Sugar: Macro Trends-II - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Sugar: Macro Trends-II

May 24, 2006

In an earlier article, we gave an insight into the production and consumption aspects of the sugar industry. In this article, we take a look at some other aspects.

Gur and Khandsari: Competitors
Sugarcane occupies about 2.7% of the total cultivated area and it is one of the most important cash crops in the country. From a level of 154 million tonnes (MT) in 1981, the cane production increased to 270 MT in 2005. Sugar cane is not only used for producing sugar but is also an input for traditional sweeteners like Gur and Khandsari. Almost 35% of cane production in India is utilised by the Gur manufacturers (see table below).

Sugarcane Utilization (in %) for different purposes
(%) White Sugar Gur and khandsari Seed, feed and chewing
1981 33.4 54.8 11.8
1991 50.7 37.4 11.8
2001 59.7 28.8 11.5
2002 57.4 31.5 11.1
2003 68.9 20.1 11.1
2004 56.1 32.5 11.4
Source : ISMA

Sugar pricing and distribution
The government has been following a dual pricing policy for sugar under which, a fixed percentage of the total production is to be necessarily sold by the sugar mills to the government at a pre-determined price. This is referred to as 'levy sugar'. The sugar so collected is distributed to consumers through Fair Price Shops under the Public Distribution System.

The balance sugar, referred to as 'free sale sugar', can be sold in the open market. Free sale sugar is also regulated to some extent, by way of a release mechanism, whereby the government determines the quantum of sugar that can be sold every month. This helps the government maintain stability in sugar prices, by regulating the supply of sugar based on the underlying demand. In the 1990s, the ratio of free sugar to levy sugar was 60:40. However, since then, the levy imposed has reduced from 40% to 10% (90:10 ratio of free and levy sugar) effective March 2002.

Cane prices Vs sugar prices
Sugarcane cost accounts for 60% to 70% of the cost of production of sugar. The determination of price for sugarcane is, therefore, a matter of critical importance both for the sugar industry and the cane growers. The central government, before the onset of crushing season, declares the Statutory Minimum Price (SMP). It is linked to the base recovery rate of 8.5% with a premium for higher recovery. This mechanism has hurt the profitability of the sugar manufactures as the minimum price paid for the cane is increased every year irrespective of the sugar prices. SMP of sugarcane has increased at a compounded rate of 5.8% during the period 2001 to 2005, while the average sugar prices have increased at a lesser rate of 4.5% per annum.

By-products - Additional revenue
The sugar industry is closely linked to the sugar price cycle. Higher cane and sugar production results in a decline in realisations for companies. Higher sugarcane and sugar production results in a fall in sugar prices and non-payment of dues to farmers. This compels the farmers to switch to other crops, thereby causing a shortage of sugarcane. This consequently leads to an increase in sugarcane prices. Taking into account the prevalent higher prices for cane, farmers then switch back to sugarcane. Due to this cyclical nature, sugar manufacturers are vulnerable to industry oscillations. However, sugar by-products like molasses (ethanol, ENA and rectified spirit) and bagasse aid the sugar producers in diversifying risks and lending stability to their revenues.

Basis: 1 MT of Cane at Recovery of 10% (Revenue in Rs)
Parameter Unit Conventional mill Integrated Mill
Sugar kg 100 100
Molasses kg 40 0
Ethanol lts - 10
Saleable power kwh - 75
Co product revenue Rs 100 410
Sugar revenue Rs 1750 1750
Total revenue Rs 1850 2160
Cane price Rs 1200 1200
Contribution Rs 650 960

The road ahead
The sugar industry in India is supply-deficient. The industry will again face production shortfalls in the year 2006, with inventory filling the gap for the third year in a row. Deficit inventory coupled with rising demand of sugar and ethanol has changed the fortunes of Indian sugar companies. These companies are gradually transforming themselves from being conventional sugar mills into multi-product businesses by realising the potential of value added revenue streams from ethanol manufacturing and power co-generation. We believe that the industry would be positively impacted by both the structural and operational changes in the country.

Equitymaster requests your view! Post a comment on "Sugar: Macro Trends-II". Click here!


More Views on News

NESTLE Announces Quarterly Results (1QFY21); Net Profit Up 11.1% (Quarterly Result Update)

Sep 23, 2020 | Updated on Sep 23, 2020

For the quarter ended June 2020, NESTLE has posted a net profit of Rs 5 bn (up 11.1% YoY). Sales on the other hand came in at Rs 31 bn (up 1.7% YoY). Read on for a complete analysis of NESTLE's quarterly results.

VENKYS (I) LIMITED Announces Quarterly Results (1QFY21); Net Profit Down 24.0% (Quarterly Result Update)

Sep 15, 2020 | Updated on Sep 15, 2020

For the quarter ended June 2020, VENKYS (I) LIMITED has posted a net profit of Rs 470 m (down 24.0% YoY). Sales on the other hand came in at Rs 5 bn (down 40.2% YoY). Read on for a complete analysis of VENKYS (I) LIMITED's quarterly results.

BRITANNIA 2019-20 Annual Report Analysis (Annual Result Update)

Aug 6, 2020 | Updated on Aug 6, 2020

Here's an analysis of the annual report of BRITANNIA for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of BRITANNIA. Also includes updates on the valuation of BRITANNIA.

BRITANNIA 2018-19 Annual Report Analysis (Annual Result Update)

Sep 16, 2019 | Updated on Sep 16, 2019

Here's an analysis of the annual report of BRITANNIA for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of BRITANNIA. Also includes updates on the valuation of BRITANNIA.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms