Muzaffarnagar and Shamli last month experienced communal violence that was unprecedented for being largely rural -centred, unlike the ‘normal’ city or town-based phenomenon.

These two western Uttar Pradesh (UP) districts along with Meerut, Saharanpur and Bijnor — besides areas such as Bareilly, Shahjahanpur, Hardoi and Lakhimpur Kheri in the central or Sitapur, Gonda, Balrampur and Kushinagar in the eastern parts of the State — are set for a renewed crisis. It threatens to be bitter and rural yet again, albeit centred around sugarcane.

Mills in UP usually start crushing for the new sugar year (which technically begins in October) from early to mid-November. Prior to that, the State Government holds meetings with millers and growers for earmarking cane areas to individual factories. The consultations happen in August-September, after which the Cane Commissioner issues ‘reservation orders’ binding growers to supply cane to the particular mill to whom their area has been exclusively assigned.

This time, there have been no reservation orders nor any cane area meetings. The reason: millers not being in a position to crush and, hence, showing no interest in securing cane allocations. As things stand, nobody knows the fate of the cane ready to be crushed in hardly a month from now.

Losing proposition

Why aren’t millers keen to start? Because the economics just doesn’t permit them to.

A typical mill with daily cane crushing capacity of 5,000 tonnes would produce 3,220 tonnes of sugar over seven days, taking the average 9.2 per cent recovery recorded by UP factories during the last 2012-13 season. At current ex-mill realisations of Rs 30 a kilo, the value of this sugar comes to Rs 9.66 crore.

On the other hand, the State Advised Price (SAP) fixed by the UP Government for cane in 2012-13 was Rs 280 a quintal. At that rate, the 35,000 tonnes of cane crushed during the same seven days would be worth Rs 9.8 crore.

Simply put, the present realisations from sugar will not cover even the mill’s basic cane cost — which excludes purchase tax, commission paid to the cooperative society through which procurement is carried out, and transport charges. Adding them would take the cost of cane delivered at the factory gate to Rs 295 a quintal.

But mills not only have to pay for cane; they also incur other operational expenses on worker’ salaries, chemicals or gunny bags, besides on repairs and maintenance before and after the start of crushing. On top of it, there are corporate administration and marketing overheads, plus interest on borrowed funds.

True, some of the non-cane costs can be met from sale of byproducts such as molasses and bagasse or their value-added derivatives, including ethanol and power. But even after accounting for these, the effective cost of sugar from cane bought at an SAP of Rs 280 a quintal today will be Rs 34 a kilo or so, exclusive of overheads and interest. The latter would push it closer to Rs 36 a kilo.

Then and now

Last year, ex-factory sugar realisations in UP averaged Rs 34.50 a kilo during October, before crushing operations took off.

Mills are normally provided working capital from banks up to 85 per cent of the value of their stocks. So, if a mill produced 3,220 tonnes of sugar during a week, its value at Rs 34.50 a kilo was Rs 11.1 crore. The 85 per cent working capital entitlement on that, at about Rs 9.4 crore, would have almost financed the Rs 9.8 crore value of the cane crushed over these seven days.

But as the season progressed, ex-factory sugar prices fell to around Rs 31.50 a kilo by March, bringing down the value of mills’ stocks while also exhausting their cash credit limits for purchasing cane.

So, what did the mills do? Well, they started delaying payments to farmers, despite the law requiring them to pay within 14 days of taking cane delivery. Effectively, they were buying cane on credit at zero interest from growers!

Today, the situation is such that even as the new sugar year has formally commenced, UP mills owe farmers nearly Rs 2,500 crore for their last season’s cane. This, without factoring in any interest on delayed payments.

Such unpaid arrears from the previous season are unusual for the fact that the defaulters’ list this time comprises not just those with a reputation for delaying payments — the U.K. Modi Group, for instance. On the contrary, it has virtually every big player, including the likes of Balrampur Chini that are known for conservative cash management and a track record of paying farmers in time ( see table ).

The way out

For growers, receiving payments for last year’s cane may be an immediate concern. The real crisis, however, is going to be over the crop now standing in the fields.

For mills, crushing the new cane is clearly unviable when sugar is fetching Rs 30 a kilo. Their problems are compounded by banks refusing to extend working capital.

Nor do they have the option of ‘borrowing’ again at zero interest from growers; why should anyone supply fresh cane without being paid for the previous crop?

What is the solution then? The millers will tell you the problem lies in the SAP and factories cannot run without linking cane prices to sugar realisations. A committee headed by the Chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan, had recommended that farmers be entitled to 75 per cent of the ex-mill value of sugar. At Rs 30 a kilo, the corresponding cane price, thus, works out to Rs 225/quintal. The current situation, in other words, demands a reduction in the SAP.

Economically sound though this logic is, it is politically not feasible; farmer organisations actually want the SAP for 2013-14 to be hiked to Rs 330 a quintal!

The only way to resolve the deadlock is for the Government to foot the difference between an SAP that gives reasonable returns to growers (they definitely need to be compensated for increases in diesel, fertiliser and labour costs) and a cane price mills can afford to pay. The latter could well be based on the Rangarajan formula, taking into account the expected average sugar realisation for the entire season.

The above price difference can be paid by transferring the money straight into farmers’ accounts. This is eminently implementable, as mills already have a system of supplying data in CDs/USB flash drives to banks on their cane purchases made from every farmer. The data is used by banks to credit payments directly to their accounts (a single mill deals with 20,000 or more growers).

There is no reason why the UP Government cannot pay for the difference between the SAP and the Rangarajan formula-based cane price by transferring the said monies directly to farmers’ accounts. After all, the SAP is the price it has fixed.

For farmers, the worst case scenario is if mills refuse to begin crushing. In that event, they will not be able to even vacate their fields for planting wheat before the winter sets in. Without liquidity in their hands, they will be pushed into desperation.

This deadlock over cane pricing needs to be broken. If it doesn’t happen, we might end up seeing worse things that what we saw last month in Muzaffarnagar and Shamli.