'Pressure on sugarcane prices likely due to shortage in availability'

Sugar prices globally have been ruling at an all-time high as a result of shortfall in production due to drought in India and floods in Brazil, the two major sugar-producing countries.

Sugar mills across the country are passing through turbulent times due to shortfall in sugarcane production and volatility in prices.

The volatility in the sugar industry, both in production and prices is however, a significant characteristic of the industry, says Mr Chandra Shekhar Nopany, Chairman and Managing Director, The Oudh Sugar Mills Ltd, which is part of Birla Sugar.

Mr Nopany gives a forecast on the price movement in the commodity over the next six-to-eight months, way forward for the industry and measures the company plans to undertake to overcome the present crisis in an exclusive interview with Business Line.

Sugar prices are at an all-time high. Where do you see the prices moving from here?

There has been an unprecedented rise in sugar prices. The retail price of the commodity has moved to Rs 50 a kg, up from Rs 20 a kg just about one year ago, an increase of about 150 per cent. My estimate is that there will be upward pressure on prices for the next six-to-eight months due to the shortage in availability of sugarcane. However, post September-October, once the next years' sugar cane production comes into the system, we can expect prices to come down moderately.

Though prices are expected to come down it might not come to the earlier low levels of Rs 20 a kg as the cost of sugarcane has gone up substantially.

What are the primary contributors to the rise in sugar prices?

The ban on imports of raw sugar, lower production of sugarcane in the country and the strong international prices are the primary factors creating an upward pressure on the commodity.

The Uttar Pradesh Government announced a ban on processing of imported raw sugar.

The move was taken citing farmers protest against imported sugar, which they said suppressed sugarcane prices and curtailed their bargaining power with mills.

The country's output during the current fiscal has also been lower at about 15-15.5 million tonnes or even lower than that (against earlier estimates of 16 mt ), falling severely short of the annual domestic consumption this year. The domestic consumption this year has been estimated marginally lower at about 22 mt (23 mt last year) with the lower consumption of sugar being offset by gur and khandsari.

These two factors coupled with strong international prices have attributed to the rise in sugar prices.

You have talked about the volatility in the sugar industry, what are the factors contributing to the volatility?

Sugar being a controlled industry, there are multiple controls on various aspects such as prices, molasses, duration of crushing etc.

Moreover, these controls are exercised by multiple authorities who seldom take a holistic view of the various issues confronting the industry.

This leads to contradictory decisions thereby causing volatility in the industry. This volatility is here to stay so long as there are multiple controls.

What is your outlook on sugar prices, production and imports for the next financial year?

As mentioned earlier, there will be an upward pressure on sugar prices for the next six-to-eight months. However post that there will be some softening in prices.

As far as sugarcane production is concerned, there is going to be a sharp spike in area under plantation next season which typically begins in April-May.

We are anticipating 25 per cent increase in plantation area.

But we will get a clear picture on this only by July-August after the report of the first survey becomes available.

This year there was a shortfall in output by about seven mt, which was to be offset by way of imports.

The country has imported almost 3.5 mt of raw sugar and the rest of it will be white sugar as mills will not be in a position to process raw sugar.

Next year however, things will be different.

With the increase in plantation area, there will be a rise in cane availability thereby bringing down the need for imports.

How has the low productivity of sugarcane affected the production capacity at mills?

There has been a severe impact on production capacity. We are operating at about 40-50 per cent capacity so far this fiscal.

There has been a diversion of cane to other areas such as gur and khandsari. Typically 60-70 per cent of the cane usually comes to the sugar mills, while the rest goes towards gur, khandsari and as seeds for the next crop season.

However, this year just about 40 per cent has come to mills while more than 35 per cent has gone towards gur and khandsari.

The sugar mills are, therefore, running under capacity.

How do you see this (working under capacity) affecting your profitability and margins? What is your outlook on profitability next fiscal?

Sugar being a seasonal industry, there are certain quarters when there is substantial profits while some quarters post dip in profits.

Typically December and March quarters post higher profits compared with the June and September quarters.

However, our profits during the December quarter of 2009-2010 will be lower than that during same period last year due to delay in our crushing operations because of unavailability of cane.

Over the next two years we will try to achieve 100 per cent capacity utilisation in production.

We are also optimistic about improved margins but I will not like to comment further on this as a lot of it will depend on pricing and availability of sugar cane.

What are the initiatives Birla Sugar plans to take to combat the present crisis situation?

We are looking at increasing our efficiency in procuring more cane.

Our entire focus is on cane plantation – looking at better varieties of cane.

We are having interactive discussions with farmers to assess how to increase the yield. We are also trying to get good variety of seeds for plantation.

source: thehindubusinessline