Dip in sugar prices negates part of Centre's incentives to clear cane dues

Steady decline in sugar price has negated part of the benefit offered by the government to help mills clear the rising cane dues and improve liquidity in the value chain.

Sugar prices have declined 3 per cent in the last two weeks, since the government announced the highest ever monthly quota release of 2.45 million tonnes (mt) for March 2019. 

For January 2019 and February 2019, however, the Union Ministry of Food had set a sugar quota of 1.85 mt and 2.1 mt, respectively.

The sharp increase in the monthly quota has increased sugar supply in the spot market, resulting into a decline in prices. While the government has been issuing its monthly quota release order since June 2018, the quantity of free sale quota is the highest ever. Consequently, sugar price has declined by Rs 1 a kg in the spot market.

“A very high monthly sugar sale quota fixed for March 2019 reduced sugar prices by over Rs 1 a kg, which will adversely impact the millers and negate some of the good steps taken by the government recently,” said Abinash Verma, director general, Indian Sugar Mills Association (Isma).

By contrast, four sugar stocks — Dhampur Sugar Mills, Dalmia Bharat Sugar & Industries, Balrampur Chini Mills and Triveni Engineering & Industries — hit their 52-week high on the BSE on Wednesday.

In the spot Vashi wholesale market, sugar M variety quoted at Rs 32.80 a kg, a decline of Rs 1 from its recent high of Rs 33.80 a kg two weeks ago. The decline, however, can be attributed to the overall weak sentiment due to abundance of sugar supply in the market.

The Centre has offered a number of incentives to bail out sugar mills from the economic crisis. Firstly, the government raised the minimum selling price (MSP) by Rs 2 to Rs 31 a kg in February. 

This is aimed at improving the liquidity of mills by Rs 5,000 crore in the entire sugar value chain on existing stocks of nearly 17 mt and additional production forecast of 7 mt.

Madan Sabnavis, chief economist at Care Ratings, however, estimates that the MSP increase will bring down the cane arrears by about Rs 3,400 crore for the sugar season 2018-19, assuming that the hike of Rs 2 per kg goes towards the payment of cane arrears.

Moreover, the Cabinet Committee on Economic Affairs (CCEA) approved soft loans worth Rs 7,900–10,540 crore for the sugar industry to clear cane dues and improve liquidity. 

Under the scheme, the government will bear the interest subvention cost of between 7 and 10 per cent to the extent of Rs 553 crore to Rs 1,054 crore for one year. The government, however, clarified that this soft loan would be available only to those mills which have cleared at least 25 per cent of their outstanding dues this season, beginning October 2018.

Meanwhile, the Union Ministry of Food has estimated total cane arrears to be Rs 20,159 crore for the period between October 1, 2018, and February 22, 2019. Such huge cane arrears is historic and have not been recorded in the past in February. The ministry hopes that the soft loan and MSP increase would help clear cane arrears faster.

In a surprise move, sugar mills have together offered to supply around 510 million litres of ethanol produced from B heavy molasses and sugarcane juice which is expected to reduce around 0.5 million tonnes of sugar production. 

By February 28, sugar mills had supplied 120 million litres of ethanol from B heavy molasses and cane juice. This has already reduced India’s sugar production by 0.1 million tonnes in the current season.