Global crisis may not affect sugar mills' working capital needs

The current global financial crisis is unlikely to affect the working capital requirements of sugar companies on the basis of the existing state advised price (SAP) of sugarcane.

However, any upward revision in the SAP, as anticipated by the industry, may lower their borrowing capacity and hence the mills could face a shortage of working capital requirements.

A school of thought, however, was apprehensive that mills may find it difficult to borrow from banks or financial institutions on the weakening sentiments in commodities. Mills may not get a proper valuation for their stocks and therefore, their operations may be affected, an industry official said.

An official with the Union agriculture ministry denied there was any possibility of revising the statutory minimum price (SMP), but an upward revision in SAP cannot be ruled out, the official added.

As a normal practice, sugar manufacturers approach banks about a month ahead of commencing crushing operations. Since, crushing of cane is set to begin early next month, mills are awaiting Centre’s decisions, if any, on approaching banks for funds.

Almost all sectors in India are facing the effects of the global financial crisis and therefore, chances are that the cash-starved sugar industry reeling under higher inventories, may face a shortage of working capital during the crushing season 2008-09. As the sugar industry operates only for 5-6 months every year, the entire machinery needs a lot of maintenance in addition to funds required for boilers.

Most importantly, sugar mills heaved a sigh of relief this year on reports of the low cane output after three consecutive years of low prices. They expect the prices to rise due to a lower output. According to industry sources, they also hold about 10 million tonnes as inventories on low price last year. But, the industry sees a recovery from last year’s loss this year on an estimated decline in output.

SAP is set by the state governments and it is often higher than the SMP fixed \by the Centre. Sugar mills pay the cane prices to farmers as per SAP in the state.

This is significant as the sugarcane availability in the country is estimated to decline 18-20 per cent with Maharashtra taking the lead with about 35 per cent (to 50 million tonnes from 76.17 million tonnes) on a huge diversion of cane area to pulses and oilseeds.

Also, Uttar Pradesh is likely to witness a 25 per cent fall in the availability of cane for crushing, at 120 million tonnes during the crushing season 2008-09 as against 160 million tonnes in the previous year. The total acreage of sugarcane in UP has been estimated at 2.5 million. Banks finance up to 85 per cent of the current market value of the stock while the remaining 15 per cent is kept as margins.