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Sugar: Macro trends

May 22, 2006

India is the largest consumer and second largest producer of sugar in the world. The Rs 500 bn Indian sugar industry is also the second largest in the country's agro-processing sector. It is a highly fragmented sector (453 operational sugar factories) with the largest private sector player accounting for a mere 3% of the market. India, as the world's second largest producer of sugarcane (after Brazil) accounts for around 5% of global sugar production. Although export restrictions and duties have gradually been relaxed, the government still largely controls the industry, particularly the pricing of sugarcane and allocation of land designated for cane growing. This is because sugar has been classified as an 'essential commodity'. This policy has in turn affected the economics of sugar production in India. Two of the key orders that govern the sugar industry in the country are:

Levy Sugar Supply Order, 1979
This order regulates sugar supply (or 'release') in the country. Releases can be classified into two categories: free sale or levy sale. Free sale is the quantity that mills is permitted to sell in the open market. Levy sales refer to the quantum of sugar that mills have to supply to the government to be distributed through the PDS. Currently, 90% of an individual mill's production can be sold through free sale.

Sugarcane Control Order, 1966
This order empowers the government to exercise control over the industry's crucial raw material.

  • Setting the statutory minimum price (SMP) payable to a farmer, which is linked to the average recovery rate. However, this is only a minimum and individual states advice mills to pay state advisory prices (SAPs) that, is generally at a premium over the SMP.

  • Regulate the movement and distribution of sugarcane.

  • Regulate and provide licenses to power crushers and Khandsari units.

Now, let us take a look at the broad dynamics that affect the sugar industry in the country.

Capacity growth
The Indian sugar industry has grown horizontally with a large number of small sized plants being set up throughout the country. The government granted licenses to new units with an initial capacity of 1,250 tonnes crushed per day (TCD) in the 1980s, which was increased to 2,500 TCD. Subsequently, de-licensing of the industry in 1998 (the only stipulation being that minimum distance between two sugar mills will be 15 kms) provided a growth impetus to the country's sugar units.

Production performance
Sugar production in India has been driven by factors like cane acreage, yield per hectare, drawal (cane crushed by the plant/ total cane produced in plants cultivable area) and recovery percentage which in turn depends on rainfall, competitive advantage to farmers over other crops. Currently around 4 m hectares of land i.e., around 2.7% of the cultivated area is under sugarcane production. The average recovery is 10%.

Area and production
Year Area undercane
(mn hectares)
Cane production
(mn tons)
1981 2.67 154
1991 3.69 241
2001 4.32 296
2002 4.41 297
2003 4.36 282
2004 3.99 236
2005 3.75 270
source : ISMA

Consumption performance
Sugar consumption depends on population growth and per capita consumption. Sugar consumption in the country has increased at a CAGR of 4% in the last 5 years and is expected to grow at the same pace going forward. Per capita consumption for sugar is around 18 kg in India, which is one of the lowest in the world.

Stock / consumption ratio
The difference between the production and consumption has reduced the inventory levels. The inventory level was 11.3 MT in FY02, which is expected to go down to 3.5 MT in 2007. Also, the stock consumption ratio, which was around 67% in FY02, has reduced to 17% in FY05. (table dec sec 2005)

mn/tonne 2002 2003 2004 2005 2006E 2007E 2008E
Opening stock 10.7 11.3 11.6 8.5 4.5 3.3 3.5
Production 18.5 20.1 14 12.5 17.5 21 23.5
Imports 0.4 2 1
Total supply 29.2 31.4 26 23 23 24.3 27
Consumption 16.8 18.3 17.3 18.5 19.2 19.8 20.6
closing stock 11.3 11.6 8.5 4.5 3.3 3.5 5.4
closing stock/consumption (%) 67.3% 63.4% 49.1% 24.3% 17.2% 17.7% 26.2%
source : ISMA

Outlook
The sugar industry in India is supply-deficient, with production shortfalls being met out of past year's inventory and imports (though miniscule). We believe that the industry will again face production shortfalls in the 2006, with inventory filling the gap for the third year in a row. However, considering that sugarcane cultivation currently occupies only 2.7% of the cultivable land in the country and that the per capital consumption of sugar is low, there exists a huge potential for the sector to grow strongly in the future.

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