Centre increases FRP for sugar cane and what it means for sugar mills?

Impact of higher FRP for sugar cane on sugar mills
Impact of higher FRP for sugar cane on sugar mills

by 5paisa Research Team Last Updated: Dec 12, 2022 - 12:57 am 21.8k Views
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The latest meeting of the Cabinet Committee on Economic Affairs, chaired by the Prime Minister, approved a hike in the Fair and Remunerative Price (FRP) of sugarcane. This pertains to the sugar cycle year 2022-23. The sugar cycle year typically begins in October and ends in September next year. In the Sugar Cycle Year 2021-22, the FRP for sugarcane had been pegged at Rs290 per quintal. For the sugar cycle year 2022-23, the government has approved raising the FRP by Rs15 to Rs300 per quintal. This is effectively immediately.

The FRP is not just set at a fixed price, but also includes an incentive for higher sugar recovery rate. For the sugar cycle year 2022-23 (October - September) the Fair & Remunerative Price or FRP at Rs305 per quintal is applicable to sugarcane with a basic sugar recovery rate of 10.25%. However, there is a premium of Rs3.05 per quintal for every 0.1% increase in the sugar recovery rate. So, if the sugar recovery rate goes up to 10.45%, then the FRP paid to the sugarcane farmer on a per quintal basis is Rs311.10 (Rs305 + Rs6.10).

In the previous sugar season 2021-22, the government had pegged the FRP for sugarcane at Rs290 per quintal. However, this was linked to a sugar recovery rate of 10%. This time, the sugar recovery benchmark has also been raised along with the FRP, so the incremental benefits are constrained. However, sugar farmers have a different perspective. They believe that the hike in FRP is too insufficient, especially in the light of the sharp rise in input costs in the last few months amidst the spike in commodity inflation globally. That is not factored in.

Apart from the input costs not being factored in, the sugarcane farmers are of the view that the Rs15 per quintal increase has come with a huge penalty as the basic sugar recovery rate has bene hiked by 25 basis points from 10% to 10.25%. The sugar recovery rate incentive also comes with an in-built incentive. Just as farmers are rewarded for reporting higher sugar recovery rates on their cane, there also be a penalty in the form of lower FRP in case the sugar recovery rate dips below the 10.25% mark. That can backfire on sugar farmers.

The Commission for Agricultural Costs and Prices (CACP) has a different take. According to its calculation, the A2 + FL (actual paid out cost + imputed value of family labour), which is the cost of production of sugarcane for 2022-23, is around Rs162 per quintal. At an FRP of Rs305 per quintal, it represents a premium over cost of production by 88.3%. This is much better than the 50% above cost formula that the government had approved for farm products. The final decision was based on a recommendation by the CACP.

However, not all sugar mills are happy with this announcement. They believe that for the FRP to be really having a strong downstream effect, the MSP for the sugar mills will also have to be increased proportionately. Otherwise, they would end up paying more for the sugarcane, without getting compensated for the refined sugar in the form of higher MSP. If that happens, the sugar cooperatives have warned, that the dues to the sugar cane farmers could once against start soaring. Sugar mills may just see more pressure after the FRP.

In Maharashtra, the second largest producer of sugar in India, the farmers are not too happy with the FRP formula. Their contention was that their cost of production had increased inordinately in the last one year due to a sharp spike in fuel and fertilizer price. The 2.6% FRP hike is inadequate if the side effects of acute input inflation are added. Sugar mills in Maharashtra are far from pleased. The FRP to farmers has led to many sugar cooperatives going bankrupt. They are unlikely to pay the higher FRP without an increase in MSP too.

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