Sugar makers in India, the world´s biggest user, are selling below cost of production as government measures to increase supplies have pushed domestic prices to a four-month low, a millers´ group said.

The government extended duty-free purchases of white sugar until Dec. 31, ordered bulk consumers to hold inventories for no more than 10 days from 15 days earlier, and asked mills to sell on a weekly basis from fortnightly sales earlier, to cool record domestic prices that have fueled food-price inflation.

“These are the highest curbs I´ve seen been put on the free-sale of sugar in the last 25 years,” said Vivek Saraogi, president of the Indian Sugar Mills Association and managing director of Balrampur Chini Mills Ltd., the country´s second- biggest producer, in an interview. “The industry feels very pinched by this. Everything is out of the window for us.”

The slump in domestic refined sugar rates may reduce the ability of the mills to pay farmers record cane prices for a second straight crop year starting Oct. 1, worsening a deficit estimated by Kingsman SA at 7 million metric tons. India became a net importer of the commodity last season for the first time since 2006, helping global prices more than double in 2009.

“Farmers will have a rethink on planting cane” if mills are unable to pay growers, Prakash Naiknavare, managing director of the Maharashtra State Cooperative Sugar Factories Federation Ltd., said in a phone interview.

Global raw-sugar prices have declined 27 percent from the three-decade high reached Feb. 1. Prices in Mumbai, the nation´s biggest wholesale market for sugar, are down 24.4 percent from a record 4,050 rupees per 100 kilograms on Jan. 8.

Below Cost

Mills in the northern state of Uttar Pradesh, the country´s second-biggest producer, are selling at 33 rupees (73 cents) a kilogram,  less than the cost of 37-38 rupees, according to M.N. Rao, deputy director general of the association. In Maharashtra, the nation´s largest producer, the cost is 30 rupees, compared with the market price of 28-29 rupees, he said.

“It will adversely affect the earnings of companies” if prices slide further, said Naiknavare.

Shares of Bajaj Hindusthan Ltd., the nation´s biggest mill, lost 1.5 percent to 162.7 rupees at close in Mumbai. The stock slumped 24.5 percent last month, the steepest drop since October 2008. Balrampur Chini fell 0.8 percent to 111.15 rupees. It lost 12.3 percent in February, the largest monthly drop in a year.

“They are not able to make money and are losing out in the short term,”  said Sageraj Bariya, an analyst at Angel Broking Ltd. in Mumbai. “That led to the fall in shares today. We are negative on the sugar sector overall.”

Yields Improve

Gains in output have also contributed to lowering prices. Production gained 5.5 percent in the five months ended Feb. 28 to 13.25 million tons as late rain improved sugar cane yields in Maharashtra, the country´s top producer, the National Federation of Cooperative Sugar Factories Ltd., said March 2.

Production in the year to Sept. 30 may exceed 16 million tons, in line with government estimates, the group said. Next year, output may rebound to as much as 23 million to 24 million tons, according to the Indian Sugar Mills Association.

Uttar Pradesh mills paid record price for cane at 250-260 rupees per 100 kilograms (220 pounds) in year that started Oct. 1, Rao said.