Increase In FRP For Sugarcane Likely To Affect Sugar Mills’ Margins

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The Cabinet Committee on Economic Affairs (CCEA) has fixed the fair and remunerative price (FRP) for sugarcane at Rs275/quintal for SY2018-19 season, an increase of Rs20/quintal, compared to the previous year.

However, cane price is linked to a basic recovery rate of 10%, as against 9.5% the previous year, resulting in an effective increase in the FRP by 2.5% yoy in SY2019. However, with sugar realizations likely to be under supply-induced pressure in SY19, this is likely to result in margin pressures for sugar mills as well as the increase in cane arrears in that year.

Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, said, “The effective increase in the FRP is 2.5% for the season SY2018-19, and this is likely to result in an increase in the cost of production of sugar by nearly Rs600-700/MT. In addition, we expect pressure on sugar realizations in SY2019, given the likelihood of an increase in sugar production by 10% yoy to around 35mn MT (as per ISMA estimates) resulting in a significant surplus in the domestic market. Hence, at Rs29/kg, the MSP set by the Central Government in June 2018, the mills are likely to report a decline in the margins. Further, this increase in the FRP could also trigger an increase in the state-advised price (SAP) set by the state governments in states that follow the methodology.”

The FRP is the minimum guaranteed cane price to the farmers, which is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). For SY2018-19, it is fixed at Rs275/quintal for a recovery rate of 10%, subject to a premium of Rs2.75/quintal for every 0.1%-point increase in recovery above that level as against Rs255/quintal for a recovery rate of 9.5%, subject to a premium of Rs2.68/quintal in SY2017-18. The FRP is estimated to be higher by 77% as against the estimated cost of sugar production at Rs155/quintal. For a recovery rate of below 9.5%, the price is fixed at Rs261.25/quintal.

As for the cane arrears, the same touched Rs22,000cr in May 2018 for the current sugar season and mills needed government support to meet farmer payments at an FRP of Rs255/quintal. Hence, at a higher FRP and a higher sugar production, the cane arrears are expected to further increase. “To prevent an increase in cane arrears, government intervention in support of the sugar mills and farmers is likely to remain critical in the coming sugar season,” Majumdar added.

SOURCEIndian Infoline

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