UP sugar mills lose markets to Maharashtra & Karnataka

Cost of production a major factor, ISMA bags for UP govt help for mills' survival

Crushing units in Uttar Pradesh (UP) are fast losing markets to mills in Maharashtra and Karnataka. Delhi, the largest consumption centre for UP sugar mills, is partly being controlled by Maharashtra mills.

Abinash Verma, director general of the Indian Sugar Mills Association (Isma), feels owing to low production costs, sugar mills in Maharashtra are able to transport the commodity across 1,450 km and compete with UP sugar mills.

About half the raw material consumed by mills in Maharashtra and Karnataka is linked with the realisation of mills. According to the existing system, farmers in Maharashtra and Karnataka get the first instalment for their cane in the beginning of the season, and the second when the standing crop is harvested. Sugar mills release the first instalment smoothly, but they assess crop output and potential of a recovery before releasing the second instalment. This keeps mills in an advantageous position for cane payments. Cane payments for farmers in Maharashtra and Karnataka are linked with the fair and remunerative price (FRP) announced by the Centre. It is also linked to sugar recovery.

In contrast, UP sugar mills have to pay cane farmers according to the state advised price (SAP) announced by the state government, which is substantially higher than the FRP. Last year, the UP government announced SAP at Rs 280 a quintal, against the Rs 210-a-quintal FRP determined by the Centre. The SAP rate is independent of the recovery of sugar.

Against an average 11.5 per cent of recovery for sugar mills in Maharashtra and Karnataka, UP sugar mills have recorded a recovery of 9.5 per cent. Therefore, beyond the high cost of the raw material, recovery is substantially higher for mills in Maharashtra and Karnataka. Consequently, the average cost of sugar production works out to Rs 3,600 a quintal for UP mills, against Rs 3,000-3,100 a quintal for mills in Maharashtra and Karnataka.

“Even with Rs 100-150 a quintal of transportation cost, Maharashtra and Karnataka mills not only compete, but also manage to sell at Rs 3,400 a quintal in the Delhi market,” said Verma.

“Certainly, we are losing market share rapidly to mills in Maharashtra and Karnataka due to their lower cost of production. The only way forward for survival is to link cane prices with sugar realisation,” said Vivek Saraogi, managing director of Balrampur Chini.

UP sugar mills have lost about Rs 3,500 crore this crushing season, the third year of continuous loss.

“A two per cent decline in recovery makes a huge difference in realisation,” said Sanjay Tapriya, chief financial official of Simbhaoli Sugars Ltd.

“We have urged the (UP) government to share the interest on working capital raised through banks at an estimated Rs 2,500 crore annually. At 12 per cent interest, the annual burden on the government would be about Rs 300 crore, lower than the Rs 400-crore annual state budgetary allocation for cooperative sugar mills. Through this, both private and cooperative sugar mills would benefit. Otherwise, survival for UP sugar mills would be difficult,” said Verma.