Sugar mills reeling under heavy losses

Production cost exceeds selling price by Rs 180. Margins for small- and medium-size sugar mills are under pressure losing about Rs 200 a tonne due to a downturn in the industry.

The cost of sugar production works out to Rs 1,680 a tonne considering a cane price of cane price of Rs 1,250, Rs 50 a tonne transportation cost and Rs 380 a tonne conversion cost. Mills sell refined sugar at Rs 1,500 a tonne.

"Immediate attention is required to address the issue. Otherwise, the situation will lead to 'cane on credit' from farmers, the practice of which may already be prevalent in some regions of the country," said an analyst.

The government has denied any subsidy for sugar sales in both the domestic and the export markets. Experts believe the 10 per cent blending of ethanol is not going to sort out the industry's problem either, as ethanol sales will not offset the loss made on sugar sales.

"Sugar sector works on sentiments. Hence, any small measure which helps in boosting the sentiment would lead to a higher price and thereby a change in the dynamics of sugar sales," said G S C Rao, executive director of Simbhaoli Sugar Mills.

Explaining a way out, Rao said either the government should offer subsidy, however marginal it may be, decontrol sales, make the buffer stock public and offer special sops to advanced licensees.

With the government lifting the ban of sugar exports completely, advanced licences make no sense at all, he added.

The government subsidy of Rs 50 a tonne on transportation of sugar continued till 2003, but was later withdrawn because of higher sugar prices.

"The lifting of sugar ban around mid-June (2006) could have benefited the industry, as we were booking our orders around Rs 2,200-2,300 a tonne. But, lifting the ban now makes no sense, as bargaining is impossible at the prevailing prices," Rao said.

B J Maheshwari, company secretary of Dwarikesh Sugar, is of the opinion that the hype of an oversupply of 3.5 million tonne has already affected the market badly. Hence, an immediate measure such as higher blending of ethanol will surely offset the loss to certain extent for sugar producers.

The sugar association has already made several presentations to the government and the latter is seriously considering the available options. If no corrective measures are taken to offset the loss, the situation will lead to non-payment of cane supplied, resulting in farmers switching over to other crops next year.

Currently, ethanol is sold at Rs 21.50 a litre, which is higher than the cost of production at Rs 13 a litre. Sugar prices in the international market are prevailing at $315 a tonne compared with $420 a tonne before the beginning of the season, reflecting a decline of 25 per cent.

If the trend continues, the industry may end up with Rs 230 crore of arrears due to farmers at the end of the current season with a rough estimate of 23 million tonne of production and Rs 100 a tonne loss to producers.