Cash-starved sugar mills in Uttar Pradesh are heading for more troubles as the price of sugar has dropped even below the cost of cane required to produce it.
Sugar prices in the country’s top cane producer, Uttar Pradesh, have hit a three-year low in December, as the mills were forced to offload stocks to clear cane arrears, further worsening a glut created by a fifth straight year of surplus production through 2014-15, according to the data compiled by the Indian Sugar Mills Association (Isma).
The average ex-mill price of sugar in Uttar Pradesh, which accounts for bulk of the cane arrears, has dropped to R2,750 per quintal in December, down roughly 2% from November and over 7% from October. Even at R260 per quintal, taking into account the fact that the UP government has announced incentives worth R20 per quintal for purchases of the key raw material, just the cost of cane to produce a quintal of sugar will be as high as R2,826.
This assumes a cane recovery of 9.2%, the average rate so far this season in UP. Mills in the state are yet to pay roughly R1,000 crore to farmers for cane purchases, according to the industry data.
In Maharashtra, which also witnessed prices falling to the lowest in three years, the average ex-factory sugar rate has declined to R2,480 a quintal in December, against R2,612 a quintal in November and R2,683 a quintal in October.
In September, the Allahabad High Court had ordered district magistrates concerned to monitor as well as “cooperate” with defaulting mills in Uttar Pradesh in offloading their sugar stocks at best possible prices and that all cane arrears, amounting to R4,626 crore then, be cleared. It had also ruled that that farmers who were yet to receive payment for cane supplies have the first right over mills sugar sales realisation, and not the lenders to mills. The subsequent rush of sales are to be blamed for the fall in prices, which would further pressure the balance-sheets of mills.
UP sugar mills had already incurred losses of R7,250 crore in three years through 2013-14 due to the state government’s policy of fixing extremely high cane prices even when both domestic and global sugar prices remain subdued.
Isma has warned that since sugar prices are R500-700 per quintal lower than the cost of sugar production, mills are facing huge challenges to be able to pay even the fair and remunerative price of R220 per quintal set by the central government, which is 27% lower than the price of R280 fixed by the UP government for 2014-15. So cane arrears may exceed R14,500 crore by March, 2015.
Sugar output rises 47% this season
Sugar output in the country rose 47% until December 15 in the marketing year that started in October, which also contributed to the fall in sugar prices.
Production touched 4.23 million tonne as of December 15, compared with 2.88 million tonne a year before, showed the Isma data. As many as 442 sugar mills started cane crushing by mid-December this year, against 426 a year before.
However, the output level will narrow a gap with 2013-14 in the coming days, as production by major mills — especially in UP — had been delayed by almost a month last year. Already, the gap has narrowed a bit as until November 30 this year, production was 56% higher than a year before.
Maharashtra produced 2.07 million tonne up to December 15, compared with 1.30 million tonne a year earlier. UP sugar mills have also produced more sugar — 7,94,000 tonne, against just 3,00,000 tonne in the corresponding period last year.
In Karnataka, production touched 7,00,000 tonne up to mid-December, compared with 7,57,000 tonne a year before. The remaining states together produced 6,58,000 tonne, compared with 5,24,000 tonne in the corresponding period last year.
The food ministry has projected a 4% rise in production for the entire 2014-15 to 25.50 million tonne, while Isma has forecast output in the range of 25-25.50 million tonne.