India, the world’s second biggest producer of sugar after Brazil, fixed a minimum floor price of 29 rupees a kilogram for domestic sugar, to prevent a further fall in prices due to a record harvest.
Since the beginning of the season, prices on the NCDEX spot Kolhapur, Maharashtra, market have dropped 32% to as low as $381/mt May 18, a 33-month low NCDEX data showed.
Announcing the decision on Wednesday, food minister Ram Vilas Paswan also said the government approved a proposal that would require sugar mills to stock 30 lakh tonnes (3 million tonnes) of the sweetener in their warehouses, with the government spending 11.75 billion rupees ($175 million) on storage expenses for 12 months.
Other than building a buffer stock, the government directed the banking sector to offer sugar mills cheap loans worth at least $657 million over a five-year period to expand their ethanol production capacity. The government will spend 13.32 billion rupees to partially pay the interest on debts, the minister told reporters in New Delhi.
Shares of sugar companies such as Dhampur Sugar Mills Ltd, Mawana Sugars Ltd, Balrampur Chini Mills Ltd and Avadh Sugar & Energy Ltd jumped on Tuesday in anticipation of the measures but the floor price of sugar announced on Wednesday was below the market expectation.
"The ex mill sugar price works out to around Rs 35 per kilo and therefore the Rs 29 is inadequate. It will, therefore, be a challenge to expect the sugar industry to clear the huge cane price arrears on this basis." The Telegraph India quoted Abinash Verma, director-general of the Indian Sugar Mills Association (ISMA) as saying.
"Creation of buffer stocks of 30 lakh tonnes will reduce some surplus sugar from the market, though only for a year, and will improve market sentiments to support domestic prices. What is concerning is that there is no idea or proposal on rationalisation of cane pricing policy, which is actually the main reason for all the problems of the industry today" he added.
ISMA said that Uttar Pradesh and Maharashtra, the nation’s top producers, are losing 7 to 8 rupees per kilogram on sugar sales.
"Some of the more efficient mills in Maharashtra can still produce at Rs 26/kg, but most mills in India will still lose money at Rs 29/kg," a trader told Platts.
Sugar production is estimated at 31.74 million mttq for the 2017-2018 (October-September) season, up more than 56% year on year, with a surplus expected to be about 7-8 million mt, S&P Global Platts Analytics data showed. The record output has helped spur a 20 percent slump in benchmark global futures.
Citing their poor financial health, Indian mills are defaulting on cane payments to farmers and currently owe nearly 220 billion rupees to cane growers-which could leap to a record 250 billion rupees in the current 2017/18 season- after prices dropped below production costs, according to government data.
New Dehli also approved a plan to provide financial support to cane farmers for produce sold to sugar mills. India has 50 million cane growers.