Fearing Q1 redux, sugar firms court Maya govt

For the country's sugar barons, all roads these days lead to Lucknow. After reporting poor results for the April-June quarter, they have started lobbying with the Mayawati government for lower sugarcane prices before their mills start production in October.

Some sugar mills have also moved court challenging the state government's formula for fixing cane prices. The mills are watching the development with bated breath.

Industry insiders say such a development will also suit the state government, which otherwise will face the political fallout of reducing the administered prices. There are about 7 million sugarcane farmers in Uttar Pradesh.

In the last crushing season (October 2006-May 2007), while cane prices were raised about 8 per cent, sugar prices fell 30 per cent due to a bumper harvest. As a result, all sugar mills in the state reported a loss for the April-June quarter. Also, cane arrears to farmers stand at an all-time high of Rs 2,300 crore in the state.

If there is no relief on the cane-price front, the losses will be higher in the coming quarters as the mills are adding new capacities. The crushing capacity in the state is expected to go up from 711,000 tonnes crushed daily (tcd) to 802,000 tcd in October.

While Bajaj Hindusthan will increase its capacity from 95,000 tcd to 136,000 tcd, Balrampur Chini plans to add 19,000 tcd, taking the company's capacity to 74,000 tcd next season.

More capacities would mean companies incurring higher losses next season as a result of higher output, which would depress prices further. The country's production is likely to cross 30 million tonnes next season, 2 million tonnes more than this season.

"Even if the state-advised cane price remains at this year's Rs 125-130 per quintal, the cost of producing one quintal sugar will be Rs 1,350 (including transportation). With conversion charges, the cost of producing one quintal sugar will be Rs 1,750, meaning a loss of Rs 500 per quintal since the sugar price may dip to Rs 1,250 per quintal. If a company produces 1 million tonnes of sugar, it could incur a loss of up to Rs 500 crore," said Kishor Shah, director-cum-chief financial officer, Balrampur Chini.

With the state's total output estimated at 10 million tonnes next year, the industry's losses may touch Rs 5,000 crore.

If the cane price is not reduced, it is certain that a number of small sugar units may not be in a position to even begin operations. If this happens, the farmers will have no one to sell their cane to. This would force them to move to other crops, said industry sources.

While most mills in the state have diversified into co-generation and distillery to hedge the losses from sugar, the revenues from these are just 10-20 per cent of the total. Moreover, with a drop in the prices of molasses and the delay in the ethanol-blending programme, the distillery business has become less profitable.

"The mills in Uttar Pradesh pay a higher cane price than in states like Maharashtra or Karnataka. The UP mills have to compete with sugar from states where the production cost is low. Moreover, these states are providing fiscal sops to sugar mills", said a UP miller.

"The ad-hoc nature of cane price is hitting the farmers and affecting the companies. The government should take a rational view on cane price that is sustainable in the long term", said Nikhil Sawhney, vice-president, Triveni Engineering.