Sugar Industry at a Critical Juncture

–Dilip Patil

The sugar industry is facing an unprecedented financial crisis, as a severe shortage of working capital, increased production costs, forecasts of a good sugarcane crop in the next season, and stable prices for manufactured goods have jeopardized the existence of many factories. The financial distress of the sugar industry has reached a critical point. Recently, news emerged that 15 private sugar factories are up for sale, indicating that the sugar industry is no longer profitable. This signifies the declining economic viability of the industry. Private factory owners are being forced to take this drastic step due to financial losses.

According to a recent ruling by the Bombay High Court, sugar factories are now obligated to pay the Fair and Remunerative Price (FRP) for sugarcane in a lump sum. This has increased the pressure on factories already facing liquidity problems.
Factories are trapped in a cash flow cycle. They need to pay farmers the sugarcane FRP in a lump sum for the next season, while revenue from the sale of sugar and ethanol starts coming in months later – there is a gap between the availability of funds and the funds required to cover expenses, and costs are rising while prices remain stable.

Forecasts of a good sugarcane crop in the coming season will further exacerbate the problems of sugar factories. Sugar factories require substantial inventory financing against the sugar stocks produced during the crushing season. It can take months or even years to sell these sugar stocks. The capital tied up in these stocks will incur additional interest burdens. The already stable market prices are likely to create more financial pressure on the daily operations of sugar factories.
Financial institutions are reluctant to provide additional loans to sugar mills, as the widening gap between production costs and revenue has made the sugar industry an unstable business model. The working capital loan crisis could prevent many mills from starting operations on time or lead to delays in paying farmers the sugarcane FRP, even with court directives.

The prices of ethanol derived from sugarcane juice and B-heavy molasses have remained stable for three years, making ethanol production from these sources unprofitable. Factories are facing significant financial difficulties due to declining revenues, while operational costs continue to rise.

The government has formed a tripartite committee to decide on the wages of sugar workers, which is expected to further increase labour costs. Industry analysts suggest that the committee previously recommended a 15% wage hike, and a similar or higher increase is expected this time.

Another problem in the coming season is that the government has not yet announced the FRP rates for the 2025-26 season. Based on past experience, a further increase in FRP rates is expected, which will put additional financial pressure on already strained sugar mills.

The market situation is not comfortable, as sugar prices are surprisingly stable. Ethanol prices from sugarcane juice and B-heavy molasses have been stable for three years, almost eliminating an alternative revenue stream for struggling mills. With a bumper sugarcane crop expected in the next season, mills will be forced to produce ethanol from sugarcane juice and B-heavy molasses, even if reluctantly.

Small private sugar factories and cooperative mills are particularly at risk, as many sugar factories lack the necessary financial strength to cope with these rising costs, extended operational periods, excess inventory, and delayed revenue.

Industry representatives are demanding immediate government intervention, including guarantees for working capital, interest subsidies, or direct financial assistance, to prevent social unrest due to unpaid farmers.

With nearly 80% of sugar factories closed due to the end of the season and sugar factories having started pre-season operations, the coming season is going to be tough for many factories, leading to delayed start-ups, reduced capacity or even temporary closures – tough decisions that will affect thousands of farmers and workers in the sugar belt.

The Author Dilip Patil is Managing Director of Karmyogi Ankushrao Tope Samarth Co-op Sugar Factory, Ambad -Jalna. (Maharashtra)