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Sugar: Macro Trends-II - Views on News from Equitymaster
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  • May 24, 2006

    Sugar: Macro Trends-II

    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.



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