According to market sources, a lot of trade took place ahead of the `2 a kg increase in the MSP to `31 a kg, resulting in a build-up of inventory.
Despite depressed sugar prices, the government has for the last few months kept the monthly quota for mandatory sales high for the mills. For March, the sales quota has been fixed at 24.5 lakh tonne, up 17% over the level in February. This has forced millers to sell the sweetener on credit, if not at a discount from the government-set minimum ex-mill sugar price, to the traders.
Given that the minimum ex-mill sugar price itself hasn’t fully bridged the gap between the cost and earnings of mills due to the (high) cane prices mandated by the Centre and state governments, selling at steeper losses could trigger a downward spiral of the market prices of sugar. This could further undermine the mills’ ability to clear the cane arrears, a situation that is clearly not what the government wants ahead of the elections.
“The intention behind announcing a high monthly quota of 24.5 lakh tonne for March 2019 may be to allow mills to get better revenue and cash flows from more sales of sugar. However, if the market requires around 20-21 lakh tonne, mainly because there were extra quotas in the previous two months, there is no way that the mills would be able to sell more than what the market could want,” Indian Sugar Mills’ Association (Isma) president
Rohit Pawar wrote to the secretary, department of food and public distribution.
Arguing that the move would depress ex-mill sugar prices and “the total net realisation of revenue from the same quantum of sale may turn out to be less”, he added, “once the barrier of the minimum ex-mill sugar price of `31 per kg (announced on February 15) is broken, the prices may then see a free fall to uncomfortable levels”.
ISMA has urged the government to reduce the quota for March 2019 to 20 lakh tonnes. If for any reason the reduction is not possible then the time period to sell the 24.5 lakh tonnes could be extended beyond March 31, 2019, to April 10, 2019, the industry body said. “Alternatively, the government may immediately announce the quota for the two months for a total for 40 lakh tonnes.” The National Federation of Cooperative Millers and Maharashtra mills are also planning to approach the Centre this week with similar demands.
The long-standing problem for the sugar industry has been the high cost of cane mandated by the Centre — states like Uttar Pradesh add to the Centre’s fair and remunerative price (FRP) to arrive at their state advised price (SAP) — and the obligation on them to buy all the cane grown in the area allocated to them. Between FY10 and FY19, the FRP rose a little over two times while the ex-mill price rose by a mere 2%. Also, while cane payments have to be made within a stipulated period, sugar sales practically take longer, adding to the mills’ woes.
Sanjay Khatal, MD, Maharashtra Federation of Cooperative Sugar Factories, said that after the announcement of the high quotas, there is little demand in the market for sugar at present. “On one hand, the Centre is announcing several sops (interest subvention on loans to clear cane arrears and to expand ethanol capacity) to millers and on the other hand it is weakening the sentiments by announcing high quotas. This would send millers with a begging bowl to the Centre seeking more sops…,” Khatal said.
Maharashtra’s sugar stocks, including old and new, is around 115 lakh tonne at present. Millers have not been able to meet 75-80% of the February sales quota of 8 lakh tonne for the state. Instead, traders who had earlier purchased sugar at the previous price of `29 per kg are now bringing the sweetener into the open market. According to market sources, a lot of trade took place ahead of the `2 a kg increase in the MSP to `31 a kg, resulting in a build-up of inventory. Cane arrears, on the other hand, have reached `20,159 crore as on February 22, 2019.