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Sugar Sector: Turning sweet II - Views on News from Equitymaster
 
 
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  • Apr 28, 2008

    Sugar Sector: Turning sweet II

    In the last article, we had given a perspective on the recent demand supply scenario and the happenings in India in the sugar sector. In this article, we shall provide more highlights on the sector.

    Other crops - More attractive: As seen from the table, wheat and paddy cultivation would lead to higher earnings than the sugarcane crop. While sugarcane earnings as percentage of cost was around 60% last year, earnings from wheat and paddy stood at around 132% of cost (1 wheat and 1 paddy crop can be grown in a year). Delay in payment of cane in the last season and uncertainty over cane prices is resulting in cane farmers switching to wheat or other attractive crops. This would reduce the availability of cane by the next crushing season due to high diversion from cane to other attractive crops and under utilisation of capacity in sugar mills.

    Crop Yield
    (Qtl/Acre)
    SP
    (Rs/Qtl)
    Total Earnings
    (Rs/Acre)
    Cultivation Cost
    (Rs/acre)
    Net Earnings
    (Rs/ acre)
    Earnings
    (as a % of cost)
    Sugarcane 250 110 27,500 17,215 10,285 60%
    Wheat 20 1000 20,000 7,029 12,971 185%
    Paddy 20 800 16,000 8,500 7,500 88%
    1 Wheat+1 Paddy 36,000 15,529 20,471 132%

    Source: Bajaj Hindustan presentation

    Capacity expansions: The sugar companies had taken up major expansion plans in the last two to three years. On account of attractive sugar investment policy in UP, the sugar majors have increased capacities. This has resulted in huge capacity additions in the state. While Balrampur Chini has increased its capacities from 47,500 TCD to in 73,000 TCD, Bajaj Hindustan's FY08 estimated capacity is 1,36,000 TCD, up by 142% from FY06.

    Delay in crushing: Normally, the sugar season i.e. crushing starts in October and ends by April-May. However, the crushing this year started by mid November. This was on account of the dispute between the mills and the government regarding the cane prices. UP mills had appealed to the central and state government to cut the price of cane to Rs 900 per quintal from Rs 1,100 per quintal fixed by the government before commencement of the crushing season. But the government was reluctant to materialize this appeal, which ultimately resulted in the mills staying away from crushing. Hence, the production is expected to be around 26 MT, as compared to the earlier estimates of 31 to 32 MT.

    Huge demand potential: Based on the Tuteja Committee Report (Dec 2004), headed by Shri S.K. Tuteja, the demand for sugar is expected to grow from 24 MT in 2009-10 to 41.6 MT by 2023-24. Currently, the per capita consumption in India is very low as compared to Brazil, Russia and the US.

    Going forward...
    The situation for the sugar sector seems to be improving on account of late crushing, lower yield per hectare, switching of crops, higher exports thereby reducing the surplus stock in the country. Also, with higher crude prices and diversion to ethanol in Brazil, the global output is expected to be on the lower side. This has led to the rising trend in the sugar prices in recent times after having bottomed out in the last 18 months.

    Production in SS08 is likely to be 26 MT, which is 7% below SS07. As per Industry estimates production in SY09 would be down to 21 MT, lower by 19% YoY due to huge crop diversion from cane to alternate crops across India. This would lead to higher realisations and higher cane costs. Also, the pain for the sugar industry is not yet over for the current season, as the mill owners are still not able to recover their cost of production from the current prices. Further, the decision on the cane prices from the Supreme Court is still pending. Though the demand scenario is robust, political regulations and the commodity cycle will have implications for the sugar sector.

     

     

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