The sugar millers are not very enthusiastic about the increase in demand for sugar from the soft drink and ice cream companies with the onset of summer. The millers are claiming that there is no actual realisation of profits from these segments.
A source in the sugar industry, when probed about the profits that the sugar millers make during the season, informed FnB News.
The source informed that the demand for sugar increases by almost 5% in the season, however, mills still run into losses and that even covering the cost of production becomes difficult.
No separate pricing policy for bulk buyers is a major bone of contention for the industry. The bulk buyers either have a separate contract with mills for purchasing sugar or their dealers float tenders responding to the expression of interest issued by the millers.
If they have a separate contract with the mills they may even get a discount of Rs 10-15 on every 100 kg of sugar they buy. If purchased through the dealers they are charged at the open market price as applicable to all.
According to the sugar policy in India, 25% of the total sugar produced is assigned for the levy quota and the rest can be sold in the open market. However, there are no set strategies to identify the bulk buyers who purchase sugar for industry use from the open market thus leaving the industry with no option but to impose the same price as that for household consumption.
“A strategy whereby bulk buyers are charged more for the sugar from the millers is needed is urgently needed, however, it is difficult to identify these buyers who normally purchase sugar by floating in tenders through dealers,” said Ajit Chowgule, MD, Maharashtra State Sugar Factories Federation Ltd. These buyers comprising industries and small business segment almost constitute 62% of free sale sugar.
His views are echoed by Abhinash Verma, director-general, Indian Sugar Mills Association. He said that even if the prices of sugar are bought down the bulk buyers, particularly the cola companies do not pass on the benefit to the consumers. The soft drink companies have not reduced their prices even when the sugar prices were almost flat from last year to this year. Thus the benefit has not been transferred to the consumers and the millers too are in loss as they are unable to cover their cost of production (currently the ex-mill price is Rs 26.5).The millers lose around Rs 2-3 behind per kg of sugar.
“The sugar mills must be able to cover their production cost and gain return on capital expenses,” he said.
According to Verma, the price of sugar for free sale quota is driven by demand and supply. “The mills have no control over the sugar pricing in the open market,” he said. India produces around 248 lakh tonnes of sugar but the demand is around 228 lakh tonnes as demand supersedes supply the mills run into constant losses.
Also, sugar being an essential commodity, the prices are constantly monitored by the ministry of consumer affairs, food and public distribution.
Verma said that on domestic front the industry is incurring loss year-on-year so export is the only channel to keep the cash flowing. The industry, however, wants the government to remove the cap ceiling on export.
The EGoM (Empowered Group of Ministers) has currently given clearance to 10 lakh tonnes of sugar which is calculated to bring cash flow of Rs 3,000 crore to this loss-making industry.
This year the government permitted export of 30 lakh tonnes of sugar but the millers are seeking for another 10 lakh tonnes before the Brazilian sugar enters the market towards April end. Once the Brazilian sugar enters the market the prices would cut down drastically.
“The industry has been asking for removal of the cap ceiling on exports. There should be no cap on quantity. The government should make an estimate of the surplus in the beginning of the season and accordingly permit export. With the on and off delay in decision-making the industry misses on an opportunity in the international market,” said Abhinash Verma, director-general of Indian Sugar Mills Association.
Notably, last year the industry bore the brunt by losing approximately Rs 1,500 crore on account of delay in decision-making by the government to allow export last year.
Delay in lifting the levy sugar by the government is another driving factor for the losses as this quota is sold at 65% lower than the open market price.
For example, in Maharashtra around 4.93 lakh tonnes sugar under the levy quota is still not lifted by the government. This sugar has been accumulated for years together. Sugar being a hygroscopic product is prone to spoilage. The Maharashtra State Sugar Factories Federation Ltd has been pleading the government to build mechanism for early lifting of sugar. A recent judgement by a bench of the Patna High Court on a petition filed by a sugar mill stated that if the government fails to lift sugar within three months the same should be allowed to be sold in the open market. The industry has hailed this judgement.
“The ISMA has been asking the government to not have a system of levy quota. It should buy sugar directly from the open market. It can subsidise the poor after purchase,” said Verma.
He further added that the higher sugarcane price fixed by the government and the lower returns from the buyers calls for recurrent losses. He opined that decontrolling the industry was an apt solution for converting this industry into a profit-making industry.
Meanwhile, the government is likely to issue a notification regarding the change from monthly release mechanism to quarterly in the coming week.
