First, the good news. In spite of losing money, sugar factories have not stopped clearing cane bills within the statutory period. What is, however, disturbing is that the factories are fast using up their credit limits for the season with banks and once the limits are exhausted cane dues will start building up.
It is not proving easy for factories to get credit accommodation in line with their handling a much bigger crop in their respective areas as the banks expectedly are also factoring in the industry’s poor financial records in the recent past. Banks have reasons to wonder, if factories could not make money in the past two short crop seasons, how will their fortunes improve in times of plenty now!
Industry official Om Prakash Dhanuka says, “Whatever losses the ex-factory sugar prices may be inflicting on factories, there is no running away for the factories to handle an additional 12 million tonnes of cane that the second advance crop estimate of 336.7 million tonnes shows. Incidentally, we are seeing much less cane diversion to gur and khnadsari this season, their prices too being uneconomic. Farmers being the final arbiter of raw material supply to factories, we dread the prospect of cane dues accumulation.”
According to Abinash Verma, director general of Indian Sugar Mills Association (Isma), factories in Maharashtra and Uttar Pradesh, the country’s two leading sugar producing states, are finding their cost of production at least Rs 100 a quintal more than the ex-factory selling price of the sweetener. Production cost for UP factories with recovery rate of 9.4 per cent and cane price of Rs 210 a quintal and after providing for loss on levy supply account and whatever realisations from by-products works out to Rs 2,900 a quintal. Due to late rain, cane productivity in UP has taken a beating and the state’s sugar output is now pegged lower at 6.4 million tonnes.
But Maharashtra where sugar recovery from cane this season is found to be 11 per cent should have production of 9.4 million tonnes. Production cost of mills in Maharashtra is Rs 2,700 a quintal while their ex-factory realisation is between Rs 2,550 and Rs 2,600 a quintal. It is somewhat quizzical that while the government itself has revised the crop estimate by 12 million tonnes in the second review, it has now pegged sugar production for the season ending September 2011 at 24.5 million tonnes, down by 500,000 tonnes from its earlier projection. Not surprising Verma does not agree. “I will stick to 25 million tonnes. Cane diversion is less this season and sugar factories will have to process almost the whole of extra 12 million tonnes,” says Verma.
Going by the more realistic production estimate of 25 million tonnes plus the season’s opening stocks of nearly 5 million tonnes, the country this time has been spared supply side concerns after two short production seasons. In fact, Dhanuka says, “Take bountiful cane plantation in October and excellent field activities this month, the industry will have to be geared up to likely crush a record volume of cane in the next sugar season. So we will be in a situation where management of overflowing stocks will remain the challenge.”
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This is where exactly the government has tripped having kept to itself the powers, among other things, to signal exports, make monthly releases of sugar and regulate stocks that the trade may hold. Food prices remain a big concern for the embattled government. But sugar is no longer a culprit being sold ex-factory at a discount to production cost. Verma says the market perception of sugar being in big surplus has made its prices uneconomic for the industry. What certainly has not helped supply management is long dithering by New Delhi in actually allowing the 500,000 tonne exports under open general licence which the then food minister Sharad Pawar allowed in mid-December citing “considerable demand from the industry as well as farmers.” The quotas were also distributed among factories.
As if these were not enough of bad tidings for the industry, the demand for the commodity was further suppressed when the government in its wisdom decided to maintain stock holding limit of traders and other intermediaries at 200 tonnes till at least March 2011. This translates into factories being obliged to hold stocks in their godowns about to overflow and bear the interest cost of holding. Much to the industry’s discomfiture, traders anticipating price falls are on occasions going back on their commitments to lift sugar from factories, says Dhanuka.
A sizeable portion of the free sugar quota given to the industry for January remained unsold and the government had to allow 300,000 tonnes to be carried forward to this month for selling. In the meantime, most of the 1.8 million tonnes released for exports under advance licensing scheme has been shipped. Verma wonders when supply is not at all a concern, why should the industry be denied the opportunity to export at world white sugar prices around $730 a tonne and earn handsomely. In fact, the gains from exports would have been more had the country made exports soon after the announcement by Pawar.