Sugar tale of two states: Sops to benefit Maharashtra mills, UP has to wait

The government recently took measures such as creating a buffer stock and re-introducing release order mechanism

The big question arising out of the government’s sugar package is how far it will help mills to pay the arrears of more than Rs 220 billion to cane growers.

The government recently decided to create a buffer stock and reintroduce the release order mechanism.

The case in point is Uttar Pradesh (UP), where till June 7, that is a day after the Union Cabinet cleared the second round of sops for sugar mills to help them make payment faster, around Rs 125 billion was still to be paid to farmers.

This was when an additional Rs 223 billion has been paid to farmers of the state by the mills, according to the data given by the UP Sugarcane Commissioner for the 2017­18 season, which ends in September.

The arrears have mounted because production in the 2017­18 season is projected to be around 33 million tonnes (mt).

A common view of industry players and experts is that the sops, announced by the government in the past few weeks, might help in clearing the sugarcane dues of Maharashtra­based mills, which owe farmers around Rs 17 billion as of June 7. Clearing dues will be difficult unless ex­mill prices move up from the current levels of Rs 3,350 a quintal.

The reason is simple — despite an improvement in sale prices, the cost of producing a quintal of sugar in UP is still higher than its sale price.

In Maharashtra as soon as a bag of sugar is produced, mills become eligible to avail of loans of up to 85 per cent of the average value of the bags.

Some experts and industry players dispute the package size, which officially is around Rs 70 billion. Industry experts and millers said the central government’s share in the package will be around Rs 41 billion. Of this, around Rs 15.40 billion is on account of providing Rs 5.50 per quintal directly into the bank accounts of farmers.

The expenditure in creating a buffer stock of 3 mt is estimated to be Rs 11.75 billion, while the interest burden the Centre will bear for providing loans of up to Rs 44 billion for setting up a fresh ethanol capacity is estimated to be around Rs 13.32 billion.

This totals around Rs 41 billion, far short of the Rs 70 billion claimed by the government.

In the case of ethanol, the package entails that banks will not charge interest on loans taken for setting up an ethanol capacity in the first year.

From the second year onwards, they will be charged a subsidised interest rate of 6 per cent, whose burden on the exchequer is expected to be around Rs 13.32 billion.

“Creating an additional ethanol capacity will not help in generating an immediate cash flow for sugar mills because this can happen three-five years,” a senior executive said.

The creation of a buffer stock of 3 mt is definitely expected to wipe off some of the surplus and push up prices of sugar, which have moved up from a low of Rs 2,350 per quintal (prior to the announcement of the package) to Rs 2,900 per quintal (which is also the minimum sale price fixed by the government).

But, to ensure that mills get sufficient liquidity, the ex­mill sale price has to move up further.

At present, the cost of producing sugar in north India, mainly UP, is around Rs 3,500 a quintal, while the ex­mill sale price is around Rs 3,350 a quintal.

Officials say once ex­mill sugar prices in north India start rising owing to curbs on monthly sales of sugar, mills will be in a better position to clear their dues.

As such, mills in UP are struggling to clear cane dues despite two incentives by the Centre in less than a month. This, sugar mills in the state said, would be easily wiped off in the days to come and mills would also have some liquidity to commence operations in the coming crushing season, starting in the next 100 days.

 Estimated burden on exchequer due to sugarcane package

•  What the official statement said: Rs 70 billion
•  What industry and trade associations claim:
• ·Direct Incentive to farmers @ Rs 5.50 per quintal: Rs 15.40 bn
• ·Cost of creating 3-million tonne sugar buffer: Rs 11.75 bn
• ·Interest-free loans for raising ethanol capacity: Rs 13.32 bn
•  Total: Rs 40.47 bn