KARVY Commodities Research. Sugar Getz Sweeter. Sugar price to reach Rs.2250 in May. Factors influencing price spurt

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1 KARVY Commodities Research Sugar Getz Sweeter Sugar price to reach Rs.2250 in May. Factors influencing price spurt Summer can bring demand for sweetener Anticipation of more export orders to Pakistan Tight international situation Prices 10 Yrs High Sugar Outlook Reasons Supply Good production due to more acreage Export and Summer demand. Demand Lower carry over stocks

2 Introduction In India, sugar industry is the second largest sector after textile industry in its volume. Apart from white crystal sugar, sugarcane is used for manufacturing traditional sweeteners like Khandsari sugar and Jaggery that are mostly consumed in rural areas. About 60% of cane is utilized for the production of sugar, about 30% for alternate sweeteners, namely gur and khandsari and the balance 10% for seeds. India is also the largest consumer of sugar in the world. In India, Sugar cane is the source of Sugar, which is cultivated in almost all parts of India as the country's climatic conditions are suitable for the cane cultivation. Apart from sweetening product other by-products that is generated during processing are molasses, baggasse and ethanol. Globally Sugarcane and sugar beet are the major source of sugar. Sugar production surged to 18.5 million tons in Sugar is one of the common household items that are used as sweetening agent in various household as well as industrial preparations. Presently, about 4 million hectares of land is under sugarcane with an average yield of 70 tons per hectare. About 45 million Indian farmers and their families are engaged in the cultivation of sugarcane. In addition to it a large mass of agricultural labor is involved in sugarcane ancillary activities constituting 7.5% of the rural population. The era of planning for industrial development began in and sugar industry was part of the Five-Year Plans and has been under the direct control of the Government ever since. The industry not only generates power for its own requirement but surplus power for export to the grid based on byproduct bagasse. It also produces ethanol, an eco-friendly and renewable energy for blending with petrol. As a commercial crop sugarcane has been popular among the farmers. One of the reasons for its success is the assured market, cane finds in sugar mills and the procurement price fixed for cane by the government. The price at which sugarcane are procured by the mills is controlled by central and state government notification on Statutory Minimum Price (SMP) and State Advised Prices (SAP) respectively. As a result of announcement by various state governments regarding rise is State Advised Price, cane farmers have increased the acreage under sugarcane during the current sugar season. During the current sugar season (October 2005 September 2006), better monsoon rains have helped in greater production expectations of sugar at around 18.5 million tons compared to 12.5 million tons produced during last year. The acrea brought under sugarcane cultivation during has increased to 4.14 million hectares from 3.75 million hectares planted in As a thumb rule higher production should pressurize the prices of a commodity but in sugar sector it is in reverse trend this time.

3 Global scenario Sugarcane Brazil maintained continuous rise in acreage Year Area (mha) Brazil India China Produ Produ Produ ction Yield Area ction Yield Area ction (mt) (t/ha) (mha) (mt) (t/ha) (mha) (mt) Yield (t/ha) From the above graph it could be inferred that, the area under sugarcane in Brazil showed a continuous rise. The same trend also noticed for India up to 2003 and then onwards it dropped mainly due to drought condition in the country. The year has proved a good for India as the monsoon rains paved the way for rise in coverage. The coverage under sugarcane has increased by 10% at 4.14 million hectares from 3.75 million hectares planted in

4 The production of sugarcane in Brazil has shown a continuous rise but in India there was a continuous drop in sugarcane production from 2003 to 2004 mainly because of drought condition in the country. With the higher coverage and rise in yield in , the overall sugarcane production is estimated at 267 million tons. Yield levels in Brazil are showing a steady trend throughout the period under review. But in Indian case it is a reverse trend. Following the drought condition the yield levels have continuously declined from 2002 onwards resulting in lower cane and sugar production in India. But the good rains supported to recover the yield during Sugar Production For , Foreign Agriculture Service division of United States Department of Agriculture has estimated the global sugar production at million tons up by 2.31% from previous year s production of million tons.

5 Brazil is leading the bandwagon of major sugar producing countries across the globe with a share of 32% which is expected to produce 28.7 million tons during sugar season followed by European Union 25 (23%), India (20%) and China (11%). In European Union, the sugar is mainly produced from sugar beet. The corresponding graph depicts the share of major sugar producing countries. Share of Major Producing Countries China 7.28% USA 4.73% Mexico 4.16% Brazil 20% India 12.78% EU % Nearly half of the Brazilian sugarcane crushed for ethanol production but in India ethanol is produced from molasses a bye product obtained during sugar production. EU-25 mainly produces sugar from sugar beet International Trade World sugar imports during sugar season are estimated at million tons down by 0.38% from million tons imported during Russian Federation is topping the list of major importers of raw sugar with the expected import of 3.5 million tons during followed by EU-25 (1.75 million tons), Korea (1.68 million tons). Major Sugar Importers 5 Million Tons Russia EU-25 USA Indonesia Korea

6 Being a major producer of sugar, Brazil also tops the list of major exporting countries with share of 38% of the world total exports followed European Union (15%), Australia (9%) and Thailand (5.65%). For , total world sugar export is projected at million tons up 3% from 46.3 million tons exported last year. Million Tons Major Sugar Exporters 2004/ /2006 Brazil EU-25 Australia Thailand UAE Global sugar balance sheet (in million tons) Beginning Stocks Production Imports Total Supply Exports Domestic Consumption Ending Stocks With the carry over stocks of million tons and imports of million tons the total availability for season would be 222 million tons across the globe. World consumption is estimated at million tons and ending stocks at million tons, which is a carry over for next year. Indian Scenario Sugarcane Area and Production Year Area (Million hectares) Production (Million tons)

7 Sugarcane absorbs about 2.7% of the total cultivated area and it is one of the most important cash crops in the country. The area under sugarcane has gradually increased over the years mainly because of much larger diversion of land from other crops to sugarcane by the farmers for economic reasons. But due to severe drought and pest attack sugar cane area has declined in the year The year proved good for sugarcane cultivation as it received good rains during monsoon period. Indian Area & production recovered in from continuous drop From , the area under sugarcane cultivation has declined following the continuous drought condition in the country but during the coverage has recovered from these short falls following the good rains and also the all the state government s decision on hike in Statutory Minimum Price to be paid to the farmers.

8 The recover in acreage resulted in recovery in production as it could be evident from the above graph. From , the production displayed an increasing trend up to State wise production The corresponding graph exhibits the comparison of sugar production between major producing states for the current year and last year. In all the major producing states sugar production has increased compared to last year. Lakh tons Statewise Sugar Production UP leading the bandwagon of major producing states 0 UP Maharashtra TN Karnataka AP Gujarat Haryana Punjab Uttaranchal Bihar Uttar Pradesh has outpaced Maharashtra and took the lead of major sugar producing states of India in the past three years. Uttar Pradesh has a lion share of 32% in total sugar output followed by Maharashtra (27%), Tamil Nadu (10%), Karnataka (9%) and Andhra Pradesh and Gujarat states have equal share of 6% of the total sugar output as it could be evident from the following graph. Major Sugar Producing States ( ) Karnataka 9% AP 6% Gujarat 6% UP 32% TN 10% Maharashtra 27%

9 Consumption Trends In India, apart from white sugar, jaggery and khandasari are also consumed, which contributes major percentage to the total utilization of sugar cane. Consumption of white sugar is comparatively more than that of gur and khandasari. Apart from sweeteners cane can also be used for seed, feed and chewing. It could be inferred from the above table that the consumption of white sugar showing an increasing trend as against gur and khandasari, which indicates the changing dietary habits of the consumers over the years due to change in income levels and standard of living. The continuous rise in both these factors fuelled the sugar consumption to a large extend especially in urban India compared to rural where people are still preferring gur as a sweetener. Per capita consumption of sugar in various countries (Kilogram, Raw value) Country Australia Brazil E.U U.S.A Thailand Japan World Average INDIA Sugar INDIA Cane based Alternate Sweeteners Consumption trend changing from other sweeteners to sugar The above table represents the per capita consumption of sugar in various countries. Indian sugar consumption is below the world average but over the years the sugar consumption trend in India has increased while consumption of khandsari and jaggery consumption declined. This indicates a changing lifestyle of the population and rapid urbanization. Per capita consumption of sugar is high in Brazil and Australia. Per capita consumption of sugar in urban india States Kgs. per annum Punjab 71.5 Haryana 68.5 Maharashtra 40.9 Gujarat 40.9 Kerala 41.5 Uttar Pradesh 35.2 Tamil Nadu 29.1 Karnataka 23.3 The consumption of white sugar in India is generally urban based, in rural areas the alternate sweeteners gur and khandsari are consumed predominately. The per capita sugar consumption is high in the states of Punjab followed by Haryana and Maharashtra. This is due to higher GDP and higher income level of that states.

10 Trade India has been exporting sugar occasionally in periods of sugar surpluses. Whereas, most of other countries will dump their excess sugar in the International market. Major importer of sugar from India is neighbouring Pakistan. Import of raw sugar began in the initially under DFRC license against white sugar exported out of the country, followed by fairly sizeable imports under the "Advance Licensing Scheme" (ALS) of the Commerce Ministry. No doubt, to facilitate import of raw sugar, Government of India at the initiative of Ministry of Agriculture and Food, relaxed certain stipulations by de-linking grain to grain matching of raw sugar import with white sugar export for fulfillment of export obligation. Further a much longer period of 36 months has been allowed to fulfill the export obligation as against the normal period of 24 months. Government has full control over sugar industry Government control on sugar In India, sugar industry is fully under the control of government. It is covered under the Essential Commodities Act, The entire process starting from cane procurement, fixing cane prices to final distribution is controlled by government. In addition to this, it also decides on licensing, procurement of cane, sugar pricing, and finalization of cane procurement area for mills and Imports and exports. Government will decide the amount cane to be released for every month in open market and also supplying for Public Distribution System at concessional rates. The sugar exports are also governed by the Sugar Export Promotion Act, 1958, which stipulates that the Government can use 20 per cent of the country's total production for sale abroad. For every quarter the government will announce the amount sugar to be released by each sugar factories as free sale quota in addition. For the first quarter of the current calendar year, the free sale sugar quota allotted by the Government of India was 36.5 lakh tons. With levy quota of 2.16 lakh tons for each of these three months, the total availability would be lakh tons for the quarter. For March, centre has decided to increase the quota from 12.5 lakh tons to 14 lakh tons. Statutory Minimum Price (SMP) and State Advised Price (SAP) In order to protect the interest of the farmers, the central government will announce the statutory minimum prices for a particular sugar season before start of the season, which guarantees the assured price to the farmers. Year after year, the government has increased the SMP which was represented in corresponding table. For sugar season, the SMP decided by the government was Rs per quintal. Sugar seasons SMP (Rs. per quintal)

11 Apart from central government s SMP to protect the farmers from price crash, all the state governments also support the farmers by way of fixing State Advised Price (SAP) to be paid by each cane mills to the cane procured from the farmers. Different states have their own policies to fix the SAP. By- Products Utilization: Additional Revenue Sugar companies have begun to diversify their business model by concentrating on effective utilization of the by-products obtained in the manufacture of sugar. The utilization of molasses (for production of ethanol) and bagasse (for the cogeneration of power) has helped the sugar companies to increase their income and strengthen their costs. Apart from sugar, cane also used for ethanol & power cogeneration Ethanol Ethanol is produced from the fermentation of molasses. Molasses constitutes percent of the sugarcane used for sugar production. It is sold either untreated or is used as a feedstock for the manufacture of industrial alcohol and potable alcohol. Government has announced ethanol blending programme in December 2002 making the sale of petrol blended with ethanol mandatory, which has added up additional revenue stream for ethanol produced by the sugar industry. In Brazil, major portion of the sugarcane is utilized for ethanol preparation to blend it with petrol. Bagasse- Based Cogeneration of Power Sugar mills use bagasse for generation of steam and power required for producing sugar. The bagasse is either sold to paper mills or is used for generating electricity to be sold to Electricity Boards. Sale of surplus electricity generated by processing bagasse is an additional source of income for sugar companies. Price Outlook Factors affecting the prices are Governments free sale quota order Demand and supply Climatic conditions Export opportunities Price Movement Since the Uttar Pradesh is the leading producer of sugar in the country, the Muzaffarnagar market in UP is considered as the referral market for the entire sugar industry in India. The next major market for sugar in the country is Mumabi Vashi market.

12 Strong national & international price trend Price (Rs/quintal) Sugar Price Movement at Muzaffarnagar Market Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 From the above graph, it could be inferred that the sugar prices looks strong during the current year. The price will be higher during the months of April to June and remain range bound during July to November. Sugar prices are following the seasonality as it could be evident from the above graph. This year, sugar prices looks strong. The major reasons attributed were good import enquiries from Pakistan, increased domestic consumption due to change in dietary levels and also increased demand from soft drink manufacturers. International Price Movement NYBOT Sugar Prices Cents/lb Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 To analyze the international price movement, sugar prices at New York Board of Trade were considered. It could be inferred from the above graph that the prices are displaying a continuous bullish rally. The reasons attributed were increased consumption coupled with increased use of ethanol to blend it with petrol across the world. During January 2006, the prices were much higher compared to the same period last year as China imported more sugar prompting lower output and New Year celebration

13 during January. Surging imports from major importers also pushed the NYBOT sugar prices to reach their peak in January. The normal cane crushing period in Brazil is May to April but the millers are planning to crush during March in order to meet the growing demand for ethanol which gives additional income to the millers. The international prices also look bullish this year. Price target Both national and international markets look strong in price front. Summer months which witness higher buying interest from soft drink manufacturers put the sugar prices in a bullish mode. The expectation of more import enquiries from Pakistan may also push the prices in the coming months. The tight international situation is also fuelling the Bull Run in domestic market. We expect the sugar prices to reach Rs.2200 per quintal during the months of March and April and Rs.2250 per quintal during May. Disclaimer The report contains the opinions of the author, which are not to be construed as investment advices. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for the accuracy of the information presented herein or for the results of the positions taken based on the opinions expressed above. The above mentioned opinions are based on the information which are believed to be accurate and no assurance can be given for the accuracy of these information. There is risk of loss in trading in derivatives. The author, directors and other employees of Karvy and its affiliates cannot be held responsible for any losses in trading. KARVY Commodities Broking Ltd is engaged in commodities broking business in India. For opening a commodities trading account contact , or any of the nearby Karvy branches. Mail us at commodity@karvy.com