UP sugar crisis: Price over Rs 225/qnt unviable, says ISMA

Fearing a law and order problem if crushing operations don’t start today, sugar mills have sent closure notice to the Uttar Pradesh Government. Hence, the ball is now in the government’s court, says Abhinash Verma, director general, Indian Sugar Mills Association (ISMA).

Verma says the association is awaiting rationalisation of the sugarcane pricing policy and a price that is viable for the mills as well.

Every sugar company in UP is losing money year-on-year says Verma who believes Rs 225 per quintal is a viable price for mills to begin operations.

Sugar cane prices have increased 17 percent on average for the last three years, while sugar prices have been lower by nearly 10 percent year-on-year (Y-o-Y) leading to deep losses by the industry.

Below is the edited transcript of Verma’s interview to CNBC-TV18.

Q: What happens next, are you waiting to hear from the sugar commissioner or the state government to be asked to come for negotiations, what should we wait for?

A: The ball is in the court of the state government now because in the last three-four months we have been communicating with the state government explaining our position to them. We have requested them to rationalise the sugarcane pricing policy and determine a sugarcane price which we can pay and don’t lose money year after year.

Unfortunately, that did not happen and there was notice from the state government including from the Cane Commissioner’s office that we have to forcibly start our sugar mills from today, that is November 20 onwards.

Fearing some unfortunate incidences there like some law and order problems if we don’t start, we had no other choice but to inform the state government that we cannot start. Therefore, today the situation is that we will be waiting for the state government to  rationalise the sugarcane pricing policy and let us know a price which is viable for us at which we can start our sugar mills.

Q: Take us through the arithmetic, what is the price of sugarcane in terms of percentage in that Rs 33-35 per kg of sugar, what is the refining charge and therefore what is breakeven at current sugar prices?

A: Let’s assume last year’s sugarcane price- at Rs 280 per quintal of sugarcane and a 9.2 percent recovery, the cost of production of sugarcane in UP is around Rs 36 per kg of sugar therefore we need an ex-mill price of Rs 36 to be able to afford Rs 280 of sugarcane price.

Last year, during the same time the sugar prices ex-mill were in the range of Rs 35-36 per kg so it was fair to assume that Rs 280 per quintal was affordable value. Last one year the prices have really fallen by about Rs 7-8 per kg and today the UP mills are getting about Rs 29.5 per kg of sugar.

If one just calculates this Rs 29 per kg as a percentage of Rs 280 per quintal, it works out to more than 95 percent of our realisation. If one has to pay 95 percent of our revenue realisation only on account of sugarcane, where do we get the money to pay to other expenses like bank interest or term loan returns, wages and salaries of our employees, maintenance of the factories, input costs, etc. If one looks at the balance sheet of a sugar company, one will find that all these other costs account for almost about 30-35 percent of the revenue realized by a sugar company. So, if we are forced to pay around 95 percent you can assume either we default in the bank loans or default in the payment to the farmers.

If you simply ask me what is our paying capacity today, at the current price of Rs 29.5 per kg of sugar, our paying capacity is not more than Rs 225 per quintal of sugarcane.

Q: What are the exact losses that the sugar mills have faced up until now?

A: Last season 2012-13 which got over on September 30, the industry lost about Rs 3000 crore. Last to last year, the industry lost about Rs 1000 crore in UP alone. And the latest results which have come out for the July-September quarter, the biggest company in UP that is Bajaj Hindustan, that reported a loss of around Rs 510 crore, Balrampur Chini reported a loss of around Rs 125 crore in just three months.

All the other companies like Triveni, Dhampur, everybody is losing money in UP, it cannot happen year after year. And the banks have refused to give loans to the industry.

Q: This is also an election year so realistically what kind of a solution are you expecting? The problem is very apparent even in Maharashtra, it is similar except that it is not a profit and loss account loss of a listed company, these are cooperatives. Do you genuinely expect that sugarcane prices will be lowered? In Maharashtra the demand is more in terms of a transportation subvention from the state government and something else from the central government, what is your realistic expectation of a resolution?

A: The state government will have to intervene, I don't think the UP government has ever helped the sugar industry or sugarcane farmers directly but if you look at Maharashtra traditionally they have always been helping the industry or the farmers. I remember the chief minister of Maharashtra had come to Delhi to meet the Prime Minister for the cause of the sugar industry. Similar happenings have to happen from the UP government also.

If my paying capacity is Rs 225 and the UP government wants the farmers to get Rs 280 per quintal there is a gap of Rs 50-55 per quintal and if you multiply by the total quantity of sugarcane that we are going to crush, it works out to about Rs 4000 crore of subsidy that the government may have to actually bear. So, Rs 4000 crore out of about Rs 18000 crore of the revenue, taxes and duties that we give directly and indirectly to the UP government, is not substantial just for one year. The solution lies in actually bridging the gap between our paying capacity and the price that the state government wants to give to the farmers.