Sugar-coating: Mills to get higher prices to offset hike in cane rates

The Centre had, in July last year, refrained from raising the FRP for 2019-20 from Rs 275 per quintal to keep a leash on mills’cane costs.

The Cabinet Committee on economic affairs (CCEA) will soon take up a proposal to raise the minimum selling price of sugar by Rs 2 to Rs 33 per kg to improve the cash-strapped, Covid-hit mills’ ability to clear cane dues that shot up to a near-record level of about Rs 20,000 crore in July. Last month, a group of ministers under home minister Amit Shah recommended the increase, in accordance with a Niti Aayog proposal.

The CCEA will also consider another proposal to raise the fair and remunerative price (FRP) of cane to Rs 285 per quintal for the 2020-21 marketing year starting October 1 from the current Rs 275. This will be linked to a basic recovery rate of 10%, beyond which a premium will be charged to mills for every 0.1 percentage point rise.

The government had kept the FRP unchanged last year.

While the increase in the minimum sale price at the factory gate is expected to improve mills’ cash flow in a market already awash with supplies, the hike in the cane FRP will raise their costs. “The government is trying to balance the interest of mills with farmers’,” a senior government official told FE.

Two successive years of bumper sugar production exacerbated a domestic glut last year, leading to a record opening stock of an estimated 14.5 million tonne in the beginning of 2019-20. While avearge prices in western and northern regions are ruling at Rs 3,590 and Rs 3,649 per quintal, respectively, these are still well below the costs, mills say. A minimum sale price serves to prevent a fall below the stipulated level and discourages market speculations.

While mills are mandated to pay cane farmers at least the FRP, states like Uttar Pradesh fix a much higher benchmark price, called the state advisory price (SAP), for cane supplies within their territories. Consequently, UP has been the epicentre of the cane arrears crisis for decades now. However, over the past decade, the Centre, too, started raising the FRP at an unreasonable pace, while surplus supplies kept a lid on sugar prices. This caused a crisis in other major producers like Maharashtra and Karnataka that practically follow the Centre’s rate structure. The FRP was hiked sharply from Rs 145 per quintal in 2011-12 to Rs 275 in 2018-19, despite occasional restraint shown by the Centre during this period.

The Centre had, in July last year, refrained from raising the FRP for 2019-20 from Rs 275 per quintal to keep a leash on mills’cane costs. Still, experts had then pointed out that if the Rangarajan panel’s formula of fixing the cane price at 75% of sugar sales realisation was applied, the effective FRP (based on the recovery rate) would be higher by roughly Rs 42 per quintal. Even while announcing the cane FRP of Rs 275 per quintal for 2018-19, food minister Ram Vilas Paswan had then admitted that it was a massive 77.4% higher than cane costs.

As has been pointed out repeatedly by analysts, unless the Centre and the states stop fixing cane prices at exorbitantly high levels, no temporary sops can prevent the recurrence of massive cane arrears year after year, although they will offer temporary relief to mills.

In April, a NITI Aayog task force recommended a one-time increase in minimum selling price for sugar to Rs 33/kg (from Rs 31) to unburden mills, capping of farmer’s land use for sugarcane at 85% of total holding, a cess of Rs 50/quintal (excluding exports) and cash incentive of Rs 6,000/hectare for farmers shifting to alternative crops from sugarcane. The report of the panel on sugarcane and sugar industry, headed by NITI Aayog member Ramesh Chand, was submitted on April 21.