Measures to provide limited respite; profitability to remain under pressure

Event

On June 6, 2018, the Cabinet approved the following measures, totalling Rs 7,000 crore, to address the liquidity issues of sugar mills and enable payment of accumulated arrears to farmers:

• The minimum domestic selling price of white / refined sugar to be fixed at the mill gate, initially at Rs 29 per kg. This can be revised subsequently based on revisions in ‘fair and remunerative’ (FRP) prices and other considerations.
• Creation of buffer stock of 30 lakh tonne for a year, entailing an estimated expenditure of Rs 1,175 crore, towards inventory carrying cost. Quarterly reimbursement to be credited to farmer accounts against mill arrears.
• To augment distillery capacity through upgradation and setting up new ones, the government will bear a maximum interest subvention of Rs 1,332 crore over five years (including a one year of moratorium) on bank loans of Rs 4,440 crore, to be sanctioned over three years based on a scheme formulated by the Department of Food and Public Distribution (DFPD).

Background

In the sugar season (SS) 2018, from October to September, we expect production to have risen a sharp 48% to 31.5 million tonne (MT). A higher production of 32MT is expected in SS 2019 too, given the rise in acreage. As a result, sugar prices dropped sharply from an average of Rs 37 per kg in SS 2017 to Rs 26 per kg in June 2018. Due to the depressed market prices, the liquidity position of sugar mills has been weakening, leading to the accumulation of cane price arrears, which have crossed Rs 22,000 crore. To be sure, cane arrears have touched a record high surpassing the previous high of Rs. 19,430 cores for SS 2014-15 (calculated as of May 2015).