Home / Companies / Balrampur Chini reports loss; sugar impasse continues in UP

New Delhi: Balrampur Chini Mills Ltd, India’s second largest sugar producer, reported a first-quarter loss of 3.96 crore because of high production costs and low realizations.

Losses to the tune of 60.13 crore from the sugar business, however, were offset by profit from other operations, including co-generation ( 56.14 crore) and distillery ( 36.39 crore). In the corresponding period last year, the company had reported a loss of 9.77 crore.

“The losses from the sugar segment are due to high costs of production. The Uttar Pradesh government fixes cane prices arbitrarily at a high level without considering the market price of sugar," said Kishor Shah, chief financial officer of the company.

The financial results of the company come at a time when the sugar industry in Uttar Pradesh is at loggerheads with the state government. According to the Uttar Pradesh Sugar Mills Association (UPSMA), the state’s sugar industry has been reporting losses for the past four years and banks and financial institutions are unwilling to extend loans. UP is the largest producer of sugarcane in the country and the second largest producer of sugar.

“The state government of UP has been declaring unrealistic prices at which industries have to procure cane from farmers. As a result, the cost of production of sugar in UP is higher than in Maharashtra and Karnataka," said Deepak Guptara, secretary, UPSMA.

In the last four years, sugarcane prices have risen 70% while sugar prices went up by only 7%, according to UPSMA. For cane pricing, the central government announces a fair and remunerative price (FRP), while the state government announces a state advised price (SAP). For the 2013-14 crushing season, the FRP was 210 per quintal while the SAP was 280 per quintal.

“The divergence between FRP and SAP has reached an extent where the industry is not viable anymore. It’s time to revise the cane price formula and link it to sugar prices," Guptara added.

According to UPSMA’s calculations, the cost of production of sugar in UP is 37 per kilo, the highest in the country, while the price realized at the mill gate is 31.5 per kilo, resulting in a loss of 5.50 per kilo.

Uttar Pradesh accounts for 30% of the sugar production in the country—about 4 million farmers grow sugarcane in the state. Currently, the industry owes 5,180 crore to the state’s farmers in cane price arrears.

On 4 August, UPSMA gave notice to the state government stating mills will suspend crushing operations for 2014-15, scheduled to begin in October. “The UP government needs to enact a law, similar to Maharashtra or the Rangarajan Committee recommendations, and adopt the ‘linkage formula’ to ensure automatic determination of cane price in relation to revenue realized from sugar and primary by-products of sugarcane, effective from the next sugar season 2014-15," said a statement from UPSMA.

“UP is the only major state which fixes SAP. Sugar mills in Maharashtra pay an average price of 255 per quintal to the farmer on account of higher recovery rate of sugar from sugarcane grown in the state. In UP, where recovery rate of sugar from cane is lower than in Maharashtra, a SAP of 280 per quintal is unrealistic," said Abinash Verma, director general of the Indian Sugar Mills Association.

“To earn political mileage, successive state governments in UP have increased SAP. Now the debt situation of the mills has reached a precarious situation. Companies owe over 40,000 crore to financial institutions. The government has to step in to reschedule debt and fix the structural issue of linking cane prices to sugar prices," said Phani Sekhar, fund manager at Angel Broking.

“But realistically, what we can expect is another band-aid solution like last year where companies will be threatened and coerced into resuming operations," said Sekhar.

UPSMA alleges that the state government has been using coercive methods. “Sugar has been seized and godowns locked, making it even more difficult to generate cash to clear the cane price arrears. FIRs (first information reports) have been filed yet again against senior management as well as against individual promoters, taking the total to over 300, including the past FIRs," reads the statement issued by UPSMA on 4 August.

Farmers unions, however, contradict industry opinion on grounds of increasing costs of cultivation and farmers’ inability to repay loans due to unpaid arrears from the sale of cane. “Sugar mills got tax relief; they were freed up from supplying the levy sugar to the government last year. Sugar mills in Haryana have no dues to farmers even though the 285 per quintal SAP is higher than in UP. UPSMA has been raising the price issue for the past two years as they don’t want the state to revise cane prices," said Dharmendra Malik, UP state spokesman of Bhartiya Kisan Union.

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