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 (YoY).
The Uttar Pradesh sugar industry is facing extinction. That's the word coming in from the region's top sugar producers, who are currently pleading to the government not to increase cane prices. 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).
According to the industry, at Rs 236 per quintal, UP mills have the highest cost of production globally. It claims to have lost around Rs 3,000 crore in 2012-13. The UP mills have incurred losses in 3 out of last 4 years.
The industry is lobbying for an immediate review on current cane pricing. It wants the UP government to introduce the revenue sharing model as per the Rangarajan committee recommendations.
Below is the edited transcript of Kushagra Bajaj, VC & Jt MD, Bajaj Hindusthan, Vivek Saraogi, MD, Balrampur Chini, and Abhinash Verma, DG, ISMA's interview to CNBC-TV18.
Q: How bad are things in Uttar Pradesh (UP) now? Have you told the government that if subsidy is not provided or Rangarajan Committee report on revenue sharing recommendations are not taken; there can be no crushing this season?
Saraogi: UP cannot remain producing at a certain cost which is thrust upon them based on a cane price assumed by the UP government. Right now, it is Rs 236 per quintal; Maharashtra and Karnataka produce at Rs 230 per quintal. The ability to now begin crushing is very difficult. It is not in our hands.
Banks said that we will not renew your limits. Where is the money? They want the farmer to get a price of Rs 280 per quintal and the ability of the mill is to pay Rs 230-240 per quintal. Depending on Rangarajan (committee’s recommendations), the difference has to be met by someone. It is the government as they are deciding the price.
Bajaj: The entire industry is united on this. We have written to the government that it is impossible to start. Banks have written to us whether it is State Bank of India, Punjab National Bank, Allahabad Bank that until the Rangarajan Committee is implemented in total we are not going to. It was partially decontrolled by the Centre in April.
Q: What is the feedback from the government as you have had a slew of meetings with the state government? What is it saying now? You have given them examples of Karnataka, Maharashtra, either the government says we are willing to accept the Rangarajan Committee report or they say no we cannot go ahead with it. What are they saying?
Bajaj: This is a crisis which is not new to the sugar industry in the world. The same thing happened in Brazil in 1998 because it was crazy cane pricing there and the whole industry went belly-up. Then they did the Consecana formula in 1998 and since then there has been a boom in the industry.
So, the government understands it whether it is the political establishment across all political parties and very much to bureaucracy. Now it is a call how things are going to pan out.
Q: Are you hopeful of a breakthrough because I don't get that sense from either of you at this point in time, are you hopeful of a breakthrough?
Bajaj: I am cautiously optimistic.
Q: Rs 3000 crore losses as far as 2011-12 is concerned, it is only going to get worse if we don't actually see any breakthrough in this situation. So is it right to say that the UP sugar business is on the verge of collapse, it is on the brink of extinction?
Verma: I think so. Until the state government comes into the picture and links the sugarcane price to the sugar price realisation, I don't see the UP sugar industry surviving for very long.
With this kind of pricing which today if you talk Rs 280 per quintal, the UP sugar mills will be paying about 93-94 percent of the sugar price realisation only on account of cane price.
So where is the money to pay to banks, where is the money for maintenance or the input cost or the administrative fees etc. If this continues, I don't see the UP sugar industry surviving and if that happens then all the political game and all will really come to a sad end.
Q: We are talking about a very sensitive political constituency which is farming, we are headed into a general election. Before that we are headed into assembly elections as well. In this political environment would you be cautiously optimistic?
Saraogi: I would be cautiously optimistic.
Q: And how much does it work out by way of a subsidy if the government were to intervene? I would imagine about Rs 3000 crore is what we are looking at.
Saraogi: Yes around Rs 3000 crore. Let us understand what is happening, this industry is a converter. If cane was sold to the consumer, we would have no role. As a converter, you cannot thrust upon a price where I am left out in the open. So we are just asking for recovering conversion cost and Rangarajan has assigned the lowest conversion cost in the world to India, to UP.
We are saying okay if that is the formula all over the country we accept that so we want that implemented. You cannot have half the country not implementing it and half implementing it. So 50 percent of the consumption is implemented. And we would be very happy if everywhere this was the cane price.
Let us take the reverse. If everybody had a cost of production of this level, we wouldn’t be having this conversation and we had challenged that UP’s efficiencies are way above the rest; we will prove it. We have good integrated factories. So it is not that owing to our inefficiency is why we are losing.