Oct. 14 (Bloomberg) -- Sugar mills in India, the world’s biggest producer after Brazil, are facing wider losses as the government prods them to pay more for cane in a bid to woo farmers before elections.
A glut of the sweetener has caused prices to slide to a 15-month low, prompting factories in the top two states accounting for 65 percent of the nation’s output to sell below cost, said Abinash Verma, director general of the Indian Sugar Mills Association. Losses at mills may mount if cane prices are raised for the crushing season starting this month, he said.
Producers are reeling under a rule that allows states to fix cane rates to help about 50 million farmers, a powerful voting bloc, earn more. Bajaj Hindusthan Ltd., the biggest producer, reported a record loss in the three months to June 30, while Balrampur Chini Mills Ltd. posted its first loss in four quarters. A shortage of working capital may force mills to delay crushing in Uttar Pradesh state, the nation’s biggest grower, Verma said.
“There’s cash loss in running the mills and I don’t have the ability to operate,” said Vivek Saraogi, managing director of Balrampur Chini, said in a phone interview. “Unreasonably high cane price, falling sugar prices, higher stocks with prospects of a large production owing to good monsoon have led all bankers to withdraw loan limits to Uttar Pradesh mills.”
The operating margin of Bajaj Hindusthan narrowed to 1.75 percent in the quarter ended June 30 from 2.59 percent a year earlier, according to data compiled by Bloomberg. The gauge of profitability fell for a second straight quarter in the three-month period to 3.28 percent at Balrampur, data showed.
“Higher cane price is already eroding margins and if this continues it will further erode margins and mills which can’t start crushing will be in trouble,” said Sanjay Manyal, an analyst with ICICIdirect.com. “If they don’t get working capital loans from the banks how will they start crushing.”
Sugar mills in Uttar Pradesh spent an average 36 rupees to make 1 kilogram of sugar, while prices at the factory gate averaged about 31 rupees in 2012-2013, according to the association. Factories in Maharashtra, the second-biggest cane producer, are selling at 28 rupees a kilogram, compared with costs of about 31 rupees, it said.
At current local prices, mills in Uttar Pradesh can only pay as high as 225 rupees per 100 kilograms (220 pounds) for cane, about 20 percent less than the state-set price for the 2012-2013 season, Verma said. Mills in the northern state owe farmers as much as 25 billion rupees, he said.
“If this kind of situation continues, more than half of the sugar companies in Uttar Pradesh will not be able to run mills,” said Verma. “Banks have told some mills that they will not be able to extend working-capital loans.”
Cane costs will climb this year after the federal government increased the benchmark fair and remunerative price 24 percent. Some farmers in Uttar Pradesh want mills to pay 327 rupees per 100 kilograms for cane this season, compared with 280 rupees a year earlier to meet rising costs of cultivation, said Sudhir Panwar, president of Kisan Jagriti Sangathan.
“I don’t think the government in Uttar Pradesh will lower the price as farmers are a large vote base,” said Prerana Desai, head of research at Kotak Commodity Services Ltd. “The government may compensate mills financially to make up for the losses and that can be the only bargaining point. There can’t be any reduction in cane price.”
In July, a Times Now and C- voter survey found that the Bharatiya Janata Party’s opposition alliance would top Prime Minister Manmohan Singh’s ruling coalition in next year’s election, with neither winning a majority. Singh’s government has raised prices of crops from rice to wheat to soybeans to bolster farmer incomes.
India should consider linking cane prices to 70 percent of the value of sugar and by-products, according to a government panel that recommended scrapping of state controls on sale of sugar by mills in the local market.
Mills in Maharashtra are yet to decide on cane prices for 2013-2014 season, said Sanjeev Babar, managing director of the Maharashtra State Cooperative Sugar Factories Federation Ltd. Producers in Karnataka have been asked by the government to pay 240 rupees per 100 kilograms as the first tranche to growers, compared with final price of 240 rupees a year earlier, the association said.
Production may total 25 million tons this season, compared with 25.1 million tons in 2012-2013, the association estimates. Stockpiles will surge to 10 million tons by the end of 2013-2014 if the nation fails to export any sugar, it estimates. Demand will total 23.5 million tons next year, it said.
Bajaj Hindusthan, which has tumbled 50 percent this year, closed at 12.65 rupees on Oct. 11, while Balrampur ended at 43.60 rupees, down 12 percent this year.
“We are not recommending sugar companies’ stocks to anyone at the moment until there is some clarity on the cane pricing issue,” said Manyal at ICICIdirect.com. “If the state governments continue to increase the price of cane because of their political reasons then obviously the industry will not be able to function. It will basically make it unviable for them to make sugar.”
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