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R. Balaji

The sliding sugar prices have adversely affected the mills' ability to source working capital.

CHENNAI, Nov. 29

WITH sugar prices continuing to fall, the sugar mills in the State are looking to cut costs on sugar cane prices as they face a severe fund flow problem, according to industry sources.

During the current season the mills in the private sector, cooperative and public sector are likely to peg sugar cane prices close to the statutory ninimum price fixed by the Central Government.

The only option for additional remuneration to farmers is if the State Government grants concessions on purchase tax that could be passed on to the farmers to enhance their remuneration.

However, it is clear that the mills cannot afford to maintain sugar prices at the levels paid last year, industry sources said.

The crunch during the current season is due to the sliding sugar prices that have adversely affected the mills' ability to source working capital.

The working capital capacity is related to the value of the stock of sugar that the mills hold.

When sugar prices drop to levels prevailing now, the mills not only fail to recover the cost of production but the working capital also dries up, according to industry sources.

With sugar prices ranging around Rs 1,100 per quintal now against Rs 1,300 about six months ago, and Maharashtra mills offloading stocks at much lower prices, the prices here have taken a beating.

International prices are ruling lower and the mills are saddled with stocks and more is on the way with the season commencing now.

The larger stocks are no consolation because the banks are reluctant to fund sugar mill operations, according to industry sources.

Banks permit working capital limits of about 85 per cent of the value of sugar with about 15 per cent margin available to the miller for his day-to-day expenses. The mills have tapped this source when sugar prices were higher, and are now not recovering enough to make good the loan.

For instance, when prices were ruling around Rs 1,250 or higher the mills would have borrowed about Rs 1,062 or higher depending on the value. But now the prices have slid to Rs 1,100 and they are not able to recover the loan.

This leaves nothing for the day-to-day expenses.

With the major chunk of the working capital needed for raw material, sugar cane that cost about Rs 750 plus the purchase tax and other taxes, there is very little left out for other expenses said one miller.

Therefore, the cost of the raw material will have to be kept low, possibly, the Tamil Nadu Government could consider a waiver of purchase tax in which case the benefit could be transferred to the farmer, they said.

During the 2001-2002 season mill prices ranged between Rs 748 per tonne to about Rs 825 when the Statutory Minimum Price was Rs 620 per tonne linked to 8.5 per cent sugar recovery.

With recoveries ranging between 8.8 per cent and 11 per cent mills have had to pay the higher prices. This is about Rs 35 to Rs 120 higher than the SMP of Rs 645 announced this year.

This year such payments cannot be envisaged and the prices will have to be closer to the Statutory Minimum Price, felt industry sources.

The cooperative sector is facing an even more difficult situation as the financial sickness has affected most of the 16 cooperative mills and the three public sector mills.

These have a combined crushing capacity of about 72 lakh tonnes and are facing a 12-lakh tonne short fall in sugar cane availability.

With six mills likely to procure sugar cane to capacity, six mills are likely to face a shortfall of about 20-25 per cent. In other cases, the sugar mills are likely to face a shortfall of about 40-50 per cent of their capacity.

Two mills are under lay-off and another mill is not likely to commence crushing operations during the current year.

The mills have taken a decision to restrict sugarcane payment to the Statutory Minimum Price and any additional payments are likely to depend on the quantum of surplus generated, if any, according to industry sources.

The financial sickness in the cooperative sector meant that the cheapest source of loans, through the National Cooperative Development Corporation couldn't be availed.

These will have to look to consortium of banks, which will mean that the State Government will have to provide the guarantee.

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