A steady decline in sugar price has nullified some of the benefits offered by the government to help mills clear burgeoning cane dues and improve liquidity in the value chain.
Sugar prices have fallen three per cent over the past two weeks, since the government announced the highest ever monthly quota release of 2.45 million tonnes for March. For January and February, however, the Union Ministry of Food had allocated sugar quotas of 1.85 million tonnes and 2.1 million tonnes respectively.
The sharp increase in the monthly quota has spiked spot sugar supply and impacted prices sharply. While the government has been issuing the monthly quota release order since June 2018, the quantity of free sale quota is the highest ever. Consequently, the price of the commoditu has declined by one rupee a kg in the spot market.
“A very high monthly sugar sale quota fixed for March 2019 has reduced sugar prices by over one rupee per 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).
Despite this situation, four sugar stocks, namely Dhampur Sugar Mills, Dalmia Bharat Sugar & Industries, Balrampur Chini Mills and Triveni Engineering & Industries, hit 52-week highs on the Bombay Stock Exchange on Wednesday.
In the spot Vashi wholesale market near Mumbai, sugar M variety shed one rupee to quote at Rs 32.80 a kg. The decline, however, can be attributed to overall weak sentiment due to abundance of supply in the market.
The Union government has offered a number of incentives to bail out sugar mills from economic crisis. Firstly, it raised the minimum selling price by Rs 2 to Rs 31 a kg in February, in order to add Rs 5,000 crore to mills' liquidity across the entire sugar value chain on existing stocks of nearly 17 million tonnes and additional production forecast of 7 million tonnes.
Madan Sabnavis, Chief Economist, Care Ratings, however, estimates the MSP hike to bring down cane arrears by some Rs 3,400 crore for sugar season 2018-19 assuming the hike of Rs 2 is used to settle cane arrears.
Secondly, the Cabinet Committee on Economic Affairs (CCEA) approved soft loans of Rs 7,900–10,540 crore for clearance of cane dues and to improve liquidity. Under the scheme, the government will bear the interest subvention cost of between 7-10 per cent to the extent of Rs 553 crore to Rs 1,054 crore for one year. The govenrment, however, clarified that this soft loan would be available only for mills that 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 of Rs 20,159 croore for the period between October 1, 2018 and February 22, 2019. Such huge arrears are historic and haven't been recorded in the past in February. The ministry hopes the soft loan and MSP hike would help clear cane arrears faster.
In a surprise move, sugar mills have cumulatively offered to supply about 510 million litres of ethanol produced from B heavy molasses and sugarcane juice. The move is expected to reduce sugar production by around 0.5 million tonnes. Till February 28, mills supplied 120 million litres of ethanol from B heavy molasses/cane juice, and already reduced India’s sugar output by 0.1 million tonnes in the current season.
Apex industry body, ISMA reported a five per cent increase in production to 24.77 million tonnes by the end of February 2019, from 23.18 million tonnes a year ago. While sugar production in Maharashtra surged to 9.21 million tonnes between October 2018 and February 2019, from 8.45 million tonnes a year ago, that in Uttar Pradesh declined to 7.32 million tonnes from 7.36 million tonnes.