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The communal riots in Muzaffarnagar in Uttar Pradesh are being watched anxiously by sugar barons in Mumbai, Delhi and Kolkata. The riots have dented the image of the Akhilesh Yadav-led Samajwadi Party government. With general elections a few months away, the disaffection needs to be quelled quickly. Otherwise, Samajwadi Party will get marginalised in national politics. All told, sugarcane farmers are crucial in about 30 Parliamentary constituencies in Uttar Pradesh. So, it is possible that Akhilesh Yadav, with the blessings of his father and Samajwadi Party patriarch, Mulayam Singh Yadav, will use the brahmastra in his armoury to win over the farmers: raise sugarcane prices.
Sugarcane prices are regulated in order to shield farmers from the "vagaries" of market forces. Since almost seven million families draw their livelihood from sugarcane in Uttar Pradesh, what should have been a simple administrative exercise has become a political tamasha. Every year, the Commission on Agricultural Costs and Prices, or CACP, in New Delhi suggests a fair and remunerative price, or FRP. Uttar Pradesh announces a state-advised price, or SAP, which is always higher than FRP (charts 1 & 2). This is what the sugar mills pay the farmers. It works beautifully: while the party in power walks away with all the credit, the mills pick up the bill for the largesse.
Mills usually start crushing sugarcane after Diwali. The state announces SAP shortly before that. This year, mills have been lobbying hard that any increase in SAP will be fatal for them. That's because, thanks to high SAP in previous years, they have run up arrears of Rs 2,500 crore to farmers. The arrears were still higher, about Rs 4,000 crore in July, when the Allahabad High Court, acting on public-interest litigation, directed the Uttar Pradesh government to settle the dues within six weeks. The state has now issued recovery certificates against five mills. (Such strong-arm tactics are nothing new for the mills; sugar stocks were seized and some personnel arrested over non-payment of arrears in 2007-08.) All mills reported losses in the quarter that ended on June 30, 2013: Bajaj Hindusthan (Rs 157 crore), Mawana Sugars (Rs 40 crore), Dhampur Sugar Mills (Rs 20 crore) and Balrampur Chini Mills (Rs 9 crore). In June, the Siddharth Shriram-controlled Mawana Sugars had informed the Bombay Stock Exchange that it will file a reference with the Board of Industrial and Financial Reconstruction.
The mills are incurring losses because at last year's SAP of Rs 280 a quintal, given a recovery of 9.2 (kg of sugar produced from a quintal of sugarcane) and conversion cost of 25 per cent, they produced sugar at Rs 36 a kg, whereas the market price of sugar is below Rs 31 a kg (chart 3). It has tumbled Rs 2 in the last six months and Rs 5 in the last one year. (That's because mills are sitting on stocks of 8 million tonnes, as against the projected demand of 23.5 million tonnes for the year. Sugar exports, which would have eased the pressure on prices, aren't allowed.) As a result, the mills incur a loss of Rs 5 on every kg of sugar they produce. The efficient ones cut the deficit by up to Rs 2 through sale of byproducts like bagasse, molasses, press mud and co-generated power. (All's not well here too. For instance, Uttar Pradesh Power Corporation owes DCM Shriram Consolidated as much as Rs 500 crore in payments.) That still leaves a gap of Rs 3 per kg. With a capacity of eight million tonnes per annum, this translates into an annualised loss of Rs 2,400 crore. "I don't expect to report profits for at least three more quarters," says a visibly-anguished owner of a chain of mills. "If SAP is raised, I see at least a third of the mills dying out."
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Such is the situation that banks are reluctant to lend them any more money - not even for working capital. "We are cautious and will not offer fresh loans till there is clarity on which way the business is moving," says an executive of a public sector bank. "We are monitoring the situation and will evaluate the business before lending afresh," adds a State Bank of India functionary. "The banks," says Vivek Saraogi, managing director of Balrampur Chini Mills, "have raised the red flag on Uttar Pradesh, not on the sugar industry." Investment analysts have downgraded the mills. As a result, sugar stocks have slumped in the last one year and the net worth of sugar barons has seen serious erosion, in some cases by over 50 per cent.
"The sugar industry in Uttar Pradesh," says Ajit Shriram, deputy managing director of DCM Shriram Consolidated, "is like a patient on ventilator in ICU and the power has gone off." Every rupee invested in the sector, he adds, amounts to "destroying value". What also piques Uttar Pradesh mills is that their cost of production is higher than Maharashtra and Karnataka (chart 4). As a result, mills from Maharashtra have begun to send their sugar to the north - the stronghold of the Uttar Pradesh mills. Encroachment hurts.
Many mill owners have raised the issue with Akhilesh Yadav in Lucknow. Privately, they say that he has so far been non-committal, even casual, and is perhaps looking for guidance from his father. So, some others have met Mulayam Singh Yadav. At the current sugar price, they cannot afford to pay more than Rs 240 a quintal, they have told him. The bureaucracy is sympathetic, they say, but the leaders are weighing the political options. If Akhilesh Yadav doesn't raise SAP, there is the possibility that Jat leader Ajit Singh may pounce on him. "The process of fixing SAP will take into account all aspects and incorporate the opinions of all the stakeholders, including the farmers and the mills," says Uttar Pradesh Principal Secretary Rahul Bhatnagar.
The Akhilesh Yadav government will not run short of arguments if it wants to raise SAP. CACP has upped FRP sharply from Rs 170 a quintal last year to Rs 210 now. The Uttar Pradesh Council of Sugarcane Research has raised the estimated cost of sugarcane production from Rs 123.84 a quintal in 2012-13 to Rs 194 for the current year. The farmers, of course, are pushing for higher SAP on the grounds that input costs have risen. "Labour and diesel costs have increased 8-10 per cent and 10-12 per cent, respectively, in the last one year," says Sudhir Panwar, president of farmers' advocacy group Kisan Jagriti Manch. "I think there would be an increase of at least Rs 20 per quintal in SAP."
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Thanks to the uncertainty over SAP, at least eight mills, says the Indian Sugar Mills' Association, or ISMA, have decided not to crush sugarcane before the row is settled. Most are hoping SAP won't be raised. "It (Uttar Pradesh) cannot raise SAP if it wants to save its only industry," says a mill owner. Some are hopeful that the Yadavs will realise that Mayawati lost the state elections last year even though she had almost doubled SAP during her five-year reign (from Rs 125 a quintal in 2007-08 to Rs 240 in 2011-12), which means that high sugarcane prices don't translate into electoral gains.
Because of high SAP, Uttar Pradesh farmers have expanded their sugarcane crop over the years (chart 5). According to ISMA, sugarcane has become the most profitable crop in the state (chart 6). There are other distortions too. Though 80-85 per cent of the sugarcane that reaches the mills is of "general" quality, the rest is the "rejected" variety with 20 per cent lesser yield. Still, mills are required to pay almost the same for both. For instance, last year, while SAP for general sugarcane was Rs 280 a quintal, for the rejected variety it was Rs 275. "The disincentive for the second variety," says ISMA Director-General Abinash Verma," should be at least Rs 25 a quintal." Shriram of DCM Shriram Consolidated says because of an assured SAP, there is no incentive for farmers to improve productivity. "The crop health is in decline," he says. Farmers in Uttar Pradesh bring the cane even four days after harvest during which it loses sugar; elsewhere, it is crushed within 16 to 18 hours of harvest.
The situation will ease if Uttar Pradesh accepts the formula suggested by the committee set up by Prime Minister Manmohan Singh to look into issues related to decontrol of the sugar sector, headed by C Rangarajan, chairman of the prime minister's economic advisory council. It had said that instead of SAP, the mills should pay farmers 70 per cent of the price of sugar and other byproducts, or 75 per cent of the price of sugar. Higher the price of sugar, more the farmers will get and vice versa. Karnataka, in May, adopted this revenue-sharing formula. Maharashtra, the largest sugar-producing state, has started the process to adopt it. All eyes are now on Uttar Pradesh.
Cane price, as a proportion of sugar price, has risen steadily in the last few years in Uttar Pradesh: from 57.1 per cent in 2009-10 to 79.06 per cent in 2010-11, 81.36 per cent in 2011-12 and 88.88 per cent in 2012-13. "With the rest, you have to pay wages, interest, do maintenance et cetera. How is it possible?" asks a mill owner. Saraogi points out that in no major sugar-producing country is the ratio more than 65-67 per cent. If the Rangarajan formula is not accepted, mills have demanded a subsidy of Rs 40 a quintal from the state, or assistance to raise a soft loan to pay off the arrears of Rs 2,500 crore. "In this year's budget, Uttar Pradesh has provided for a loan of Rs 400 crore for the co-operative mills. In the past, this money has always been written off. It can be used to pay the interest of Rs 300 crore the mills will accumulate if they take loans to clear the arrears," says ISMA's Verma. Over to Lucknow.
Manojit Saha in Mumbai contributed to this report
