Magnum positive on Indian sugar sector

Magnum has come out with its report on sugar sector. According to the research firm the use and valorization of sugarcane by-products, such as ethanol, electric power, and other derivatives, can cushion against low sugar prices and other market risks.

Indian Sugar Sector: Sugar sector is India’s second largest agro-based processing industry after the cotton textiles industry, having a lion’s share in accelerating industrialization process and bringing socio-economic changes in under developed rural areas. Sugar sector holds considerable significance to the Indian economy as it is one of the main drivers of the country’s rural economy, supporting its agricultural growth. Over 50 million farmers and their families are directly dependent on the sector, along with workers and entrepreneurs of almost 500 operating mills, apart from a host of wholesalers and distributors spread across the country. On the global front too the Indian sugar sector occupies a noteworthy position of being the top producer after Brazil and the largest consumer of the commodity in the world. India is and remains a key growth driver for world sugar, growing above the Asian and world consumption growth average. Besides farmers, an estimated 0.5 million workers are directly employed as agricultural labor involved in cultivation and harvesting.

The sugar industry also supports diversified ancillary activities and skills that support the local economy. The dependent population creates substantial demand for local goods and services. The sector also has major social and economic impact for the nation as it is a green industry and is largely self-sufficient in energy needs through utilization of bagasse for generating electricity and steam. In fact, the sugar industry generates surplus exportable energy through cogeneration and contributes to reducing the energy deficit that country is currently facing. Sugar Industry in India is well developed with a consumer base of more than billions of people. While consumption of sugar has been growing historically, the production has been cyclical in the inherently a cyclic industry.

The sector follows a 5 year sugar cycle of 2-3 years of good production of sugarcane followed by 2-3 years of low production. The cyclic pattern basically is manifested in the supply-demand dynamics and with both supply and demand being relatively inelastic in the short run. The competing crops and their remuneration, too, play important role in sugarcane output, particularly in India. This industry has been in the limelight on the back of a surge in crude oil, the main source of energy, which resulted in a rise in demand for ethanol, a derivative of sugarcane. However, investments in by-products are at a nascent stage, and the sector has struggled to generate a return on invested capital in excess of its cost of capital in most years, primarily due to a high mandated fixed cane price and a volatile sugar price.

Conclusion: With, India’s consumption expected to double in next 20 years, the nation with world’s second largest population could account for around 18% of the world’s sugar consumption. India which is currently the largest sugar consumer has one of the lowest per capita consumption figures (21 kg per annum compared with 58 kg in Brazil). This under consumption provides room for large consumption growth in the foreseeable future. The country’s population of over 1.21 bn is expected to reach over 1.53 billion by 2030, which should drive sugar consumption to new highs. Various initiatives like NREGA (outlay increased from Rs 40,100 crore in 2010- 11 to Rs 41,000 crore in 2011-12) should catalyze rural incomes and food demand, leading to higher sugar consumption. Sugar is an income derivative. India’s increasing per capita income from Rs 10,574 in 1993-94 to Rs 44,345 in 2010-11, will also translate into a higher sugar offtake in the coming years.

Indian Sugar sector can well be a global leader provided it comes out of the vicious cycle of shortage and surplus of sugarcane, lower sugarcane yield, lower sugar recovery, ever increasing production costs and mounting losses. It needs quality management at all levels of activity to enhance productivity and production. Attention is required on cost minimization and undertaking by-product processing activities. With sugar demand in India growing steadily at around 4% per year over the past 10 years, there is a need to expand sugar production in India. The potential for expanding production surely exists but is not being fully exploited which can be done by introducing some adjustments to ensure a market driven relationship between sugar and sugarcane prices. Also, relaxing some of the existing measures, such as the monthly releases, could provide sugar factories with some cash flow flexibility.

The use and valorization of sugarcane by-products, such as ethanol, electric power, and other derivatives, can cushion against low sugar prices and other market risks. Clearly, the decontrol of the sugar industry can only be undertaken within the context of broader domestic reforms, because of the linkages on both demand and supply sides that prevail in agricultural commodity markets.

source: moneycontrol