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    The Indian Sugar Industry  
  Home > The Indian Sugar Industry    
 
 
 
 
  The Indian Sugar Industry
 
   
Sugar Industry in India
Indian sugar industry is the 2nd largest agro-industry with approximately 50 million sugarcane farmers and a large number of agricultural laborers (7.5% of the rural population) involved in sugarcane cultivation and ancillary activities.

Though consumption of sugar in India has been growing at a steady rate of 3%, and is currently at 23.1 million tones, per capita consumption at 18 Kg (lower than world average of 22 Kg) indicates potential upside from a demand standpoint.
 
Raw Material (Sugarcane)
In India, sugarcane is the key raw material, planted once a year during January to March. It is the major cost driver for the production of sugar. It being an agricultural crop is subject to the unpredictable vagaries of nature, yielding either a bumper crop or a massive shortfall in its cultivation from year to year.

The sugarcane growing areas may be broadly classified into two agro-climatic regions—subtropical and tropical.
 
Sub- Tropical zones Tropical zones
  • Uttar Pradesh (UP)

  • Uttaranchal

  • Bihar

  • Punjab

  • Haryana

  • Maharashtra

  • Andhra Pradesh (AP)

  • Tamil Nadu (TN)

  • Gujarat

  • Karnataka

 
Maharashtra and UP are the main cane producing states.
 
 
Industry Structure
About 50% of the sugar capacity is controlled by Cooperatives & Public sector mills. There are 566 sugar mills installed in the country, of which about 100 (mostly cooperatives) are not in operation. Almost half of the operational sugar cooperatives are in Maharashtra alone.

Though most private players have been moving towards larger and integrated complexes, most cooperatives are still much smaller in capacity, and are standalone sugar mills. This has resulted in their becoming uncompetitive as compared to private mills.
 
 
Government Policies
Sugar has historically been classified as an essential commodity and has been regulated across the value chain. The heavy regulations in the sector artificially impact the demand-supply forces resulting in market imbalance.

Sensing this problem, since 1993 the regulations have been progressively eased. The key regulatory milestones include de-licensing of the industry in 1998 and the removal of control on storage and distribution in 2002.

However, policy still plays an important role in the industry.
 

Legislation

Sugarcane procurement - Concept of Command Area which binds Cane farmers and Sugar mills to sell and buy from each.
- Sugar mills have to purchase all the Cane sold to them, even if it exceeds their requirement.
- In case of capacity expansions at existing Sugar mills, there is uncertainty regarding allocation of additional Area based on the expanded capacity.
Sugarcane pricing - Government administered Statutory Minimum Price (SMP) which acts as a floor.
- States like UP, Haryana and Punjab fix a higher price for cane, called the State Advised Price (SAP). . Historically, the SAP has been as high as 20-30% above SMP.
Sugar sales - Government mandates 10% of sugar to be sold as levy quota sugar at prices much lower than the market.
- The government also specifies monthly release quotas for free sale sugar.
Capacity and Production - Sugar producers are not allowed to own cane fields in India.
- New sugar mills cannot be set up within 15 km of existing units.
Exports & Imports - Imports of both raw and white sugar attract a basic duty of 60% and a countervailing duty of Rs. 910 per ton.
- In periods of sugar shortage, under the Advanced License Scheme (ALS), license holders can import raw sugar without paying any duty, subject to the condition that they re-export white sugar within a fixed period.
Others - Restriction on Cogen PLF, currently only in AP.
 
Value drivers
Source: ISMA, SBI Capital Markets Limited report on sugar sector August 2006.
 
  • As per government regulations, farmers are eligible to sell their crop at Statutory Minimum Price (SMP). Hence, their profit is impacted by differential between SMP and the cost of cultivation, harvesting and transportation, which are in turn dependent upon farm productivity, labor availability, distance between farm & market, mode of transport etc. Any price offered to farmers over and above SMP is additional profit for them.
  • Since cane prices are governed by SMP, the drivers for economic profits for the mills are the sugar prices in domestic and international markets, milling costs and by-product realizations. Lately due to depressed sugar prices, there is an increased focus on cogen and distillery products. This strategy enables better profit realization and risk mitigation through product diversification.
Sugar Industry cycle
Like any other agricultural product, cane production follows a cycle. This impacts the sugar industry which has a typical of 4-5 year cycle.

Higher sugarcane production results in a fall in sugar prices and non-payment of dues to farmers. This compels the farmers to switch to other crops causing a shortage, which in turn results in increase in sugarcane prices and extraordinary profit. Taking into account the higher prices for cane, the farmers switch back to sugarcane, which completes the cycle.
 

Production (1961-2007), Source: ISMA

 
Outlook
Based on the past ten years' growth in consumption and estimates from various independent sources, it is expected that in 2017, the domestic sugar consumption would be approximately 28.5 million MT. Given the high cost of imports and the strategic importance of food security, India would need to target its production in excess of domestic consumption. Given the past trend in production cyclicality, sugar equivalent to 1.5 months of consumption i.e. an additional 3.5 million MT of sugar would need to be produced by 2017. Therefore the sector has huge investment potential.

In the near term (Sugar Season 2008-10), prices are expected to go up as most mills had reduced their production due to low sugar prices.
 
Emerging trends
The new plants which are being constructed are integrated complexes. This would help in de-risking from
sugar downturns and benefit from untapped potential of ethanol and cogen. For instance, while sugar capacities are set to grow by 58%, Cogen and ethanol capacities are planned to grow by 175% and 217% respectively.
 

looking to export refined and raw sugar to foreign markets. There are two key factors that are driving this trade:
  1. India is located close to major sugar deficient markets. The Indian Ocean countries of Indonesia Bangladesh, Sri Lanka, Pakistan, Saudi Arabia, UAE and some East African countries are sugar deficient and import sugar regularly.
  2. International trade has the potential to enable stability in the domestic market and is promoted by the government.
 

 
 
 
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