The Cabinet Committee on Economic Affairs (CCEA) on Thursday approved a proposal to raise the benchmark price of sugarcane by R10 to R220 per quintal for the next marketing year starting October.

The food ministry had sought the CCEA approval to raise the fair and remunerative price (FRP) of cane to R220 per quintal for 2014-15 from R210 this year, based on the recommendation of the Commission For Agricultural Costs and Prices (CACP). The FRP is linked to a basic recovery rate of 9.5%, subject to a premium of R1.46 for every 0.1 percentage point increase in recovery beyond that.

Although the Centre fixes the FRP, a state is free to determine the minimum price at which sugar mills within its territory must purchase cane. The cane price set by an individual state, however, is much higher than the FRP, as the ruling party often uses the pricing policy as a tool to woo farmers who form the largest chunk of votes, making the FRP largely irrelevent. However, in states like Maharashtra, the FRP sometimes becomes the bechmark for offering the first instalment of money to farmers for cane purchases.

Earlier, a move by the Centre to introduce the FRP to discourage states from fixing higher cane prices was opposed by them. In Uttar Pradesh, the state advised price (SAP) of cane for 2013-14 stands at R280 per quintal, compared with the FRP of RRs 210.

While suggesting the FRP last year, the CACP had cautioned that any further increase in the SAP of cane by producing states would drive up output costs of sugar mills.

Earlier this marketing year, mills in Uttar Pradesh refused to undertake crushing after banks denied them working capital loans, citing mills’ continued losses due to a drastic mismatch between cane and sugar prices.

A deal was finally hammered out last month whereby the state government granted mills an incentive of R11.03 per quintal of cane in the form of a waiver of purchase tax, entry tax and society commission. Additionally, the Centre last week offered interest-free loans worth R6,600 crore to cash-strapped mills, mainly to clear cane arrears. Mills are asked to pay in five years with a moratorium on repayment in the first two years.

The country expects to produce around 24.1 million tonne of sugar in 2013-14, while its annual consumption is pegged at 23.50 million tonne. However, successive years of surplus production has boosted the stocks and kept prices low despite high cane prices.