Starch makers in a fix over high input cost, low demand

Maize prices up 15% since October on falling acreage, spurt in export demand.

Starch producers are facing a double whammy. On the one hand, input cost — that is, the prices of maize — is rising fast on falling acreage and lower rabi crop estimates. On the other, prices of starch (the finished product) are below the cost of production. In fact, even glucose (a byproduct) is selling low, forcing starch companies to operate at a lower production capacity of 70-80 per cent.

Maize prices went up by 10 per cent in a fortnight due to a spurt in export demand, while prices are almost 15 per cent higher since early October, as acreage reports were showing a falling trend. The rabi sowing last year was 669,000 hectares, which is 614,000 ha this season. In a normal year, rabi maize used to be a million hectares. This rabi season, the crop is expected to be lower, though official estimates have yet to come out. In kharif, the crop was estimated at 15.7-15.8 million tonnes. The rabi crop is generally 20 per cent of the total, but this season it is estimated to be less than three mt.

 

As a result, maize prices shot up 10 per cent in the last two weeks — from Rs 1,100 per quintal to Rs 1,225 at present. Prices are higher compared to last December by 15 per cent. Maize is used by poultries as feed, while industries make starch and the rest is exported. Exports were 2.8 mt last year. This financial year, exports are expected to cross three mt.

“Exporters are getting good returns,” notes a multinational trader. “Their demand has resulted in an increase in the prices of maize in the open market.”

While exporters make money, starch producers are losing money. The All India Starch Manufacturers Association says units are running at 70-80 per cent of capacities. “In the last three quarters, they have not done well financially,” says Vishal Majithia, president of the association. “The whole year will be like that.”

The cost of production for starch at the current price of maize is Rs 22 per kg, while they have to sell it at discounted prices, as an ongoing slowdown has affected demand. The textile sector is the biggest user of starch. Even glucose, used by confectionery makers as a sweetener, is trading at Rs 21 a kg. A couple of weeks ago, the price had even dipped to Rs 19.50 a kg.

Starch makers traditionally used to sign annual supply contracts for glucose in January. However, according to a starch maker, this season they want prices higher than those prevailing. Else, they wish to enter only quarterly contracts. Negotiations that generally get over by end of December are yet to happen on a serious scale.