Sugar mills not out of the woods
Losses narrow as prices rise; firms seek more help from govt
The worst is not over for the Indian sugar industry and farmers despite the government’s measures such as imposing import duty and limiting the release of the sweetener in the market by mills.
The mills earlier sold sugar at prices 15-20 per cent below their cost of production. The government’s initiatives helped improve the ex-mill, prices or price realisations, by 7-10 per cent. This means losses have narrowed, but the sugarcane crushing business is still unviable.
Industry executives and analysts have sent an SOS to the government to boost the cash flow into sugar mills to prevent mounting dues to farmers, which in turn will help in reducing losses suffered by the mills.
With production on the higher side, imposition of stockholding limits will increase the fund requirement of the mills in order to hold additional stock.
The Indian Sugar Mills Association (ISMA) had projected 26.1 million tonnes (mt) of output for 2017-18 season (October to September). Of this, 17 mt had been produced till January 31. February is considered the peak season for production.
According to analysts, the fair and remunerative price (FRP) for sugar is expected to cross ~200 billion by the end of March, and considering the state-advised price payable in Uttar Pradesh, Haryana, Punjab and Uttarakhand, dues could be as high as ~270 billion.
The FRP is the minimum price that sugar mills have to pay farmers.
If dues are not paid in two weeks, there will be arrears.
The sugar surplus in the 2017-18 sugar year is estimated at over 1 million tonnes.
“There will be surplus production, both in the current as well as in the upcoming sugar season (2018-19). Hence, it is crucial for the government to ensure that the interests of all stakeholders are protected and the sector remains viable,” said Gaurav Dixit, associate director, CARE Ratings. There was a need to incentivise exports of surplus sugar, he added.
At current prices, exports are not viable even if the 20 per cent exports duty is removed. Exporters from Maharashtra suffer losses of ~9-10 per kg.
“With sugar prices expected to remain under pressure, large integrated sugar mills will be in a better position to clear cane dues as most such mills have significantly reduced their debt, resulting in low interest outgo in the current year. However, standalone sugar mills are still significantly leveraged and function without any distillery or power plant may find it difficult to clear dues in time if cane prices fall sharply,” said Dixit.
“The main problem is the surplus sugar expected next year,” said Abinash Verma, director-general of ISMA.
However, it will be good to start the next season with lowest possible opening balance, for which India should try to export around 1-1.2 mt in the next six months. ISMA is suggesting a surplus of over 1 mt this sugar year.”
Verma estimates that export of the surplus production will generate cash flows of ~30-40 billion, which will ensure exmill prices sustain at 34-36 per kg and, the next season can start with the minimum possible opening balance.
At present, the ex-mill price in Maharashtra is ~31, while in Uttar Pradesh it is ~34.50.