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Bitter season awaits UP's sugar mills

Source : BUSINESS_STANDARD
Last Updated: Wed, Dec 26, 2012 19:32 hrs

The sharp increase in cane prices could lead to more losses and arrears in payments to farmers; disaster, says industry, when coupled with Centre’s controls

Uttar Pradesh, the country’s largest sugar producing state, has once again chosen to give politics prominence over economics in deciding the price of sugarcane for the sugar industry. The state is home to the country’s top sugar firms like Bajaj Hindusthan, Balrampur Chini, Dhampur Sugar Mills and Triveni Engineering, among others. The Akhilesh Yadav-led Samajwadi Party government announced an increase on December 7 of Rs 40 a quintal, or 16 per cent, in the state advised price (SAP) of sugarcane across varieties. The new price is Rs 280 and Rs 290 a quintal for normal and early varieties, respectively.

Yadav’s predecessor, Mayawati, had also raised sugarcane prices by Rs 40 a quintal last year as Uttar Pradesh was preparing for elections to the legislative assembly — there are close to seven million sugarcane farmers in the state. No party can afford to antagonise these farmers if it wants to rule Uttar Pradesh. The sharp increase has come at a time when sugar prices have softened considerably from this year’s peak of Rs 3,600 a quintal in September to Rs 3,250 a quintal now. The industry, desperate for a profitable production season this year (crushing of sugarcane starts in October or November and ends in April) after losses in recent years, was all along anticipating a lower increase. According to calculations at the Uttar Pradesh Sugar Mills Association, the mills are in a position to pay only in the range of Rs 238 to Rs 243 a quintal in 2012-13, assuming average sugar prices in the range of Rs 3,350-3,400 a quintal during the year. The higher price, as fixed by the government, will result in losses and more arrears in payments to sugarcane farmers. At the beginning of the season, sugar mills in Uttar Pradesh owed Rs 85 crore to farmers.

Rising costs
Abinash Verma, director general of the Indian Sugar Mills Association, says at the new sugarcane price, the cost of sugar production would be Rs 3,600-3,700 a quintal, which leaves a deficit of Rs 350-450 a quintal over the current market price of Rs 3,250 a quintal. Considering the likely output of 7.9 million tonnes this year, the industry could end the season with a loss of over Rs 3,500 crore. Share prices of sugar companies have crashed up to 20 per cent since the new sugarcane prices were announced on December 7. The industry is perplexed.

Vivek Saraogi, managing director of Balrampur Chini, the country’s second-biggest sugar producer with 10 mills in Uttar Pradesh, is visibly upset with the decision. What can the mills make from sugarcane, he asks. “Nothing other than sugar, bagasse and molasses. The best global benchmarks show that a sugar mill cannot share more than two-thirds of the realisation from the three products with farmers. The remaining one-third is required for wages, interest cost and processing charges,” he says.

According to Saraogi, the two governments, central and state, control the sugar sector and there is a complete lack of autonomy for the mills. The situation is made worse by elections, at one level or the other, every two or three years in the state. “The state government wants to raise sugarcane prices to appease the vote bank, while the Centre wants to control sugar prices to check inflation. This is a perfect recipe for disaster,” says Saraogi. This is why the industry faces cycles where production can decline sharply from 25 million tonnes to 15 million tonnes and then go back to 25 million tonnes within a couple of years. Consequently, the shortage has to be met through imports. Saraogi, who deals with 500,000 sugarcane growers across his 10 mills, says this system is creating inefficiencies in Uttar Pradesh. “Maharashtra and Tamil Nadu (they go with the lower fair and remunerative price for sugarcane fixed by the Commission for Agricultural Costs and Prices at the Centre) have lower sugarcane cost and are, therefore, more efficient like mills in Brazil. In Uttar Pradesh, the sugarcane cost is so high that our cost of producing sugar is higher by Rs 5 a kg. But, we all sell in the same markets at a similar price,” he says. No wonder banks have become extra cautious towards the industry and are not coming forward to lend money. They fear it will raise their non-performing assets.

Brewing crisis
According to Verma, Uttar Pradesh has no alternative crop to compete with sugarcane now that SAP has been fixed at this high level. “Given this price, sugarcane acreage in the state will go down only if the farmers do not get paid in time. Otherwise, we are likely to see a further increase in the sugarcane crop, which will expand sugar output further from this year’s projection of 7.9 million tonnes,” he says. This could lead to more losses and payment arrears. Mills seldom have the option to turn back farmers from their gates. It can become a political issue.

Interestingly, this time, the Uttar Pradesh mills have not legally challenged the increase in sugarcane SAP as it had been doing often in recent years. The industry has instead pleaded with the state government to grant incentives like a waiver of the purchase tax of Rs 2 on every quintal of sugarcane, reducing the society (through which the sugarcane is routed to the mill) commission from Rs 5.1 to Rs 2.1 a quintal and elimination of the three per cent entry tax levied on sugar produced and consumed within the state.

Verma says the industry also wants the Samajwadi Party government to restore the incentives committed to the industry in its previous tenure under the 2004 Sugar Investment Policy. That policy, announced when Mulayam Singh Yadav was the chief minister and Amar Singh his right hand man, had attracted investments of close to Rs 10,000 crore, in both expansion and new capacity. The policy had provided incentives such as exemption from entry tax, trade tax on molasses, stamp duty and registration charges on purchase of land, purchase tax on cane, society commission on cane and administrative charges on molasses. It had also offered a subsidy on transport of sugar and sugarcane and a capital subsidy of 10 per cent on investment. All these were to be given for five years if a company/group invested a minimum of Rs 350 crore and for 10 years if the investments were at least Rs 500 crore. However, the policy was scrapped by Mayawati immediately after she came to power in May 2007, and most companies could not avail of the full benefits that were promised by her predecessor. No major fresh investment in the sector has been made in the past five years.

Interestingly, the Akhilesh Yadav government is working on a new sugar investment policy that promises incentives for investments in the eastern part of the state, in sugar, ethanol and bagasse-based power. Given the current state of affairs, the new policy is unlikely to draw investments anywhere close to the previous one. While the state plays spoilsport through sugarcane pricing, the Centre does its bit through regressive regulations like levy sugar and a release mechanism. Under levy, every mill in the country is mandated to sell 10 per cent of its sugar production to the government for its public distribution system at a price of Rs 1,900 a quintal, substantially lower than the production cost. The Union food ministry also fixes the amount of sugar that mills can sell in the market.

“We continue to face archaic regulations in the form of levy sugar and release mechanism. When there was a shortage in domestic production, exports were banned. Today, there is surplus situation but imports continue relentlessly at a ridiculous duty of 10 per cent, benefitting farmers in countries like Brazil and Pakistan and impacting our realisation and ability to absorb the shock of this sugarcane price. If things are not rationalised, you will soon see havoc in terms of huge payment arrears to farmers,” says Saraogi. The only way to minimise the impact of the Rs 280 sugarcane price is to ban import of sugar and remove the levy obligation immediately, he adds.

Sugar mills have other revenue streams as well, like molasses and power, but the non-sugar businesses do not account for more than 15-20 per cent of their revenues. In the molasses and extra-neutral alcohol business, most mills enter into annual contracts with liquor companies, which dictate prices. In ethanol, too, the price revision from the current Rs 27 a litre has been hanging fire for more than a year. Some believe that the recent Union Cabinet decision to make it market-linked will help in improving prices to Rs 32-33 a litre. Power is a profitable business, since the cost is fixed and they get Rs 4 per unit for power. This cushions the loss from sugar to some extent.



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