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Sugar 

Background

India has been known as the original home of sugar and sugarcane. In global sugar economy, the Indian sugar industry has achieved a number of milestones. The Indian Sugar industry is the second largest agro-processing industry in the country.

Sugar is extracted from two different raw materials sugarcane and beet. Sugarcane (Saccharum officinarum) is the main source of sugar in India and holds a prominent position as a cash crop. It accounts for 60-65% of the cost of production of sugar. Both produce identical refined sugar. Sugarcane is grown in semi-tropical regions, and accounts for around two-thirds of world sugar production. Beet is grown in temperate climates, and accounts for the balance one third of world production. In India, sugarcane is the key raw material for the production of sugar.

Sugar production in India is concentrated in six states, viz., Maharashtra, Uttar Pradesh, Gujarat, Tamil  Nadu, Karnataka, and Andhra Pradesh which together account for 85-90% of sugar production in India. The industry directly employs around 0.5 million people while it indirectly provides gainful employment to another about 4.0 million people engaged in sugarcane cultivation.

Size

  • The Indian Sugar industry accounted for around 1% of GDP of the country during FY2005.
  • The Indian sugar industry contributes an estimated Rs. 17 billion annually to national exchequer and treasuries of various state Governments by way of excise duty and purchase tax on Sugarcane.
  • The sugar industry employs 0.5 million workers and also provides substantial indirect employment through various ancillary activities
  • India has been the largest Sugar Producer in 7 out of 10 years and is currently the second largest sugar producer in the world (after Brazil), accounting for around 10-12% of worlds production. It has an estimated production of 18.6 mt in sugar year or SY2006 (sugar year is from October-September).
  • India has the Second Largest Area under Cane/Cane Production
  • India has sugar amongst the cost-effective industries with its field cost (Sugar cane) being the second lowest, despite small land-holdings and low productivity
  • India is the fourth efficient processor of sugar despite low capacity of its sugar plants as compared to very large size plants in other parts of the world
  • India is the largest consumer of sugar in the  world, mainly due to its  tropical  climate, easy availability of low-cost labour, and low-cost irrigation  facilities (owing  to the availability of subsidised water and power) has helped it attain this position in the world sugar economy
  • The Indian sugar industry accounts for about 5% of the global sugar production.

Structural Characterstics

  • The Indian  sugar industry  is  highly  fragmented with  over  450  mills  and  no  single player having a market share of over 5%. In fact, the largest private sector player accounts for only 3% of the domestic market.
  • Around 60% of the mills are in the co-operative sector, 35% in the private sector, and the rest are in the public sector. Although cooperatives account for around 43% of the total production in the sugar industry, their share has gradually declined.
  • The Sugar industry can be broadly classified in to two sub sectors, the organized sector i.e.,sugar factories and the unorganized sector i.e. manufacturers of traditional sweeteners like gur and khandsari.
  • Sugar plant size (in terms of cane crushed per day) is the main criteria for determining the productivity and viability of the sugar industry. In India average plant sizes have increased in recent years from around 2,500 tcd in SY1995 to an estimated 3,500 tcd at present, though lower as compared with 9,000-10,000 tcd in Brazil. The present trend is for an initial installed capacity of 5,000 tcd, with capacity expandable upto 7,500-10,000 tcd or above. Cane availability is the limiting factor behind increasing plant sizes.
  • The economics of sugar in India are different than those of sugar industries in many other countries. This is because of the co-existence of the centrifugal (i.e. white refined sugar) mill industry with a large cottage industry that manufactures traditional sugar forms such as gur and khandsari. Sugar mills face strong competition for sugarcane supplies from gur and khandsari manufacturers.
  • During periods of normal monsoons, higher acreage under sugarcane and higher yields result in higher sugarcane production. Area under sugarcane and its production is also a function of fluctuations in prices of gur and khandsari, and changes in returns from competing crops to sugarcane.
  • Generally, higher sugar prices and lower stocks of sugar result in higher revenues for sugar mills, and lower cane arrears/dues payable to the cane growers. One of the main reason for the decline in sugarcane and sugar production during SY2004 was the high cane price arrears in SY2003 season.

Global Sugar Situation

The world sugar consumption rose from 118.1 mt in 1996 rose to 145.1 mt in 2005. India and China together account for about 45% of the worlds total sugar consumption. Overall, the world sugar consumption is expected to grow to 160.7 mt by the 2010. The following structural changes are likely to have a significant impact on the global sugar prices in the medium term:

a)  Success of flexi-fuel vehicles (FFVs) in Brazil : Currently, the blending of ethanol with gasoline in Brazil is in the ratio of 20:80. As Brazil has started manufacturing flexi-cars with 100% ethanol, more cane is expected to be diverted towards ethanol production resulting in higher sugar prices.

b) Rising crude prices: As crude prices continue their upward surge, further diversion of cane towards ethanol production is possible putting pressure on sugar prices. 

c)  EU subsidy reduction: The European Union (EU) is a key player in the sugar market producing around 20 mt of sugar and one of the largest exporters in the world. The EU pays around US$ 1.8 bn subsidy to the sugar sector per year. The WTO ruling announced in mid 2005 stipulating cut in EU sugar subsidies, therefore, means higher global sugar prices. Since the WTO announcement both raw & white sugar global prices have increased by over 20%.

India global competitiveness is hampered by low sugar recovery of 10.2%, as compared with 12-13% in some of the major producing countries. 

Policy 

· The sugar Industry is highly regulated with the government exercising control right from cane sourcing to sugar distribution and pricing. Sugar comes under the purview of Essential Commodities Act, 1955 and is also controlled by Sugarcane (Control) Order, 1966 or SCO, 1966, the Levy Sugar Supply Order 1979, plus the other relevant acts of the State Governments.

·  The Central Government announces the Statutory Minimum Price (SMP) for sugar cane at the beginning of each season. The SMP has been increased every year since 1988, and was fixed at Rs. 79.50 per quintal for the 2005-06 sugar year (SY). Over and above this, the State Governments announce State Advised Prices (SAPs) in respect of sugar cane supplied to mills within their boundaries which are generally substantially higher than the SMP.

· The Government follows a policy of partial control on sugar distribution under a two-tiered pricing system since 1967. The first tier applies to `levy sugar™ and sugar mills have to supply quotas to the Food Corporation of India (FCI) at prices fixed by State Governments. The remaining domestic supplies plus imported sugar are sold at Free Sale Prices (FSP). The ratio of LSP to FSP is currently fixed by the government at 10%: 90%.

   The Government has placed imports of sugar under Open General Licence (OGL) since 1994.

Outlook

  • Despite fluctuations in production, India sugar consumption is expected to increase at a steady rate of 4.5% per annum in the medium term. Income increases, and high-income elasticity of sugar, and the continued switch in demand from gur and khandsari to sugar are expected to drive consumption.
  • Although gur and khandsari are still the main sugar products consumed in rural areas, demand for white sugar is expected to continue to increase both in absolute and per capita terms.
  • Moreover, the growth of sugar demand by food industries and other non-household users, estimated to account for about 45% of total consumption, could provide additional impetus to longer-term market growth.
  • In the short term, higher sugar production during SY2006 and SY2007 could result in replenishment of sugar stocks and exert a downward pressure on prices. In the medium term, both area and production of sugarcane are expected to fluctuate considerably from year to year, depending on variations in climatic conditions, the vulnerability of areas cultivated under rainfed conditions, fluctuations in prices of gur and khandsari, and changes in returns from competing crops.
  • The industry is expected to move into a robust surplus situation in 2006-07 SY, with production of 22.2 million tonnes and domestic consumption of 19.6 million tonnes, coupled with exports of 1.5 million tonnes.
  • During 2007-08 SY, too, supply is expected to outstrip demand. Supply is expected to be around 24 million tonnes, compared with consumption of about 20.2 million tonnes. This would add to stock levels. Besides, global prices would determine the export opportunity and affect stock levels.
  • Sugar companies are aggressively going in for capacity expansions over the past two years on account of growth in demand and a favourable global scenario. Completion of these projects would add a crushing capacity of 2.78 lakh tonnes adding about 38 lakh tonnes to the total sugar manufacturing capacity

References : www.indiansugar.com;ICRA reports, CMIE reports, CRISIL reports
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