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SYNOPTIC VIEW OF ARTICLE
1. No business can survive with negative returns in absolute terms for last three years. It remains unclear whether industry is actually in loss or merely books are reflecting red numbers.
2. With irrational SAP in Uttar Pradesh and commercially unsustainable model for last three years, mills should shut down. But none of that is happening or foreseen.
3. It is business as usual with 25 million tons production in 2013-14 and carry in is about 8 million tons by conservative estimates.
4. Since almost 50% of the allied production of a mill has better profitability than sugar, production can be shifted to collateral items. This may require certain adjustments in data and records.
5. It is the Indian concept of Yukti and not Juggad that is working.
SURPRISINGLY, AILING SUGAR MILLS SURVIVE AND THRIVE
In the new sugar season (SS) of 2013-14, mills, media and analysts have forecast bleak chances of survival of sugar industry, especially in Uttar Pradesh. Arrears of farmers and interest liabilities owed to banks have made headlines. At the same time, production of sugar cane is rising despite unpaid amounts—an incredible situation where farmers continue to grow more even if they are remunerated less than agreed. Can the conclusion be that growers are happy even if they are paid partially (about 70%) of the committed value and still garner profits?
Gur (Jaggery) industry pays much less to farmers for cane than Mills. Any price over and above value settled by Gur/Khandsari/ small scale industry to growers is additional earnings for them. Barring unseen draught conditions, sugarcane is the most profitable crop and requires least effort by virtue of “Ratoon” or “Re-tune” cycle which is extendable up to three crop years.
PERCIEVED LOSSES IN UP SUGAR MILLS
Uttar Pradesh Sugar Mills Association (UPSMA) has run several newspaper advertisements with a plea to save the sugar mills on impending hike in State Advisory Price(SAP) of sugarcane which was Rs 2800/mt ($51) last year ($=Rs55)—the highest anywhere in the world. (Gur Industry paid to farmers Rs1800-2100/mt about $32-$38/mt). In SS 2012-13, sugar traded at about Rs 29/kg in domestic market or $528 /mt at recovery rate of about 9.5%. Average cost of sugar production in UP is Rs 35/kg or $636/mt. Almost $100/mt was loss to the industry in UP. For 7.5million tons of sugar production in this State, straight line loss calculation is about $750 million (Rs 4200 crores) or perhaps more. Part of this loss (about 25%-- as per Crisil report “Prospects of UP sugar industry mills”) may have been recouped by selling ethanol, molasses, press mud, power generated etc. Thus losses are mitigated to Rs 3150 crores (4200*0.75) as an approximation.
When any private industry is driven to the wall by Government’s arbitrary policy prescription, businesses find ways and means to survive. The current scenario represents that paradigm. Sugarcane can be sourced cheaply by managing access to farmers with upfront lump sum payments at a negotiated price. Since almost 50% of the allied output-- particularly molasses-- has better profitability than sugar, more production can be shifted to collaterals items for higher compensation. This may require certain adjustments in data and records.
FULL THROTTLE OUTPUT IN 2013-14
Recent pronouncements by ISMA and the Government confirm that sugar production in SS2013-14 will be around 25 million tons with added carry in of about 8 million tons. Supply side is 33 million tons versus demand of 23 million tons—leading to a surplus of 10 million tons. Domestic prices may plunge further even after accounting 2 million tons for export. Apparent direct losses to the industry, predominantly in UP, and outstanding to growers ought to soar. Interest liability to banks will ascend steeply. Recurrence of last two year is likely to be repeated. Logically, the scene and sense is of commercial unsustainability and therefore mills should shut down. But none of that is happening or foreseen. It is business as usual.
UNVIABLE BUSINESS PROPOSITION
As per rational analysis--if the major stake holders, that is farmers (because they are clamouring for higher SAP) and mills are both losing money—how can sugarcane and sugar production a viable business proposition. And for the last three years if the industry is not profitable from the core business of sugar and yet surviving—it implies either raw material is somehow accessed cheap or allied products production/ sale is over emphasised or both strategies may be pursued simultaneously.
UP mills are pleading the State government to reimburse proposed hike in SAP to growers directly. It amounts to direct subsidy to farmers for vote bank politics—where MSP/SAP is shared by industry and the State Government. Any precedent in UP will create similar demand in other States and negate the principle sugar decontrol notified in April 2013.
Was the persistent noise and pressure to decontrol Indian sugar industry in its existing format a right decision? Centre also played politically by not implementing 70:30 sugarcane price and profitability sharing formula suggested by the Rangrajan Committee.
It remains unclear whether industry is actually in loss or books are reflecting red numbers for aligning them with SAP. No business can survive with negative returns in absolute terms. Rational inference can be that commercial viability may be attained by ways and means which are unlikely to be disclosed openly. Audited reports, these days, cannot be fully relied upon. Red numbers perhaps may assist in extra financial support/relief from the States and for restructuring their liabilities to the bank. That will make industry more profitable directly or indirectly.
Amazing it is that when policymakers/associations are working for fixing SAP; banks are pursuing outstanding debt; arrears to farmers is posed as a major liability and industry appears to be crisis ridden, the mills are meeting the challenge by application of their business acumen for ensuring better returns in absolute terms. It is the Indian concept of Yukti and not Juggad that is working.
ECONOMIC TIMES 11TH NOV 2013..