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The Indian Sugar Industry |
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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. |
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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. |
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Sub- Tropical zones |
Tropical zones |
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Uttar Pradesh (UP)
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Uttaranchal
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Bihar
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Punjab
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Haryana
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Maharashtra
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Andhra Pradesh (AP)
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Tamil Nadu (TN)
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Gujarat
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Karnataka
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| Maharashtra and
UP are the main cane producing states. |
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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. |
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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. |
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Legislation |
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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. |
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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. |
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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. |
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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. |
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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. |
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Others |
- Restriction on Cogen PLF, currently only in
AP. |
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| Source: ISMA,
SBI Capital Markets Limited report on sugar sector August
2006. |
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- 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.
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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. |
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Production (1961-2007), Source: ISMA |
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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. |
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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. |
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| looking to
export refined and raw sugar to foreign markets. There are
two key factors that are driving this trade: |
- 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.
- International trade has the potential to enable
stability in the domestic market and is promoted by the
government.
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