Sugar the long forgotten commodity! From the bull run of 2008, the commodity could never return to its glorious past. That hasn't happened in India alone, but in the global scenario as well. So what happened that led to such a lucrative and cash rich business turn into losses and debts with many of the state owned mills in India closing down and unable to pay their debts?
Sugar cane prices in India have doubled from Rs. 130 to Rs. 275 per quintal in the last 9 years, where as average ex-mill prices have risen only 5% from Rs. 29.5 to Rs.31 per Kg. This price mismatch has made production of sugar almost un-viable as average cost of production of sugar runs into Rs. 35-36 per kg. The sugarcane arrears rose to Rs.20,000 cr last year and the amount looks similar for current season as well. Yet, if you look at farmer level there is more incentive to grow sugarcane crop as compared to other crops as average realization per ton is Rs. 2750 as compared to Rs. 1735 of paddy or wheat.
So why do farmers produce more and more sugarcane in spite of delayed payments ?
Sugarcane is a sturdy crop: It can withstand weather fluctuations better than others.
Better remuneration: Farmers get 50-60% higher returns from sugarcane as compared to any competing crop.
Assured buyer: Each farmer is attached to a sugar mill. The mill can’t close till it crushes all sugarcane grown in its area.
Assured price: Farmer gets full cane price fixed by Central or State Govt. , which is not the case for other crops.
No middlemen: Cane is bought directly and payment made directly into bank accounts of farmers.
With the demand of sugar for consumption pegged at 26 lakh tons per p.a. in India , the total availability for the current season is around 40.4 lakh tons (comprising of 10.4 lakh tons opening stock plus additional production of 30 million tons). Selling the resulting surplus of around 14 lakh tons in the domestic market will only cause huge losses to the millers. Hence, exports is the only available avenue to remove this surplus from the market, which is not possible without the help of govt. price incentives as the parity prices are way off the mark.
The cost of production of sugar in India is USD 554 / ton vs Brazil's USD 333.75 / ton there by making exports of excess sugar noncompetitive in the global market. Thus exports is very poor and India achieved only 24% of its export target. The Parity price calculation can be understood from the below table :
The problem of sugar bear run isn't only in India but at the global level. Global excess production of sugar for the year 2017-18 remained high at 18 lakh tons, there by creating a buffer stock of approx 55 lakh tons. This is almost 30% of the world's consumption of sugar. Also with renewed focus on health people are avoiding sugar in drinks and food resulting in low growth in demand. While the world population is growing at 1.07% annually, the sugar demand is increasing by 1.15-1.5% and becoming more and more stagnant. With calorie count mandatory in certain countries and sugar taxes being imposed, big industries are moving towards alternative low calorie sugar substitutes there by impacting demand of sugar. The phenomenon of low sugar consumption is also visible in India but with India known for its sweets and sweet tooth the issue may be futurist. The glut in sugar prices is also due to its high dependence on oil prices. Ethanol derived from sugar cane is an oil substitute and has direct relation to price of oil. In 2008-09 there was a boom in the oil market there by cane juice used for making sugar as well as ethanol was directed towards production of ethanol. That caused the sugar parity prices to rise for short duration. With the current parity price of sugar and ethanol at 14.39 $ per pound of sugar in Brazil, the worlds largest cane grower, there is limitations to the upside of the sugar prices. Also the diversion of production of ethanol to sugar could cause strain on sugar prices. So unless the oil prices go up or there is a huge deficit in the following years in sugar production, the prices are likely to remain range bound.
So Is India on the Right track to find the Sugar Solution ?
Recent steps by Govt. of India
New Bio-fuel Policy in 2018
Allows sugar mills/distilleries to make ethanol from cane juice, B-molasses, food grains, potato etc.
Procurement price of ethanol being fixed by Govt. since 2014. Price increased significantly for 2018-19
Premium prices for ethanol made from cane juice/B-molasses/grains Relevant Act amended to make ethanol movement smoother
States being convinced/ pursued to withdraw the controls Standards fixed for 20% ethanol blended gasoline in India
Subsidized loans by Govt. for new/ exp Need to implement 20% blending levels Govt. has already fixed ethanol blend standards at 20%
Ethanol production capacities to be set up at a great pace
This would mean possibility of 450-500 crore liters of ethanol production by 2020-21 equivalent to over 15% blend levels which will only continue to increase. Hence, immediate need to get all stakeholders to move to 20% blend levels, starting with UP and Maharashtra in 2019-20
More Steps that need to be Implemented/Rationalization of cane pricing policy International laws/practice across sugar producing nations:
Cane price automatically gets determined as per formula as a percentage of revenue from sugar and/or by-products. It varies in the range of 60-66% Brazil, Thailand, Australia, EU, Mauritius, Kenya, Tanzania etc.
If India has to export sugar, it needs to be competitive and adopt similar systems/ practice
What Does that mean for the industry ?
Generally sugar sector isn't held by long term investors. Its majorly held by short term investors wanting to get the maximum in case of the bull run within a short time period. However with regulations and pricing of sugar being done properly, the profits from this sector would become more predictive every year and thereby leading to an expansion of PE multiple and lower down trends in these scripts. With formula based pricing coming into picture it could re-rate the entire sugar industry.
References: https://www.reuters.com/article/us-brazil-sugar-ethanol/brazil-economy-gasoline-price-hikes-boost-ethanol-outlook-as-crop-nears-idUSKCN1QA2JG https://www.business-standard.com/article/reuters/global-sugar-deficit-in-2019-20-seen-at-1-36-million-tonnes-green-pool-119020101210_1.html https://greenpoolcommodities.com/news/global-sugar-deficit-201920-seen-136-million-tonnes-green-pool/ http://www.agri-outlook.org/commodities/Agricultural-Outlook-2018-Sugar.pdf https://www.cnbc.com/2018/10/11/reuters-america-world-sugar-market-could-swing-to-deficit-in-201920-as-brazil-eu-curb-output--broker.html Www.indiansugar.com
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