President Uhuru Kenyatta has directed the Ministry of Agriculture and the Treasury to put in place a framework to pay sugarcane farmers their Sh 2.6 billion arrears.
Uhuru said the amount should be audited first before payments are made for cane delivery.
The Head of State spoke on Saturday at Bukhungu Stadium in Kakamega during celebrations to mark Mashujaa Day.
"My administration has consistently focused on supporting sugarcane farming and production. It is not acceptable that factories have been collecting cane from farmers and not paying for it yet the demand for sugar is on the rise," he said.
Premier miller Mumias Sugar Company has been shut down because of a Sh20 billion debt.
The factory owes cane farmers more than Sh 700 million. Other public millers are Sony, Muhoroni, Nzoia, Chemilil and Miwani.
Uhuru said the people who embezzled money meant for farmers must be pursued and prosecuted.
"I encourage farmers to sell their produce to factories that are well run and which pay on time. Selling cane to the informal markets is undermining the farmers’ incomes and reversing the development of a proper sugar industry," he said.
The President met leaders from Western Kenya three weeks ago and discussed the revival of the sugar industry.
Uhuru said during the meeting that payment of farmers’ arrears will be given priority. The sugar industry supports an estimated 10 million people largely in Western Kenya.
The President told the Ministry of Agriculture to avoid what happened to maize farmers from repeating itself. He said the government gave money for paying maize farmers but business people were paid instead.
He said no Kenyan has the capacity to produce maize worth Sh200 million.
"I have asked Agriculture CS Mwangi Kiunjuri to look for these people or else we shall deal with him," Uhuru said.
"This money is for farmers. We will follow the money that has been stolen and the people behind the theft will be punished," he said.
Namibian President Hage Geingob, Deputy President William Ruto, NASA leader Raila Odinga, Musalia Mudavadi (ANC), Moses Wetang'ula (Ford Kenya) and Wiper's Kalonzo Musyoka were present.
The governors who attended the event include Wycliffe Oparanya, (Kakamega), Wilber Ottichilo (Vihiga), Patrick Khaemba (Trans Nzoia), Anyang' Nyong'o (Kisumu), James Ongwae (Kisii), John Nyangarama (Nyamira), Sospeter Ojaamong (Busia), Jackson Mandago (Uasin Gushu) and a host of MPs.