)
The marginal 4.54% increase in the Fair and Remunerative Price (FRP) of sugarcane as decided by the Union Cabinet for the 2015-16 crushing season that will start in October this year last week has left both farmers and mill owners dissatisfied.
The FRP comes against the backdrop of a bitter struggle between sugar millers and farmers on one hand and the state government on the other over pricing of cane in view of falling price of sugar, particularly in India's second biggest sugar producing state of Uttar Pradesh. It has raised questions over the methodology adopted by the government to determine the so-called ‘fair price’ of sugarcane.
Sugarcane farmers feel that such a small increase in FRP for the coming season is unreasonable, given that cost of producing sugarcane in 2014-15 itself was much higher, while millers are complaining that paying even this price uniformly across the country will be difficult unless realisation from producing sugar goes up significantly in the months ahead.
In India, the central government determines a floor price of sugarcane, also known as the FRP, which has to be mandatorily paid by all sugar mills across the country.
However, since sugarcane is a state subject, state governments are also free to determine their own respective floor price, known as the State Advised Price (SAP), to protect the interest of growers.
Not surprisingly, this often leads to a situation where the FRP is less than the SAP in many states across India that grow sugarcane, particularly in Uttar Pradesh.
For the 2014-15 season, the SAP in Uttar Pradesh is around Rs 280 per quintal, while the Union government-fixed FRP is Rs 220 per quintal.
However, an approximately Rs 100 per quintal drop in ex-factory sugar prices in 2014-15 from the previous year has complicated the equation.
"The cost of producing sugarcane for an average farmer in Uttar Pradesh in 2014-15 is around Rs 251 per quintal, while in 2015-16 it is expected to be around Rs 280 per quintal. Therefore, to fix an FRP which is way below the cost of production raises a big question mark over the process of calculation," said Sudhir Panwar, a professor from the Lucknow University and member of the Planning Commission in Uttar Pradesh.
He said the current FRP does not cover the cost of production not only in UP, but also in other cane producing states such as Maharashtra and Tamil Nadu.
“The calculation of rental value and supervisory cost by the Commission of Agriculture Costs and Prices (CACP) is not correct and raises a big question mark over the annual exercise of soliciting views of all state governments before finalising the FRP,” Panwar pointed out.
The CACP, a central government body mandated to fix the minimum price of a number of farm commodities, annually holds discussions with all stakeholders, including state governments, before finalising the FRP for sugarcane.
However, for the 500-odd sugar mills, which include about 290 in the private sector, paying a low FRP in the coming season itself is expected to be a challenge because of a drop in realisation from sugar and high cane price fixed by some state governments.
According to the millers, the all India average ex-mill sugar price in 2014-15 season till December 2014 was around Rs 2,650 per quintal, while the cost of producing sugar during the same period is around Rs 3,100-3,600 per quintal.
In other words, millers are making a estimated loss of around Rs 4.5 to Rs 9.5 for every kilogram of sugar sold in the market this year.
The loss is primarily due to bumper sugar production, drop in international prices and also high sugarcane purchase cost in some states like Uttar Pradesh, where the minimum price set this year is Rs 280 per quintal.
"It will be a challenge for the sugar mills to be able to pay the FRP of Rs 230 per quintal of sugarcane linked to 9.5% sugar recovery in 2015-16 sugar season unless and until the ex-mill sugar prices improve from the current all India average of Rs 2500-2600 per quintal of sugar to Rs. 3400-3500 per quintal,” said Abinash Verma, Director General of Indian Sugar Mills Association (ISMA). ISMA is a national industry body for private sugar mills in the country.
He said that it is evident from the current season (2014-15) where almost all the sugar mills across the country are unable to afford to pay even FRP of Rs 220 per quintal of sugarcane.
“ISMA has also requested the Government to freeze the FRP for next few years especially in view of the fact that FRP was increased from Rs 145 per quintal in 2011-12 season to Rs 220 per quintal in 2014-15 sugar season, an increase of more than 51 per cent in just 3 years," Verma said.
As a consequence of the mismatch between the price at which sugarcane is purchased from farmers in some states like Uttar Pradesh and the rate at which sugar is sold in the open market, millers are unable to pay farmers their due in time.
In the 2014-15 season, the mills owned farmers around Rs 12,500 crore as on April 1, 2014, which had subsequently been brought down to around Rs 1,000 crore by September 31, 2014. However, mills say that unless a reasonable price of sugarcane is fixed or there is a sharp upward jump in sugar prices, the arrears would again mount to the 2014 levels by April this year.
“Due to lower realisation, banks have stopped extending working capital loans to sugar mills,” a senior industry executive said.
Panwar, meanwhile, added another dimension to the whole debate, pointing out that that abolition of the release order mechanism by the previous UPA government is to be blamed for the current situation of excess supplies and low demand.
The mechanism that provided for regulated sale of sugar in the open market as determined by the Central government was removed a few years back as part of the then government's effort to reform the sugar sector.
The suggestion to abolish the release order mechanism was made by a high-level committee constituted by the government under the chairmanship of then head of Prime Minister's Economic Advisory Council (PMEAC), C Rangarajan.
"Those states which had better sugar recovery rate from cane benefited from the abolition of release order mechanism, while those which did a lower recovery rate like Uttar Pradesh missed out," Panwar said.
He said there have been instances in the past when the Central government had to re-introduce the release mechanism after removing it.
India's sugar production in 2014-15 crop season is projected at 25-25.5 million tonne, 4-5% more than last year.
