Sugarcane FRP hike no sweet deal

Rajalakshmi Nirmal | Updated on July 23, 2018

Neither the farmer nor the mill is happy

Last week, the Centre hiked the fair and remunerative price (FRP) of sugarcane to ₹275 per quintal for the 2018-19 marketing year starting October.

It was ₹255/quintal last year, but cane farmers are still in low spirits.

The numbers below explain how the changes in calculating FRP has taken the joy out of the move for farmers.

When a mill crushes a tonne (1,000 kg) of cane, it recovers only 9-11 per cent of sugar. Last year, the FRP to be paid by the mills to farmers was linked to a recovery rate of 9.5 per cent.

Every mill had to pay ₹255/quintal (100 kg) for cane if it recovered 9.5 kg of sugar by crushing 1,000 kg of cane. With every 0.1 percentage point increase in recovery, FRP was higher by ₹2.68/quintal. So, if the recovery rate was 10 per cent last year, the mills paid FRP of ₹268.4/quintal.

Now, the ₹275/quintal announced for the 2018-19 season is, thus, an increase of only ₹6.5/quintal, or 2 per cent.

But sugar mills are seeing red even with just a 2 per cent increase in FRP.

The mills have come through a very bad year with arrears for 2017-18 season mounting up to ₹23,000 crore in May as the market price of sugar crashed on a 50 per cent jump in cane harvest. With recovery in sugar price, the industry settled some dues, but it still owed a staggering ₹18,000 crore by June-end.

The latest FRP hike is also not looking good with the large carry-over stock of the current year set to go as opening stock for 2018-19. This is only set to make matters worse, lament sugar mills.

Gaurav Goel, President, Indian Sugar Mills Association (ISMA), estimates the opening stock for the next year to be 9-10 million tonnes.

Sugar production in 2018-19 is expected to be a record 35 million tonnes.

After consumption of 25 million tonnes, the market will still have a surplus of 20 million tonnes.

Cost of production

Market prices of sugar have recovered sharply over the past two months, thanks to measures including the Centre’s announcement of minimum support price (MSP) for sugar in June. In Maharashtra, prices were ruling at ₹26-27/kg in May; it is ₹31/kg now. This gives some breather for mills, but given the cost of production itself is around ₹35/kg of sugar, the current prices are still not remunerative for mills.

Assuming the basic recovery rate of 10.8 per cent (1,000 kg of cane when crushed gives 108 kg of sugar), which is the average in most mills in the west, FRP comes to ₹2,970/tonne of cane for 2018-19 season. So, the cost of cane for producing 1 kg of sugar comes to ₹27.5/kg (2,970/108).

The market price of sugar is now ₹31-33/kg. But, besides the cost of cane, mills also have other overheads which have to be paid, and this is the reason mills are stressed.

In June, along with the financial assistance of ₹5.50 per quintal for cane crushed by sugar mills for exports, the Centre also announced an MSP for sugar. But it came at ₹29/kg, which is below the cost of production of sugar, and made the entire exercise meaningless.

Export is an option to get rid of the excess stock in the domestic market. But prices in the international market, again, are low — ₹20-22/kg. Thus, only a large subsidy from the government would make it a viable business option.

Rangarajan formula

While many observers from outside see the revenue-share formula recommended by the Rangarajan Committee as a solution to the woes of the sugar mills, it is not the case.

Even though the formula assures higher profits to farmers in a good year, it offers little respite to mills in a bad year. As per the formula, farmers and mills will share the revenue from sale of sugar in the ratio of 70:30 or 75:25 (if the value of sugar alone, without by-products, is considered).

This a good deal — both from the farmers’ and the mills’ perspective. But the twist in the tale is that the Committee recommends FRP as the minimum price to be paid any year.

So in bad years, when sugar prices are down, mills will feel the pinch as they have no option but to cough up the FRP.

If the Centre is able to remove the minimum FRP requirement from the Rangarajan formula and implement it across States, it could be a long-term solution for the problems of the sugar mills and the farmers.

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Published on July 22, 2018
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