Cane pricing revision still a threat

IN FOCUS / SUGAR

The sugar industry was at crossroads, with recent government rule changes boosting profitability. However, the gains could be wiped out by unreasonable cane pricing by central and state governments.

First, the positive steps.
Statutory minimum price (SMP) would now be linked to 9 per cent base recovery instead of 8.5 per cent. The cane price will be based on average recovery rather than peak recovery.

As a result, raw material cost would decline as payment would be linked to average rates of recovery.

Interest rates on Sugar Development Fund (SDF) loans had been slashed to 4 per cent from 9 per cent. The lower interest rates was expected to favour investments in integrated sugar complexes.

Finally, raw sugar import had been liberalised. Mills could now process import raw sugar and achieve higher capacity utilisation during periods of cane shortage.

According to credit rating agency Crisil, these measures would have a positive impact on the bottomline of of sugar mills and improve their risk profile.

Now for the bad news.
These measures will lower sugarcane prices by around 10 per cent, if the SMP was unchanged. However, SMP for 2004-05 season was be announced shortly.

Any significant increase in it from the current level of Rs. 73 per quintal could nullify the effect of this announcement, warned Crisil.

Moreover, sugar mills in Uttar Pradesh paid a state-advised price (SAP) at a rate higher than SMP. Their gains would be wiped out unless the SAP was also linked to average recovery rate.

The principal weakness of the industry continued to be pricing of cane and the mills' capacity utilisation.

Crisil admitted the steps needed to be followed by full decontrol of sugar sector to improve the returns to farmers and mills alike.

Sugarcane accounted for around 70 per cent of the cost of producing sugar and any reduction in price would lift sugar mills' profitability.

The new cane pricing removed the anomaly of linking cane prices to peak recovery rates, which were about 0.3 percentage points higher than the average recovery rate of around 10 per cent.

Also, from the 2004-05 (October to September) sugar season, the SMP will be linked to 9 per cent recovery as against 8.5 per cent earlier.

Reduction in interest rate on loans from SDF was expected to tempt mills to modernise or diversify into ethanol and cogeneration projects. These would enable them to partially insulate themselves from market cycles.

Crisil said administrative bottlenecks had restricted use of SDF and led to low disbursements in the past, and had to be addressed urgently.

Raw sugar imports would help tackle the current domestic shortfall in cane production so that mills could work round the year and raise capacity utilisation.

Imports were linked to export obligations to avoid flooding of domestic market with imported sugar.

High sugar prices prevailing today, and reduction in sugar inventory to sustainable levels by the end of the next season, should help the government to introduce full decontrol going forward, Crisil went on to add.

Central government announces an annual statutory minimum price (SMP) for sugarcane procured by sugar mills. The SMP benchmark was used by state governments to declare the state-advised price (SAP). In some states, SAP was higher than SMP by 20-25 per cent.

High sugarcane prices and poor sugar prices led many sugar mills to default on payments to farmers.

The farmers then shifted to other crops, resulting in sugarcane shortage and higher sugar prices.

Sugar mills also pay a cess of Rs 20 per quintal of sugar for SDF which gave term loans to mills for modernisation and expansion projects and create buffer stocks of sugar to stabilise prices.

Among Indian mills, Balrampur Chini Mills was the most prominent of those which had diversified into ethanol and co-generated power.

Its installed crushing capacity was 29,000tcd, distillery capacity 160 kilo litres per day (KLD) and power generation capacity 39.80MW.

Distillery and power business as percentage of operating profits (OPBDIT) was around 30 per cent, said another credir rating agency, ICRA, recently.