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Informist, Monday, Feb. 24, 2025

 

MUMBAI – The medium-term financial health of small- and mid-sized sugar mills with a capacity to process less than 5,000 tonnes of sugarcane per day can be boosted by sustaining the improvement in market realisations and keeping them in sync with procurement costs, India Ratings and Research said in a release. While market realisations have improved since December and remain higher than the minimum selling price for sugar, small players still sell at a discount and remain reliant on an increase in the minimum selling price, the agency said.

 

Along with the impact on profitability, the major concern for mid-sized sugar mills is to maintain adequate liquidity amid rising sugarcane dues and pressure for quicker payments to farmers. When the cost of production exceeds sugar realisations, many small sugar mills often hold on to their inventories to get higher funding in the form of pledge loans from banks, which could affect their credit metrics. The core internal liquidity of all these small mills in the agency's portfolio is stretched-to-poor with liquidity ratios often at or even below 1.0x, according to the release.

 

"An increase in (minimum selling price) could provide better support to these entities in sustaining the improved realisations in 4Q (Jan-Mar) and the medium term, facilitating quicker cane payments without depending on inventory funding and lessening the impact on their cash flows and balance sheets," Abhash Sharma, senior director, Mid Corporates, India Ratings and Research, said. 

 

In January, the government approved sugar export of 1 million tonnes in a long-awaited move to ease the financial stress on mills and provide support to sugar prices which had fallen to their lowest levels between March 2023 and December. Sugar prices declined owing to the large buffer stock of approximately 8.55 milion tonnes as of Sept. 30 from the sugar season 2023-24 (Oct-Sept), and an initial production estimate of around 29.3 million tonnes, after diversion, from the Indian Sugar and Bio-Energy Manufacturers Association for 2024-25 against an estimated domestic consumption of around 29 million tonnes. 

 

However, prices are on the rise again since January with the government allotting export quotas and fears of a fall in supply in 2024-25 due to the early closure of several mills across Maharashtra, Karnataka, and Uttar Pradesh, the three largest sugar-producing states in the country.

 

At one point in Dec–Jan, before the export boost, prices in Maharashtra had fallen below INR 3,500 per 100 kg, which is below the cost of production after considering conversion costs, according to the release. Furthermore, with early indications of a higher sugarcane crop for the next season, the resulting increase in sugar production could bring prices down further unless the government approved a higher export quota.

 

In such circumstances, India Ratings said a timely increase in minimum selling price for sugar would be necessary to stabilise domestic sugar prices, giving a boost to small- and mid-sized mills. The present minimum selling price of INR 3,100 per 100 kg, unchanged since February 2019, has been significantly below the market price of sugar since 2021. Sugar millers across the country, the Indian Sugar and Bio-Energy Manufacturers Association, and various other stakeholders have been pushing for an increase in the minimum selling price to around INR 3,900 per 100 kg in the current season amid the rise in production costs.

 

The fair and remunerative price for sugarcane has increased every season since 2020-21, and if the government again increases it for 2025-26, the cost of production is likely to continue to rise in the medium term. Given that the market prices for medium-grade sugar are already at the upper bound of the new minimum support price proposed by the industry, India Ratings believes that while the increase may not tick actual sugar market prices significantly, given the lower production estimates for 2024-25, a higher base rate might protect small mills, which often sell at sizeable discounts compared with the average ex-mill prices in the industry, from a significant downside.

 

India Ratings believes a timely increase in the minimum selling price for sugar beyond break-even level could be vital to the financial health, solvency, and long-term sustainability of small- and mid-sized sugar mills.  End

 

Reported by Taniva Singha Roy

Edited by Rajeev Pai

 

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