Sugar offers livelihood to over 50 million farmers and is the second-largest agro-based industry in the country. Until recently, not all was well with its exports. But with sugar prices on the rise across global markets, the future seems to be sweeter for its exporters. However, slim margins call for volume trade in this commodity.

Neha Dewan | January 2016 Issue | The Dollar Business

The sugar that adds that oh-so-important sweetness to your morning cuppa has a bittersweet story to it. It is apparently the reason behind the growing obesity and heart diseases. But it is undoubtedly a story that will hold your attention, going by the significance this industry commands. A sheer glance at the numbers reveals that with an annual production capacity of over 30 million metric tonne (MMT), the Indian sugar industry is the second-largest producer of sugar in the world.

The Golden Crop

The British called sugar White Gold, and true to its name the sugar industry has been the backbone of India’s agro sector. Offering livelihood to over 50 million farmers and employment to approximately 5 lakh skilled and semi-skilled workers in sugar mills and allied industries, it is evident that this industry is highly crucial for the development of the rural strata. India produces, as per broad estimates, about 300-350 MMT of sugarcane, 24-26 MMT of white sugar and 6-8 MMT of jaggery and khandsari every year. As per a recent Care Ratings report on the Indian Sugar Industry, the annual turnover of the industry is pegged at Rs.41,000 crore and it is known to be the second largest agro-based industry in the country after cotton. The report further states that India will continue to be a major sugar producer and is expected to be a sugar surplus country for the sixth consecutive sugar season (from October-September). The industry, the report predicts, will be a net exporter of the commodity in sugar season 2015-16 and sugar imports will be negligible.

Typically, sugarcane cultivation requires a hot and humid climate and takes up to 15 or 18 months to harvest, based on geographical conditions at play. Since extreme cold conditions can adversely affect sugarcane cultivation, it is essentially harvested before the winters set in if grown in parts of Northern India. Sugar recovery is known to be the highest in arid weather when humidity is low and there is little rainfall during the ripening period. When it comes to geographical distribution, India has the largest area under sugarcane cultivation in the world, being the world’s second largest producer after Brazil.

Uttar Pradesh (UP) has one of the maximum areas under sugarcane cultivation in the country – as many as 30 districts of UP produce sugarcane. Maharashtra too is a major producer of sugarcane in India with areas such as Ahmednagar, Kolhapur, Pune, Nashik, Solapur and Sangli being some of the key sugarcane producing belts. In fact, Maharashtra and UP together account for nearly 60% of the total sugar production in the country. Earlier UP was the largest sugarcane cultivating state – however over the last five years, the average yield of sugarcane in Uttar Pradesh has been about 57-59 tonne per hectare as against 80-85 tonne per hectare in Maharashtra. Hence, Uttar Pradesh has been ranking second in sugar production after Maharashtra over the last 5 sugar seasons. Karnataka follows closely as the third-largest sugarcane producing state of India.

A Sliver of Sunshine

With sugar prices taking a beating over the last couple of years across global markets, the Indian sugar industry was dependent mostly on domestic consumption, and today, has a stockpile of surplus sugar. With prices having recovered in the last two months across world markets, owing to a production shortfall, the industry can see a sliver of light.

Recently, India announced new rules making it mandatory for sugar producers to push up exports to at least four million tonnes in the upcoming crushing season. This, as it is expected, will reduce stockpiles as India has a surplus for the sixth consecutive year.

But is this in any sense a realistic target? “No, it isn’t,” says Mohan Narang, Managing Director, K. S. Commodities, rather emphatically. He is of the view that the main objective of such regulatory guidelines has been to induce positive sentiments. “Even if a million tonne or two million tonnes move, prices will improve in India and if prices improve, the general health of the sugar mills will be better. It has already started – you will see the results in the next six months or so,” he says confidently. The last couple of months have seen immense volatility as far as sugar prices are concerned. “Two months ago, sugar futures at London Exchange were trading at $330 per metric tonne and now they are at $415. So there has already been a rise of $85 in the last two months, per tonne. And this is bound to have an impact on the Indian domestic prices as well,” adds Narang.

Echoing similar sentiments Vishidha Vijayakumar, Research Analyst, Geofin Comtrade, reasons that price fluctuations have been there over the last few months because it was season time, which typically lasts October-January. “It is a good time for sugar as production in the world market is estimated to be in deficit and demand is also steady. Prices will be able to hold to Rs.2,500 per 100 kg and will recover to Rs.2,800-2,900 per 100 kg.” As per an insight by Karvy, sugar futures are predicted to continue their bullish trend. Active demand of the commodity in spot market amid expected rise in exportable supply may continue to support sugar prices in the coming days. “In near term, sugar prices are expected to be on the lower side. The demand is on the weaker side. Production is expected to be lower in India. But sufficient carryover stock could compensate. The climatic conditions are expected to be favourable,” adds Vijayakumar.

The report further highlights that sugarcane production and area under cultivation registered a CAGR of 3.70% and 2.03% respectively over the last 10 years. Acreage under cultivation has seen a steady rise during the last five years and as such, sugar production is also expected to remain higher in sugar season 2014-15 over the last season.

Bittersweet

However, the sugar industry has always been plagued by certain challenges that have impeded its growth. The production surplus in domestic and global markets, for one, has a direct bearing on sales realisation. Moreover, high sugarcane prices over the last few years in the domestic market and uncompetitive pricing in the export market have also affected the financial performance of the sugar producers and exporters.

Going forward, what can surely help is government support for an industry which has been grappling with the dual blows of high sugarcane prices and low sales realisation amounting to losses by sugar producers. Steps such as incentivising exports, removing logistics bottlenecks for exporters, creating a beneficial interface between government and sugar producers/exporters, etc., can all be measures that can aid the industry. Increasing ethanol blending and building buffer stocks can also come in handy to give a leg up to the industry.

Good news is that the situation seems to be a bit brighter for sugar season 2015-16. The average sugar recovery rate for cane is expected to improve and even on the consumption side, robust domestic demand from soft drink manufacturers, hotels, bakeries and ice cream manufacturers are expected to drive consumption patterns. “India’s relatively strong economic growth, stable political situation, rising incomes, a young population, and changing consumer consumption patterns are envisaged to be the key drivers encouraging higher sugar consumption,” states Care Ratings in a sector report.

Loading of bullock carts with sugarcane in a field in Ahmednagar, Maharashtra

Those in the trade are bullish about the season. “Margins up to 10% can be expected for an exporter. We don’t export sugar every year, but this year we are. It is a lucrative time for the business and exporters can hope to have a good run,” sumsup Narang. With margins in single digits, if exported in bulk, sugar is bound to taste as sweet at the bank as it does at home. So, are you up for this sweet game? 

“The Margin Is About 5-10% For Indian Sugar Exporters.”

Mohan Narang
MANAGING DIRECTOR,
K. S. COMMODITIES

TDB: Despite India being the world’s biggest sugar producer after Brazil, why are exports not viable enough? What can be done to address this?

Mohan Narang (MN): Exports in India are governed by domestic prices. If domestic prices are low, then exports will be good. Brazil is focused only on exports, as they don’t have high domestic consumption. Brazil has surplus sugar for export, whereas India does not have enough surpluses for the same. India focuses more on the domestic market, which is why it is on-and-off in the export market.

In the last two months, contracts have been signed for the export of 100,000-130,000 tonne. We expected bigger contracts, but since domestic prices have gone up, the expected export contracts haven’t materialised.

TDB:What is your near-term outlook on sugar prices?

MN: It all depends on the international market. Two months ago sugar futures, at London Exchange, were trading at $330 per metric tonne and now they are at $415. If international prices go up, domestic prices do too. Exports will happen, but in small chunks.

The difference between raw and white sugars lies in the price. Raw sugar is cheaper, as it is reprocessed into white sugar. We are currently exporting more of white sugar, although two years ago, we exported more raw sugar.

There can be a push for raw sugar if the government announces better export subsidies, which benefit both sugar mills and sugarcane farmers. For exporters, it means that the mills are able to offer sugar at cheaper prices, which in turn means we can export at more competitive rates.

TDB: Do you think the government is doing enough to boost sugar exports from India?

MN: So far, yes. They are supporting the sugar industry. They have announced ethanol blending from 5% to 10%. They say they will give us subsidies, in addition to interest-free loans.

TDB: What are the major challenges faced by sugar exporters?

MN: Logistics is a challenge. The nearest port for us is Nhava Sheva, Mumbai. Logistics-wise, this port is chock-a-block. Infrastructure is very bad; turnaround of the containers takes a lot of time. We don’t even know if our containers will be loaded on to the vessel.

The port handles almost 60% of containerised trade in India, whether imports or exports, but the roads to it are blocked most of the time. This affects movement of cargo. If the government can move the containers by rails from the CFS to port, that will work out much better. We have to work around these challenges by offering discounts to our clients, and we are always under pressure to meet deadlines due to these delays.

TDB: Do you think India’s bid to compel producers to export surplus sugar in the present crushing season in an effort to cut stockpiles? Is the target realistic?

MN: India cannot meet 4 million tonne of export target. Even if India tries to meet 2 million tonne, prices will jump, and then the government will say that this is a pulse-like scenario in India. The objective of this initiative is to promote a positive sentiment so that mill owners buy cane from the farmers, as they were threatening to stop running the mills unless the government supports them. If they don’t run the mills, there will be agitations by the farmers. Even if 1-2 million tonnes move, prices will improve in India, meaning the general health of the sugar mills will get better.

TDB: What are the margins in the trade for exporters? Are the incentives given to exporters enough?

MN: The margin is about 5-10% for exporters. There are no incentives. Duty drawback is about 1%. And we don’t have any expectations.

TDB: What new markets are exporters looking to tap into?

MN: People are looking at exporting to Europe, Russia, Iran, Bangladesh and other offbeat markets.

TDB: Would you say that this is a good time for a sugar exporter, given the current market dynamics?

MN: In the last two months, international prices have jumped up. It is a therefore a very good time for someone looking at the business from an exports perspective. We too are expecting very positive months ahead.