 36.5 rupees (60 U.S. cents) a kilogram, versus factory-gate sugar prices of 31-31.5 rupees. He said all of the 1,200 employees at the Simbhaoli-based company, except senior executives, have been asked to go on leave, and that pay cuts are being considered.
The company has reported losses for the past 12 quarters. Mumbai-based Bajaj Hindusthan has posted losses for five straight quarters. Balrampur Chini Mills Ltd. (BRCM), based in Kolkata, lost money in four of the last five quarters.
Bajaj, Balrampur and other mills in Uttar Pradesh delayed crushing in November last year, demanding rationalization in cane pricing. They agreed to start production after a two-week shutdown when the state government said it would consider linking cane price to refined sugar rates.
Their share prices have climbed this year on speculation Uttar Pradesh will eventually link cane rates to sugar prices and after India increased taxes to deter cheap imports. Simbhaoli is up 3.7 percent, Bajaj Hindusthan 34 percent and Balrampur Chini Mills 7.6 percent. That compares with a 26 percent rise in the benchmark S&P BSE Sensex index.
Even so, Rohit Agarwal, an analyst with SPA Securities Ltd. in Kolkata, said he wouldn’t recommend sugar shares in the short term. A delay in crushing will hurt Indian production, he said. Cane crushing typically starts in November.
Sugar output will be 24.8 million tons in 2014-2015 with a “negative bias,” Agarwal said. That compares with a forecast of 25 million tons to 25.5 million tons by the Indian Sugar Mills Association on Sept. 17.
Spot prices of sugar in Mumbai have fallen 7.8 percent from a 10-month high on April 4 amid a domestic and global glut, according to data from the National Commodity & Derivatives Exchange Ltd.
“The question is of long term survival,” said Vivek Saraogi, managing director of Balrampur Chini. “I have no other business than sugar to survive. All of my family’s money is in sugar, and I can’t run the business like this. I have no option but to suspend operations. If there is no linkage, it’s impossible to run the mills.”
The sugar industry’s woes add to challenges faced by Uttar Pradesh Chief Minister Akhilesh Yadav, which range from power blackouts to bouts of communal unrest and crimes against women. The state, India’s most populous, has about 200 million people - - roughly the same as Brazil, the world’s biggest sugar producer.
In the Uttar Pradesh village of Malakpur, 55 kilometers east of New Delhi, sugar cane farmer Tejbir Singh said the federal government and Prime Minister Narendra Modi have to step in to resolve the mess.
“Our survival depends upon the factories,” he said.
Singh, 55, said he helps support a family of 22 people, is owed 500,000 rupees for earlier crop and has 1.5 million rupees worth of cane under cultivation. He said he might sell some cane to smaller-scale makers of jaggery, a local sweetener.
Another cane farmer, 60 year-old Dhanbir Shastri in Rasoolpur village, 65 kilometers from Delhi, said he’s struggling to repay a loan of 439,000 rupees because of the arrears at millers.
The Uttar Pradesh Sugar Mills Association said last month crushers in the state decided to suspend operations for the 2014-2015 season that starts Oct. 1. The plants are willing to pay 225 rupees per 100 kilos of cane, versus the 280 rupees set by the local government in the prior season, it said.
Uttar Pradesh is ready for talks with mills, Subhash Sharma, its sugar cane commissioner, said Sept. 3.
The government should announce cane price before planting to help farmers decide on which crop to grow, Mahesh Chand Tyagi, a 61-year-old farmer, said in an interview at Datiyana, 85 kilometers from Delhi.
“Farmers need to be protected as cane is the only crop where farmers are dependent on mills to sell their produce,” said Ashish Bahuguna, federal agriculture secretary. “There could be a solution if cane rates are decided before planting.”
To help settle dues to farmers, Uttar Pradesh has seized about 60 percent of the 3.5 million tons of unsold sugar stockpiled at plants, according to the sugar mill association.
Simbhaoli’s Singh, a pack of sweetener sitting on his desk, said some of the company’s stock was seized in June.
“There’s deadlock between the government and industry,” he said. “The whole industry is in a vicious cycle.”