Three big ironies in the India Sugar sector

Last Updated : 19 September 2012 at 13:20 IST

Total decontrol of India sugar sector could still remain a distant dream as the center and state governments are involved in controlling of the commodity. “I don't expect it so soon.”said a sugar industry official.

An expert committee headed by PMEAC(Prime Minister's Economic Advisory Council) is expected to give report on sugar decontrol by September end.

“We have held all the deliberations. We have met with all the representatives of sugarcane growers, various state governments. So, we are in a position to submit the report within the next 10-15 days at the maximum,” Prime Minister’s Economic Advisory Council (PMEAC), chairman, C Rangarajan told reporters on the sidelines of an event in New Delhi.

The sugar industry had been demanding partial decontrol of the commodity; ISMA or Indian Sugar Mills Association and NFCSF (National Federation of Cooperative Sugar Factories Limited) demanded freedom to sell sugar in the open market and levy sugar obligation for PDS be curtailed.

On January 27, the Prime Minister of India. Dr. Manmohan Singh set up an expert committee, under chairmanship of C. Rangarajan, to examine issues related to decontrolling of the sweeter.

The three ironies

The sugar sector in India can be divided into two parts: the sugar cane side and the sugar side. In India, the state government controls the sugarcane side even as the government at the center controls the sugar side of the sector.

The regulation of the sugar side is relatively easy in the sense that it is less controversial and hence susceptible to manipulations. But regulating the cane side is no so easy.

Ironically, the tag of “most organized industry in India” turns out to be the industry's biggest disadvantage.

“Sugar sector is the most organised sector in India. And yes, it is more of a disadvantage as far as the industry is concerned as we can be easily targeted.” lamented an official with a major sugar mill in India. “There could be around 500 mills in India and it is far easier when you want to control the industry.” he said.

One just has to take care of the 500 mills and the rest follows: the logic is evident.

Sugar is the most controlled commodity in India. The mills as per the law of the land is obliged to supply sugar under the levy mechanism. This means the mills set aside 10% of their output, which is a variable, that would be released to the Public Distribution System as per government directives for a price fixed by the government.

This is termed levy sugar and the prices of the levy sugar are way below the production cost of the sugar.

“The mills in effect, subsidise the sugar for the Public Distribution System.”the sugar industry official said.

But when it comes to the cane side, the matter gets complicated as the livelihood of millions of farmers are at stake.

“The farmers are a vote bank. So the political parties generally do not do anything that would estrange the farmers.”

The farmers in Maharashtra are offered a Fair and Remunerative Price or FRP by the government. In Tamil Nadu, the state government has brought in a system of State Administered Price or SAP.

However the sugar industry is also one of the industries that is bearing the brunt of (imprudent) incentives. This is yet another irony.

“ In the State of Uttar Pradesh, way back in 2005-06 the then Mulayam Singh government decided to introduce incentives for sugar cane crushing. That was a time when the sugar mills were functioning 160-180 days a year.” the official recalled.

“The number of mills engaged in crushing, subsequently to the announcement, shot up and the figure suddenly came down to 100-110 days by 2006-07 as the cane availability did not register much of a surge. Meanwhile output from the mills too climbed. In 2003-04 the output hovered around 3 lakh tons even as in 2006-07 output witnessed a surge by around 5 lakh tons to almost 8 lakh tons.” the industry source said.

But this production surge together with other factors like tight regulation took the industry to the brim.

The sugar industry in India is also the most litigant sector despite the numerous acts—like Essential Commodities Act or Sugarcane Control Act--governing it; the third irony.

“With hundreds of acts in place to govern it, sugar mills often engage in spat with each other and with governments--central and states--with regard to levy price, sugar cane price among many other things.” the official said.

Meanwhile, for the quarter ending September sugar mills may garner some profit as the prices have appreciated, the official added. The lack of availability of labour to work in the fields is an issue awaiting the next season, the official concluded.

The sugar industry in India has some uniqueness as well:

New players or mills are not joining the game!

The players who are currently involved in the industry have been here for 3-4 generations spanning 70 years or possibly even more. They know the markets well and have seen their share of ups and downs. The farmers too cherish long drawn relations with the mills.

Many of the farmers, since the time of their parents and grandparents have been supplying sugar cane to these mills, may be for four generations or more. So there is an organic and often emotional relationship between the mills and the farmers.

“Multinationals like Cargill are eyeing an entry into the field. But most of them are hesitant given the complexity of reality on ground. The family owned business houses are at an advantage as they have weathered the storms many a time and hence are adaptable.” the official said. 

As published in: http://www.commodityonline.com/news/three-big-ironies-in-the-india-sugar-sector-50418-3-50419.html

How East Asian countries making a kill on Philippine sugar

Why there are buyers for Philippines Sugar despite it is reportedly lacking in quality? Or is it that buyers of the Philippine sugar, like Japan, South Korea and Indonesia are making a neat kill?

In fact, Filippino traders are desperate to find buyers for its raw sugar and to lure customers, are offering sugar at a discount of $30-$35 a ton. As on August 12, Japan, South Korea and Indonesia have booked import orders for about 66,000 tons of sugar even as Philippines wants to sell about 2 lakh tons(0.2mn tons).

The country wants to clear the glut and ease the warehouses to stock sugar that would arrive in the ensuing crushing season.

This has prompted them to offer sugar at discount rates, and with buyers lacking other than the three countries mentioned, is in for price erosion.

Sugar quality is often measured in terms of ICUMSA (International Commission for Uniform Methods of Sugar Analysis). The whiteness of sugar adds to the ICUMSA content. The more the ICUMSA, the better; but admittedly, this is just a question of perception. If you are a customer, then you buy sugar looking at the whiteness and fine nature of the same, or in other words, the ICUMSA content.

Here one has to remember that sugar is mostly consumed in an indirect manner through bakers’ products and confectioneries where ICUMSA or perceived quality is secondary. If sugar is mellow, but edible and consumable, then the ICUMSA content or the whiteness of sugar does not matter at all when it is processed into syrup or other form.

Philippines classification of sugar runs into four categories.

‘A’ category sugar that makes for 4% of stocks and targeted at the US markets, alone.

‘B’ category sugar intended for domestic consumption which accounts for 90% of domestic stocks.

‘D’ category Sugar intended for non-US exports and for which there is no fixed volumes.

‘C’ category sugar or reserve sugar that can be converted to fall in any of the above categories.

This means, Japan, Indonesia and South Korea are receiving ‘D’ category sugar. Given that both Japan and South Korea are developed economies and where standard of living is high, compromise on quality of sugar is unthinkable. And given that sugar is mostly consumed in an indirect way, ICUMSA preferences are secondary.

Accordingly, the perception of poor quality of raw sugar may not be valid at all and Japan, South Korea and Indonesia are making a neat kill!

Is China listening?

Of course, they are, but to Brazilian sugar industry; ignoring the voices of Thai sugar.

Compared to the quality of raw sugar being supplied from Brazil, Reuters cited sources saying that Thai sugar is not up to the mark!

"Chinese buyers even accept higher freight costs to buy from Brazil because the quality is better. Some Chinese buyers said Thai raw sugar gives lower yield when it was processed into white.” Reuters said.

But there is yet another factor that is playing out here. Given the volumes that China requires (to the tune of 2 million tons), importing sugar from Thailand can be more expensive as Chinese demand can perch up Thai prices to break the roof.

So, China may find it more profitable to import sugar from Brazil, the freight costs notwithstanding.

But, China is not a game changer in sugar industry. India is!

Chinese sugar consumption is relatively low when compared to India. Chinese mostly consume Saccharin, an artificial sweetener.

As published in: http://www.commodityonline.com/news/How-East-Asian-countries-making-a-kill-on-Philippine-sugar-41665-3-1.html

Sugar decontrol: Will it happen this time?

Last Updated : 06 July 2011 at 16:20 IST

“We are bleeding...not ticking....”said Vijay.S.Banka, whole time director of Dwarikesh Sugar Industries Limited.

He was responding to the question: ‘What keeps sugar mills ticking in the era of license raj sort of controls?’

“The industry’s CAGR (Compound Annual Growth Rate) is the lowest among all sectors...” he said.” So, it would be wrong to say that we are ticking. We are surviving...”

Concurs S.K.Agarwal, Company Secretary, Balrampur Chini.

“Sometimes we are a loss making industry...since we (Balrampur Chini) have diversified into power and distillery business, we are able to sustain.” He added.

Sugar in India is a sour topic! At least for the mills and farmers...

The commodity is the most controlled in India and is a relic of the license raj. The release mechanism and levy obligation is exercised by the government to control sugar. In the open market, sugar is being sold subject to the directives from the Directorate of sugar in the Union govt.

Release orders are issued every month and the mills are given a sales quota. Mills cannot sell above this quota. “So, we cannot leverage the markets fully when sugar prices are up...” laments an industry official.

Worse, the mills get a penalty if they fail to sell the quota within the stipulated time.

Another aspect is that of levy obligation.

The mills have to sell 10% of their output to the government at a price quoted below the market price. (Through the PDS, this sugar is supplied to families below the poverty line.)

Of course, given this unsustainable scenario, a delegation of industry players led by Maharashtra Chief Minister Ashok Chavan met the Prime Minister in this regard, recently. The delegation also demanded additional export quota for sugar.

The glimmer of hope came on July 4 when agriculture minister Sharad Pawar indicated that some pragmatic decision will soon be arrived at with regard to Sugar decontrol and all issues in this industry will be addressed in-depth.

Back in 1971-72, and in 1978-79, attempts to decontrol the industry was made only to be retracted later on.

So, will the government allow for the decontrol?

“Sugar is an essential commodity...and given its political aspects very difficult to predict...I don’t want to speculate...” said Pritam Kumar Patnaik of Kotak Commodities.

“It is a contentious issue...”he added. “Prices of sugar will not rise in the short-term, even if it gets de-controlled. But with export commitments coming up, in the long-term, the prices may rise.” he said.

“As a commodity player, I don’t see any negatives in allowing sugar decontrolling...” he added.

“The act of decontrol can bring about parity in national and international prices”, said C.P Krishnan, Head, Commodities, Geojit BNP Paribas.

“Such a move is always welcome...he continued.

Currently, some sugar mills are finding it difficult to raise capital trough bank credits. The Public Sector Banks are an exception in this regard. “But private banks are only fair-weather friends...” said another industry participant.

Sometimes higher sugar cane prices also plague the industry and lower cane prices often deter farmers from engaging in cultivating the same.

“In Brazil, cane prices are linked to price realisation...such a practise can be followed in India too...” said S.K. Agarwal.

“De-controlling of sugar will develop a free-market and would bring in competition. This would ultimately benefit the consumers...” Agarwal added.

In case of sugar, the State governments also have a say. It is the state government that decides on the State Advised Price for sugar.

“A concerted effort on the part of State and Centre is required to effectively implement the decontrol...” said an industry player who did not want to be named.

As published in: http://www.commodityonline.com/news/Sugar-decontrol-Will-it-happen-this-time-40563-3-1.html

Crude oil rally may be sweet news for sugar industry

Sugar, the sweetener king, often trades on a sour note. The ‘problem’ is often attributed to surplus. But crude oil and sugar prices are related in a twist of developments. It is highly likely that sugar prices can go up as crude breaks the charts.

The reason is that, when crude oil prices go up, ethanol demand also heats up in the planet. Ethanol can be produced by fermenting the juice that is produced by crushing sugar-cane. Once can also crystallise the sugar cane juice to produce sugar.

But here lies the incentive:

“Currently, the industry in Brazil is finding it much more profitable to produce ethanol over sugar, with realisations of around 2,381.5 real or $ 1,470 on every cubic metre (kilo-litre) sold domestically.” --writes Harish Damodaran in an analysis in The Hindu.

Brazil is the biggest producer of sugar in the world.

In Brazil, sugar output forecast to the tune of 34.6 million tons may be missed.

For the April-March 2010-11 period, around 55% of cane crushed was used for ethanol production. In the new season, a whopping 65% of the cane crushed has been diverted to ethanol production.

In the past two weeks, global sugar prices plunged almost one-fifth attributed to Thailand’s production surplus of 2.6 million tons pegging the output at 9.8 million tons when compared to last year’s (2009-10; October-September) 7.2 million tons.

However it would be simplistic to assume that the sugar prices would continue to stay low:

“India sugar futures on Monday witnessed corrections on profit selling on early gains for the day. Steady spot market activity due to increased supply resulted in the fall at futures. However, overall positive trend is still intact.” said a report from Karvy Comtrade Tuesday.

If this be the case in India, where domestic surplus is failing to keep sugar trading on a depressed note, global scenario cannot be different.

There are also reports that China is scouting for sugar as domestic demand surge.

In the year ending September 30, 2011, China’s output may rise to 12 million tons from the present 11.3 million tons, says USDA. But consumption in China would be to the tune of 13.6 million tons as per revised estimates.

This would cause imports by China—the second biggest consumer of sugar after India—to jump 35%, said a Bloomberg report citing Australia and New Zealand Banking Group Ltd.

According to expert estimates, Chinese reserves of sugar are close to exhaustion. China is expected to source sugar from Thailand and Brazil for about 25 cents a pound(inclusive of an import tariff of 50 percent).

India’s output of sugar—second biggest in the world-- has jumped by 25% to touch22.6 million tons in the first seven months of sugar season which marked its beginning in October 2010, said a recent report in the Bsuiness Standard citing Indian Sugar Mills Association (ISMA) Director General Abinash Verma.

The surplus is attributed to good monsoons of the previous year.

Sugar production in Maharashtra, India’s biggest sugar producing state jumped to 8.3 million tons for the period ending April in comparison to 6.77 million tons for the same period last year.

Sugar production in Uttar Paradesh that closely trails Maharashtra climbed to to 5.9 million tons from 5.17 million tons. Kanataka too witnessed a jump in output from from 2.4 million tons to 3.45 million tons.

For the season ending 2011, ISMA projects India’s sugar output at 25 million tons. Government estimates show that the output may be at 24.5 million tons.

Last year, the output figures read 19 million tons.

But with inflation concerns on the anvil, India’s sugar surplus is not expected to reach the international markets, other than the 5 lakh tons that has already been approved by the EGoM (Empowered Group of Ministers).

Can we say a sugar bull is in the offing?

As published in: http://www.commodityonline.com/news/Crude-oil-rally-may-be-sweet-news-for-sugar-industry-38881-3-1.html