Business Today

A Crushing Blow

A delayed cane crushing season in Uttar Pradesh is hurting both the industry and farmers in the country's second-biggest sugar producing state.
Ajay Modi | Print Edition: Dec 22, 2013
A Crushing Blow
Mess in the mills: In a February 2012 picture, cane farmers wait outside a Bajaj Hindusthan mill in Shamli district of Uttar Pradesh. PHOTO: Aditya Kapoor

After onions and tomatoes, consumers may have to brace for higher sugar prices. Sugar output in Uttar Pradesh, the country's second-biggest producer, is likely to fall as most mills are staying shut due to a dispute with the state government over the price of cane they pay farmers.

*Price for general variety that accounts for bulk of the sugarcane
Private-sector sugar mills want the state government to cut the cane price from Rs 280 per quintal to Rs 225. Sugar mills in Uttar Pradesh, which accounts for 30 per cent of the country's output, usually begin crushing operations by mid-November but have not done so this year. On November 19, Bajaj Hindusthan and Balrampur Chini informed the stock exchanges of their decision to suspend crushing operations until the dispute was resolved. The state government's "unreasonable and unaffordable" price for cane caused huge losses to the mills and forced them to keep their factories shut, they said. The industry has been pressing for a lower cane price in line with the recommendations of a committee headed by C. Rangarajan, the top economic adviser to Prime Minister Manmohan Singh, which submitted a price formula in its report last October. The formula suggests the cane price be fixed at 70 per cent of a mill's realisation from sugar, bagasse and molasses or 75 per cent of the price realised from sugar alone. The industry arrived at a cane price of Rs 225 per quintal through this formula.

If the state government makes up for this gap of Rs 55, it will have to fork out Rs 4,000 crore as subsidy, according to industry estimates. Union Food Minister K.V. Thomas says the central government was open to helping the sugar mills. "The delay affects the industry as well as farmers," he says.

Sugarcane pricing has become a political issue as it affects millions of farmers. Successive state governments have largely ignored the economic rationale and steadily raised prices year after year. Mills in Uttar Pradesh purchased cane worth Rs 22,000 crore from farmers last year at Rs 280 a quintal. But they still owe Rs 2,300 crore to farmers as sugar prices remain low because of a surplus for three years. Things do not look different this year either. Export prospects are also bleak due to a glut in the international market.

Problems in the state's sugarcane economy will impact sales of several products such as autos, tractors, consumer durables, cement and steel. Mills will likely face difficulties in making payments to farmers this season as well. According to the Indian Sugar Mills Association (ISMA), mills in the state suffered a loss of Rs 3,000 crore in the sugar season that ended September 30. The lobby group estimates the loss will widen to Rs 5,000 crore this season if mills pay the state-mandated price.

Talks between Uttar Pradesh Chief Minister Akhilesh Yadav and the mills led by Bajaj Hindusthan Vice Chairman Kushagra Bajaj and Balrampur Chini Managing Director Vivek Saraogi to salvage the situation have fallen through. While talks were on, the government filed cases against promoters of Triveni Engineering and Dhampur Sugar to put pressure on the mills. Rahul Bhatnagar, Principal Secretary in charge of sugar industries and cane in Uttar Pradesh, says the state government has given several incentives to the mills that work out to seven rupees per quintal of cane. "If they don't run the mills, we will take all possible actions."

But the sugar industry has dug in its heels. "We are ready to face any action, including arrest, but we would not start operations under current circumstances," says Abinash Verma, Director General of ISMA. Verma adds that banks have also stopped giving loans to the sugar industry, multiplying the mills' problems.

The cane price dispute could also affect sowing of wheat in Uttar Pradesh, the country's biggest producer of the grain. "Farmers need to clear the fields to sow wheat," says an industry executive, who does not want to be named. "They would want to cut sugarcane even before the mills give them a schedule to supply. It will affect the mills as recovery will be lower." Recovery refers to the amount of sugar that can be produced from a given quantity of cane. It could be lower due to a time lag between cutting and crushing cane.

Another industry executive, who also does not want to be identified, says the delay in crushing is hurting farmers as well. "Today, price is not their priority. They wish to start cane supplies as soon as possible," the executive says. "They have financial obligations and expenses like everyone else."

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