Nov. 21 (Bloomberg) -- Sugar mills in India’s biggest growing region will extend a shutdown to curb losses after the government retained cane prices at a record high, potentially curbing output in the world’s second-largest producer.
Factories will remain shut as the mills are unable to pay growers the price set by the state, Uttar Pradesh Sugar Mills Association President C.B. Patodia said yesterday in a phone interview in New Delhi. Producers can only pay as much as 225 rupees ($3.60) per 100 kilograms (220 pounds), compared with the state-set price of 280 rupees, he said.
The deadlock may delay cane crushing and reduce output from the 25 million metric-ton Indian crop estimated by the Indian Sugar Mills Association, Director General Abinash Verma said yesterday in New Delhi. Bajaj Hindusthan Ltd., Dhampur Sugar Mills Ltd., Triveni Engineering & Industries Ltd. and other producers in Uttar Pradesh, the nation’s biggest cane grower, will stop crushing until the government fixed a viable cane price, the companies said in separate exchange filings.
“Indian mills are caught between the rock and hard place,” Michael McDougall, head of Brazil desk at Newedge Group in New York, said in a phone interview yesterday. “It makes no financial sense for the mills to carry out operations. International prices are not helping either.”
Indian 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. A smaller Indian crop may reduce a global glut, potentially boosting futures traded in New York that have plunged 51 percent from the 30-year high reached in February 2011.
Local prices have tumbled to almost a 17-month low, prompting factories in the top two states accounting for 62 percent of the nation’s output to sell below cost. Mills in Uttar Pradesh owed farmers as much as 24 billion rupees for cane supplied in the last season and that figure may rise to as much as 130 billion rupees by April if they paid 280 rupees in 2013-2014, Verma said.
Sugar mills in Uttar Pradesh began to announce on Nov. 19 that they were shutting down over the cane price.
Bajaj, India’s biggest producer, reported a record loss in the three months to Sept. 30, while Balrampur Chini Mills Ltd., the second-largest, posted its second straight quarterly loss.
It cost mills an average of 36 rupees to produce 1 kilogram of sugar in Uttar Pradesh, while their average selling price at the factory gate averaged about 31 rupees in 2012-2013, according to the Indian Sugar Mills Association.
Shares of sugar producers rallied for a second day in Mumbai on speculation the government may take steps to stem losses at mills and boost domestic prices. Bajaj climbed as much as 3.7 percent 15.50 rupees, Dhampur jumped as much as 5.8 percent to 35.85 rupees, the highest price since Aug. 1, Triveni rose as much as 3.8 percent to 15.15 rupees and Balrampur advanced as much as 2.6 percent to 50.25 rupees.
The federal government expects the deadlock to end in the next eight to 10 days and it is exploring four to five options, Agriculture Minister Sharad Pawar told reporters in New Delhi yesterday after the close of stock trading. He didn’t specify what options were being considered.
“By keeping the same price for this year, the profit margin of cane farmers will be either reduced or become negative,” said Sudhir Panwar, president of growers group Kisan Jagriti Sangathan in Lucknow. “Farmers in Uttar Pradesh will cut cane planting and switch to other crops like basmati rice next year. India will be in a sugar cycle again that warrants imports after every two years of surpluses.”
Brazil is the world’s largest sugar producer.
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