Impact on sugar cos post scrapping of clause 3(B)

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The government plans to end the logjam on sugar pricing by scrapping clause 3(B) of the Sugarcane Control Order, 1966, which makes it mandatory for the state governments to bear the difference between the fair and remunerative price (FRP) and the State Advisory Price (SAP).

SP Tulsian of sptulsian.com says post the repealing of clause 3(B) profits of sugar companies would shrink by Rs 3 per kg this season. Despite all this, he adds that sugar companies will make a profit of Rs 4 per kg on a rack rate of Rs 33 per kg.

To put things in perspective, Uttar Pradesh, India's second-largest sugar producer, has announced a SAP of Rs 165 per quintal. However, farmers are demanding a price of Rs 210 per quintal. The Centre's fair and remunerative price stands at Rs 130 per kg. Earlier, the Rs 35 difference between the FRP (Rs 130) and SAP (Rs 165) was paid by the state government. The difference (Rs 45) between SAP (Rs 165) and the current price (Rs 210) was borne by mill owners, if paid at that price.

The government now wants mill owners to bear the entire difference (Rs 80). Tulsian feels this is a practical solution which would help end the impasse. "This will be quite beneficial for UP sugar mills. We should be able to see mills starting their crushing from Monday."

How would realizations shape up?

Tulsian says sugar companies will still make a profit of Rs 4 per kg on a rack rate of Rs 33 per kg. "At present, the realization is close to Rs 33 per kg in UP. One needs to see what will be the levy price set by the central government. If it is Rs 15 per kg, there will be an additional loss of Rs 3 per kg which needs to get added. I take sugar price at Rs 24 per kg and add manufacturing cost of about Rs 5, which gives me Rs 29. If I sell my sugar at Rs 33, which is likely to remain maintained for the entire season, mills will make a profit of Rs 4 per kg. On top of it, they will have an extra realization of close to Rs 425 per kg from molasses and bagas. I don't think any miller can expect better profits than this. This must be the highest realization in their lifetime."