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  • Increase in FRP for sugarcane by 3.6% Y-o-Y for SY2021, to impact mills OPM by 100-150 bps: ICRA

    Published on August 24, 2020

    The Cabinet Committee on Economic Affairs (CCEA) has fixed the fair and remunerative price (FRP) at Rs. 285/quintal for SY2020-21 season, an increase by Rs. 10/quintal compared to the previous year. The increase in the FRP is 3.6% for the season SY2020-21 and assuming that the prevailing sugar prices are likely to continue in SY2021, the operating margins of sugar mills are likely to get adversely impacted by 100-150 bps due to rise in the cost of production.

    Says Mr. Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, “The increase in the FRP is likely to result in an increase in the cost of production by around Rs. 1000/MT of sugar. The sugar prices increased to Rs. 32-33/kg in June – July 2020 from closer to MSP levels of Rs. 31/kg in April – May 2020. While the recent pick-up in consumption and pace of sugar exports is likely to support the sugar prices in the near term, given the sugar surplus scenario, some moderation in the sugar prices cannot be ruled out. Assuming that the prevailing sugar prices are largely likely to continue in SY2021, the operating margins of sugar mills are likely to be impacted by 100-150 bps and the contraction may increase for any correction in the sugar prices from current levels. Given the increase in FRP, the increase in the MSP for sugar remains critical given the continued sugar surplus scenario in the domestic market.”

    The FRP, which is the minimum guaranteed cane price to the farmers, is fixed based on the recommendation of the Commission for Agricultural Costs and Prices (CACP). For SY2020-21, it has been fixed at Rs. 285/quintal for a recovery rate of 10%, subject to a premium of Rs. 2.85/ quintal for every 0.1 percentage point increase in recovery above that level compared to Rs. 275/quintal for a recovery rate of 10%, subject to a premium of Rs. 2.75/quintal in SY2019-20. For a recovery rate between 9.5%-10.0%, the reduction is FRP is by Rs. 2.85/quintal for every 0.1 percentage point decrease in recovery. For a recovery rate of below 9.5%, the price has been fixed at Rs. 270.75/quintal.

    “This increase in the FRP likely to result in an increase in the state-advised price (SAP) set by the state governments in the SAP following states. At a higher FRP and an expectation of a higher sugar production for SY2021 Y-o-Y, the cane arrears are expected to increase. Thus, the Government’s intervention in support of the sugar mills and the farmers will remain important in the coming sugar season to prevent an increase in the cane arrears,” Mr. Majumdar added.

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