Sugar-Pricing Plan Seen Reviving Nation’s Mills: Corporate India

Sugar mills in India, the world’s largest grower after Brazil, are banking on a proposal to link the price of cane to the sweetener to reverse record losses.

An accord to tie cane prices to sugar rates from the 2014-15 season would be “historic” and encourage banks to extend credit to factories in Uttar Pradesh, India’s biggest cane producer, said Abinash Verma, director general of the Indian Sugar Mills Association. Mills agreed to resume output on Dec. 1 after a two-week protest shutdown when the Uttar Pradesh government said it would consider the pricing plan.

“We are starting the mills with the expectation that there will be viability next season,” Vivek Saraogi, managing director of Balrampur Chini Mills Ltd., said in a phone interview. “At present this is a loss-making proposition. We hope banks will understand there will be a scientific methodology in 2014-15 for fixing of cane price.”

Producers such as Balrampur Chini will return to profit if the plan is implemented after reporting record losses, said Rohit Agarwal, a Mumbai-based analyst with SPA Securities Ltd. The proposed pricing mechanism will help mills reduce costs and boost exports, potentially lowering raw sugar futures in New York, which are heading for the longest slump since 1992.

A panel headed by Chakravarthy Rangarajan, chief of the Prime Minister’s Economic Advisory Council, this year recommended linking cane prices to 70 percent of the value of sugar and by-products, while scrapping state controls on sale of sugar in the local market.

Government ‘Assurance’

The Uttar Pradesh administration has set up its own panel headed by the state’s chief secretary to “look at all the different modalities for fixing of cane price,” and the Rangarajan committee’s suggestions, said Rahul Bhatnagar, principal secretary for sugar in Uttar Pradesh. Any change will come into effect from the next crushing season, he said.

The state government’s “assurance” prompted banks to resume lending to mills this year, ISMA’s Verma said.

“There should be a national policy on pricing of sugar cane,” M. Srinivaasan, joint managing director of Sakthi Sugars Ltd. and ISMA president, said in a phone interview yesterday. “For that to happen, the central government has to stabilize the sugar prices at a higher level.”

Balrampur Chini reported a record loss of 1.22 billion rupees ($19.6 million) in the three months ended Sept. 30, while Bajaj Hindusthan Ltd., India’s biggest sugar producer, posted a 5.1 billion rupee loss in the quarter.

Indefinite Shutdown

Balrampur Chini, which has fallen 27 percent in the past year, dropped 1.8 percent to 45.50 rupees in Mumbai today. Shree Renuka Sugars Ltd. rose 0.9 percent to 21.40 rupees, while Bajaj Hindusthan retreated 1.1 percent to 14.15 rupees.

Mills in Uttar Pradesh agreed on Dec. 1 to start crushing cane again and pay farmers 269 rupees per 100 kilograms (220 pounds) of the crop after the state government said it will waive 11 rupees of taxes, according to the Uttar Pradesh Sugar Mills Association. The millers’ group had initially said that they could only pay 225 rupees for cane as per the current sugar prices, compared with the state-set rate of 280 rupees.

The mills had said the suspension was necessary to prevent their losses from widening. The factories are squeezed by a rule that allows states to fix cane rates to help about 50 million farmers, a powerful voting bloc, to earn more. General elections in India must be held by May of 2014.

Prices Tumble

The government’s policy of fixing crop prices for farmers may keep investors including Manish Sonthalia, a Mumbai-based money manager at Motilal Oswal Asset Management Co., away from sugar stocks.

“Where in the world are the raw material and the end product prices not in sync with each other,” said Sonthalia, who oversees about $200 million in equities. “Even if the policy is changed, we would not like to buy sugar shares.”

Sugar prices in India have tumbled 16 percent in the past year, prompting factories in the two top producing states of Maharashtra and Uttar Pradesh to sell below cost. The two states account for 62 percent of Indian output. Raw sugar in New York has fallen 14 percent this year. Futures for March delivery advanced 0.4 percent to 16.87 cents a pound on ICE Futures U.S. in New York today.

Sugar Inventories

It cost mills in India an average 36 rupees to produce 1 kilogram of sugar in Uttar Pradesh, while the mean selling price at the factory gate was about 31 rupees in 2012-2013, according to ISMA.

Mills in Uttar Pradesh owed farmers as much as 24 billion rupees for cane supplied last season and that figure may jump if sugar prices don’t improve, ISMA’s Verma said.

Inventories in India surged to a five-year high of 8.85 million tons at the start of this season, enough to meet demand for four months, according to the mills’ association. The reserve may expand to 10 million tons by the close of the season on Sept. 30, 2014 if the nation fails to export any sugar, it estimates.

“If recommendations of Rangarajan committee are adopted, ultimately the mills will earn a particular set of margins next year and they will gain from it,” SPA Securities’ Agarwal said. “At current sugar prices, they will keep making losses.”

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