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23 May 2018 11:41 AM, Outlook RASHMI RAWAT

Sugarcane price arrears to cross Rs.262 billion in 2017-18 sugar year

To be highest ever

Sugarcane price arrears are expected to rocket from Rs.32.72 billion as on 1 October 2017 to Rs.262 billion by the end of the current sugar year. They had risen from Rs.7.6 billion as on 1 October 2016 to Rs.32.72 billion as on 1 October 2017.

Sugarcane arrears topped Rs.182.9 billion as on 15 March 2018, according to the Directorate of Sugar of the central government. The sugar mills association has claimed that sugarcane price arrears as on 30 April 2018 are over Rs.210 billion. The arrears are expected to rise further by the end of the season and cross Rs.260 billion as sugar prices are expected to remain weak.

Sugarcane arrears at the end of the current sugar season will be the highest unpaid dues the industry has ever reported in the past.

Sugar mills are unable to make payment to farmers on time for the cane purchased as sugar prices have fallen below their cost of production. While the cost of producing sugar is around Rs.35 per kg, as per the Indian Sugar Mills Association (ISMA), sugar is currently being sold at Rs.26 per kg in the domestic wholesale market. As a result, mills are suffering a loss of Rs.9 per kg on sale of sugar.

There is a huge gap between the cane prices to be paid by the sugar mills as per the Fixed and Remunerative prices (FRP) and the prices the mills can afford to pay at the prevailing rate of sugar price. As per the FRP fixed by the Centre, mills are required to pay Rs.255 per quintal on cane purchased. The mills, however, can only pay Rs.237 per quintal.

This is because, for every one quintal (100 kg) of cane crushed, mills produced roughly 10.7 kg sugar. The current market price of sugar is Rs.26 per kg. We believe that sugar will average Rs.29.5 per kg for the year as a whole. At this average price and with a 10.7 per cent recovery rate, mills can pay a maximum of Rs.237 per quintal. This does not even cover the FRP.

The gap for sugar mills in UP is even higher as the State Advised Price (SAP) is much higher than even the FRP at around Rs.315-325 per quintal. UP is also the largest sugar producing state in India and consequently accounts for nearly half of the cane arrears.

With the wholesale market price averaging at Rs.29.5 per kg, the mill gate price would average Rs.27 per kg. This would result in an underrecovery of Rs.256 billion. The Rs.5.5 per quintal cane subsidy by the central government would reduce this by a maximum of Rs.17.6 billion. Consequently, sugar mills are likely to pile up arrears to the extent of Rs.238 billion by the end of the current sugar season. Add to that arrears of the previous two sugar seasons amounting to Rs.24 billion. The total arrears of the industry is expected to touch Rs.262 billion by September 2018.