The government on Wednesday decided to create a buffer stock of four million tonnes of sugar over one year at a cost of Rs 1,674 crore, which will suck out a sizeable chunk of  the massive surplus stocks from the market and stabilise sugar prices, as cane arrears hit Rs 15,200 crore as of July 15, a record for this time of the year.

The Cabinet committee on economic affairs (CCEA) also refrained from raising the fair and remunerative price (FRP) from Rs 275 per quintal for the next marketing year starting October 1 to keep a leash on mills’ cane costs.
Though the government will keep unchanged the cane FRP, experts say if the Rangarajan panel’s formula of fixing cane price at 75% of sugar sales realisation is applied, the effective FRP (based on the recovery rate) is still higher by roughly Rs 42 per quintal. Even while announcing the cane FRP of Rs 275 per quintal for 2018-19, food minister Ram Vilas Paswan had admitted that it was a massive 77.4% higher than cane costs.

As has been pointed out repeatedly by analysts, unless the Centre and the states stop fixing cane prices at exorbitantly high levels, no such sops can prevent the recurrence of massive cane arrears year after year, although they will offer temporary relief to mills.

The creation of buffer stocks will help “protect the interest of sugarcane farmers and ensure dues are paid on time”, information and broadcasting minister Prakash Javadekar told reporters after the CCEA meeting. In August 2018, the Centre had set up a buffer stock of three million tonnes of sugar, which was estimated to cost Rs 1,175 crore to the exchequer.

Top industry executives say the latest decision on the buffer stock will serve mainly three purposes. First, it could potentially move up the ex-factory sugar price from an average of around Rs 31.5 per kg (which is only slightly higher than the minimum sale price of Rs 31 fixed by the government and lower than cost of production of Rs 36-37/kg) by trimming the available stocks from around 14.5 million tonnes at the end of this year to 10.5 million tonnes. Stocks still would remain way above the normative requirement of five million tonne, they say. Second, while banks usually offer mills working capital loans up to 85% of the sugar stock value, on buffer stocks, they typically extend up to 100%. This means mills would get more working capital loans on four million tonnes of buffer sugar. Third, since the carrying cost is borne by the government, mills save on their costs (Rs 1,674 crore in this case).

Since the 2019-20 marketing year is likely to commence with huge carryover/opening stock, building a sugar buffer stock will help maintain demand-supply balance and to stabilize sugar prices, according to an official statement. The Indian Sugar Mills Association (ISMA) expect production to touch 28.2 million tonnes in 2019-20, lower than that of 32.9 million tonnes this year but still higher than the expected consumption of around 26 million tonnes.

The buffer stock will be created for one year from August 1, 2019, to July 31, 2020, according to the official statement. “This would improve the liquidity position of sugar mills. The reimbursement available under the scheme would be directly credited into farmers’ account on behalf of sugar mills against their cane price dues,” the government added.

Welcoming the decision, industry body ISMA Director General Avinash Verma said it will help reduce a substantial part of the burden of sugar mills. “Not only will it give extra cash flows to sugar mills, but will also hugely improve market sentiments, because creation of buffer stock immediately withdraws 4 million tonnes of sugar from the market for the next 12 months,” he said.

On the FRP, Verma said: “The FRP has increased quite steeply in the last few years and sugarcane has outstripped the returns to farmers from other crops. This decision will restore some balance amongst the crops. It will benefit the sugar mills because 70 to 75% of the cost of producing sugar is only on account of sugarcane.  At the same time, it will help keep cane price arrears of farmers under control," it said in a separate statement.