For more than five years, Uttar Pradesh-based Mawana Sugars have been incurring losses. Shunned by lenders, “harassed” by the state government over cane arrears and unable to cope with a drastic mismatch between sugar and cane prices, the company informed the Bombay Stock Exchange last week that it was shutting shop.

Barely had a day passed, the UP government told Mawana closing operations half way through the crushing season was illegal. State government officials have now been deployed at the offices of the company — already struggling with an exodus of almost all its directors and most of the senior staff — to check if it is turning away farmers coming to sell cane.

Mawana’s plight is the symptom of a larger systemic disease in the form of exorbitantly high benchmark price fixed by UP, but what is less obvious is that it has caused enough distortions in the sugar industry of other states as well, notably Maharashtra and Karnataka.

For the first time, mills across the three major producing states have been struggling to pay even the fair and remunerative price (FRP) fixed by the Centre to farmers, thanks to a drastic fall in sugar prices, caused by forcible offloading of stocks in UP following a court order. It worsened a glut in the market and dampened prices in other states as well. Inventories brimming with stocks following a fifth straight year of surplus production in the country and a plunge in global prices just exacerbated the fall. Prices have been dropping consistently each month since August-September in major producing states.

The Allahabad High Court’s directive came after mills had failed to clear cane arrears on time due to high state advised price (SAP) fixed by UP, which was 27% higher than the FRP in 2014-15, even though sugar prices were subdued. The court’s order that farmers had the first right over sugar sales realizations, and not lenders, prompted the banks to further squeeze lending to the sector, said A Vellayan, chairman of EID Parry.

Many mills haven’t got working capital loans this year, he said, making it difficult to clear cane arrears that have hit a record Rs 14,547 until mid-February this season. Including the arrears from earlier seasons, dues owed to farmers have been to the tune of Rs 17,243 crore.

Refused loans by banks and forced by the state to clear cane arrears at the earliest, UP mills are selling sugar stocks below costs, said Tarun Sawhney, vice-chairman of Triveni Engineering. Since ex-factory prices in Maharashtra and Karnataka are usually lower than in UP due to the high SAP in the northern state, mills in these states are also selling at lower prices to preserve their markets. Bulk consumers’ reluctance to stock up in a falling market also compounded the problems.

Since the centre has linked the benchmark price of Rs 220 per quintal to a 9.5% recovery rate, the effective FRP for Maharashtra is Rs 266 per quintal of cane, considering an 11.5% recovery rate. However, the average sugar price this season has dropped to around six-year low of Rs 2,476 per quintal. This means just the cane cost, even at the FRP, for producing each quintal of sugar in Maharashtra would be Rs 2,313, or a record 93% of the ex-factory sugar rate and far worse than the ideal 75%. The situation is worsening by the day, as the prices last week hit Rs 2,250 per quintal in the state. Since the FRP is the floor price mills and co-operatives are required to pay to farmers even under the Rangarajan formula, there is no respite for them. Higher wage costs in Maharashtra and Karnataka than in UP have just made the matter worse for them.

Even the Commission for Agricultural Costs and Prices (CACP) had recommended the FRP of Rs 220 per quintal on the assumption ex-mill prices of sugar would be in the range of Rs 3,000-3,400 per quintal in 2014-15. But since prices have dropped to the range of Rs 2,250-2,500 per quintal in March across the major states, even paying the FRP is difficult, said industry executives.

“On one hand, the price of sugar is left to the market to be determined, while on the other hand, the raw material price is fixed by the state government. The state even decides how much of cane will be crushed by a mill and the mill can’t say no to crushing cane from the stipulated area. How will the mills do business?” asked Abinash Verma, director general of the Indian Sugar Mills Association (ISMA).

Surplus stocks at the end of this season are expected to be near record levels, at around three million tonnes, even after discounting six million tonnes required for three months’ consumption in the country.

Despite the centre’s push for the mandatory blending of ethanol with petrol to enable mills to improve cash flow, various state-level levies on the bio-fuel and the requirement of obtaining permits from various authorities have made the matter worse for sugar mills that produce ethanol.