MUMBAI - Cane arrears in India could leap to a record 250 billion rupees ($3.8 billion) in 2017-18 as a drop in sugar prices to their lowest level in 28 months made it difficult for mills to pay farmers mandatory cane prices, industry officials told Reuters.
The record arrears, up from 20 billion rupees in the previous year, will force the world's second-biggest sugar producer to provide incentives for exports, increasing pressure on global sugar prices.
Mills currently owe farmers 200 billion rupees, but the figure will rise unless the government offers incentives to export surplus output, said Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories (NFCSF).
"Every week sugar prices are falling. Mills could not make cane payments at the government's fixed price," he said.
Record output has sent domestic sugar prices down by a quarter in the past year to their lowest since December 2015.
At the beginning of the season India was expected to harvest 25 million tonnes of sugar, but the industry now expects a record 31 million tonnes, Naiknavare said. India's sugar demand is pegged at about 25 million tonnes.
To reduce stocks, India made it mandatory for mills to export 2 million tonnes of sugar in March, but mills have failed to sign deals because prices are lower overseas, said one Mumbai-based dealer with a global trading firm.
"Mills are waiting for government incentives. They will incur a loss of more than $100 (per tonne) if they sell in the world market at current prices," he said.
The government is likely to approve a proposal to pay farmers about 55 rupees per tonne of cane sold to the mills, government sources said this month.
"A few mills are making distressed sales to cover cane payments and putting pressure on prices," said Balasaheb Patil, chairman of the Sahyadri co-operative sugar factory in Maharashtra.
Mills need to pay cane farmers within two weeks of harvest.
The mills agreed in May to pay farmers 11 percent more for their cane for the 2017/18 marketing year, which started Oct. 1.
The continuous fall in sugar prices has prompted large consumers such as drink and sweet makers to keep lower inventory, said Ashok Jain, president of the Bombay Sugar Merchants Association (BSMA).
"Production is going up but consumers are reducing purchases in expectation of further price falls," Jain said.