Are sugar mills really doing badly?

In the new sugar season (SS) of 2013-14, mills, media and analysts have forecast bleak chances of survival of the sugar industry, especially in Uttar Pradesh. Arrears of farmers and interest liabilities owed to banks have made headlines.

At the same time, the production of sugarcane continues to rise, despite the unpaid bills — it’s an incredible situation. Farmers continue to grow even if they are paid less than what’s been agreed upon. Can the conclusion be that growers are happy even if they are paid partially (about 70 per cent) of the committed value, and still garner profits?

The gur (jaggery) industry pays much less to farmers for cane than mills. Any price over and above the value settled by the gur , khandsari and small-scale industry to growers is additional earnings for them. Barring unseen drought conditions, sugarcane is a profitable crop and requires least effort by virtue of the “ratoon” cycle which is extendable up to three crop years.

PERCeiVED LOSSES

The Uttar Pradesh Sugar Mills Association (UPSPA) has run several newspaper advertisements with a plea to save the sugar mills from an impending hike in State Advisory Price (SAP) of sugarcane, which was Rs 2800/tonne ($51) last year ($=Rs55) — the highest anywhere in the world. (The gur industry paid to farmers Rs 1,800-2,100/tonne or about $32-$38/tonne).

In sugar season 2012-13, sugar traded at about Rs 29/kg in the domestic market or $528/tonne at a recovery rate of about 9.5 per cent. The average cost of sugar production in UP is Rs 35/kg or $636/tonne. The industry in UP ran up a loss of almost $100/tonne.

For 7.5 million tonnes of sugar production in this State, the loss is about $750 million (Rs 4,200 crore) or perhaps more. Part of this loss (about 25 per cent — according to the Crisil report, “Prospects of UP sugar industry mills”) may have been recouped by selling ethanol, molasses, press mud and power generated from bagasse.

Thus losses are mitigated to Rs 3,150 crore (three-fourths of 4200) as an approximation.

When any private industry is driven to the wall by Government’s arbitrary policy prescription, businesses find ways and means to survive. The current scenario represents that paradigm. Sugarcane can be sourced cheaply by managing access to farmers with upfront lumpsum payments at a negotiated price.

Since almost 50 per cent of the allied output — particularly molasses — has better profitability than sugar, more production can be shifted to collateral items for higher compensation. This may require certain adjustments in data and records.

FULL THROTTLE OUTPUT

Recent pronouncements by the Indian Sugar Mills Association and the Government confirm that sugar production in sugar season 2013-14 will be around 25 million tonnes with added carry-in of about 8 million tonnes.

A demand of 23 million tonnes leaves us with a surplus of 10 million tonnes. Domestic prices may plunge further even after accounting for 2 million tonnes for export. With apparent direct losses to the industry, predominantly in UP, growers’ outstandings are likely to soar.

Interest liability to banks will ascend steeply. Logically, the scenario points towards the prospect of mills closing down. But none of that is happening.

UNVIABLE BUSINESS

If the major stake-holders, that is, farmers (because they are clamouring for higher SAP) and mills are both losing money, how can sugarcane and sugar production be a viable business proposition?

If for the last three years, the industry is not profitable as far as its core business of sugar is concerned, and yet surviving, what does that mean? UP mills are urging the State government to reimburse the proposed hike in SAP to growers directly.

It amounts to a direct subsidy to farmers for vote bank politics — where minimum support price/SAP is shared by industry and the State government. Any precedent in UP will create a similar demand in other States and negate the principle of sugar decontrol notified in April 2013.

VEILED WORKINGs

It remains unclear whether industry is actually in loss or the books are reflecting losses for aligning them with SAP. No business can survive with negative returns in absolute terms.

The rational inference is that commercial viability may be attained by ways and means that are unlikely to be disclosed openly.

Audited reports, these days, cannot be fully relied upon. Red numbers perhaps may help in extra financial support from the States and for restructuring their liabilities to the bank.

That will make industry more profitable, directly or indirectly.

It is the Indian concept of yukti and not jugaad that is working.

( The author is a grains trade analyst )