30 July Supply Demand Price

Transcription

1 30 July 2008 Seasonal Outlook on Sugar Supply Demand Price

2 In India, sugar industry is the second largest sector after textile industry in its volume. The first sugar mill in the country was set up in 1903 in the United Provinces. 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 are generated during processing are molasses, baggasse and ethanol. Globally Sugarcane and sugar beet are the major source of sugar. 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 tonnes 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 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. About Sugarcane Sugarcane and sugarbeet are the main sources of sugar in the world. Out of total sugar produced in the world 60 per cent is obtained only from sugarcane. Modern sugarcane is a complex hybrid of

3 two or more of five species of the genus Saccharum. It belongs to family Gramineae, class monocotyledons and order glumaceae sub family panicoidae, tribe Andripogoneae and subtribe saccharininea. The officinarums are called the "noble canes' due to thick, juicy, low fibred canes of high sucrose content. The origin of S.spontaneum is subtropical India. The habitat of these two wild canes is swamps, river banks, water courses etc. Cultivation of sugarcane in India dates back to the Vedie period. The earliest mention of sugarcane cultivation is found in Indian writings of the period 1400 to 1000 B.C. the word 'sugar' is derived from the Sanskrit word 'Sankkara' or 'sarkara'. The genus Saccharum has five important species viz., 1. Saccharum Officinarum, 2. S.Sinense 3. S.barberi 4. S.robustum 5. S.spontanuem. The first three species are the cultivated species and the last two are wild ones. Distribution Sugarcane is grown over the land surface of the earth between latitudes 35oN and 35oS. The important sugarcane producing countries in the world are India, Cuba, Brazil, Mexico, Pakistan, chine, Philippines and Thailand. Sugarcane growing regions Broadly there are two distinct agro climatic regions of sugarcane cultivation in India, viz., tropical and subtropical. However, five agro climatic zones have been identified mainly for the purpose of varietal development. They are North Western Zone; North Central Zone; North Eastern Zone; Peninsular Zone; Coastal Zone. Global Sugar Scenario For , Foreign Agriculture Service division of United States Department of Agriculture has estimated the global sugar production at million tons down by 2.28% from previous year s production of million tons. The major fall is expected in India wherein production will be around million tons from 25.4 million tons produced in

4 Brazil is leading the bandwagon of major sugar producing countries across the globe with a share of 29% followed by India (24%), European Union 25 (23%), and China (11%). In European Union, the sugar is mainly produced from sugar beet. Interestingly, India took second place by pushing back the European Union to third place. The corresponding graph depicts the share of major sugar producing countries. Nearly half of the Brazilian sugarcane is crushed for ethanol production but in India ethanol is produced from molasses a bye product obtained during sugar production. Last year, looking into

5 bumper cane harvest, the Indian Government permitted the domestic mills to crush the canes directly for ethanol production. International Trade World sugar imports during sugar season is estimated at million tons up from million tons imported last year. Russian Federation is topping the list of major importers of raw sugar with the expected import of 3.15 million tonnes during followed by EU 27 (2.92 million tonnes), Indonesia (2.37 million tonnes). Being a major producer of sugar, Brazil also tops the list of major exporting countries with share of 41% of the world total exports followed Thailand (10%) and Australia (7%). For , total world sugar export is projected at million tons from million tons exported last year.

6 Global sugar balance sheet (in million tonnes) e Beginning Stocks Production Imports Total Supply Exports Domestic Consumption Ending Stocks Stock to Use Ratio (%) With the carry over stocks of million tons and imports of million tons the total availability for season would be 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 In the year , India had produced 25.4 million tons compared to 28.5 million tons produced in For , India s Sugar production is projected in the range of million tons due to lower acreage under the cane cultivation. According to latest Weather Watch Report released by Union Ministry of Agriculture, till date Indian farmers have planted million hectares of area with sugarcane compared to million hectares planted in the same period last year. Lesser acreage has been seen in Maharashtra due to inadequate rainfall. Sugarcane Area and Production 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 inadequate rain in Maharashtra, sugar cane area has declined in the current tear. The decline in acreage can be seen in the corresponding graph.

7 State wise production Uttar Pradesh has outpaced Maharashtra and took the lead of major sugar producing states of India in the past five years. But in , Uttar Pradesh lost its first place because of lower output due to delay in crushing. The basic reason for delay in crushing was cane pricing was between farmers, mills and the government.

8 From the above graph, it could be inferred that output in major producing states saw dramatic rise in following record acreage under the crop but in production fell sharply following delay in crushing especially in Uttar Pradesh. 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. 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. 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.

9 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 of sugar to be released by each sugar factories as free sale quota. Sugar cane pricing Sugarcane is the main raw material for sugar industry and accounts for 70% of the cost of production of sugar. It is also the major source of income for millions of farmers. The determination of price for sugarcane is, therefore, a matter of critical importance both for the sugar industry and the cane growers. It was noted that for a sustainable production both of sugarcane and sugar, the sugarcane price should be fixed on a realistic basis. The Central Government fixes a Statutory Minimum Price factory wise in respect of each sugar season considering the following factors: Cost of production of sugarcane Return to the growers from alternative crops and the general trend of prices of agricultural commodities Availability of sugar to consumers at a fair price Price at which sugar produced from sugarcane is sold by sugar producers Recovery of sugar from sugarcane 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.

10 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. Release Mechanism Under the partial control of sugar industry followed by the Central Government, 90% of the sugar produced by sugar mills may be disposed off by them, without any restriction on price and movement. The balance 10% is to be supplied by them at prices fixed by the Central Government. However, both free sale sugar and levy sugar are subject to monthly quotas decided by the Central Government. The sugar produced in 4 to 5 months in a sugar seasons is controlled and regulated to be sold throughout the year. This release mechanism has been in place since 1942, when the Sugar and Sugar Products Control Order was first promulgated and has since been followed except for a break during , when monthly release was given up. The reason for monthly release of sugar has been to ensure that sugar is available throughout the year at reasonable prices to consumers, while at the same time maintaining the price at a steady level helps the industry. Levy Sugar Central government will procure 10% of the sugar produced by the factory as levy sugar at a predetermined price for supply to consumers through the Public Distribution System. This proportion of levy sugar was 60% in and has been gradually brought down to 10% from The distribution of sugar through public distribution system is presently for the most vulnerable sections of the society, namely, the Below Poverty Line families in all the States. 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. 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

11 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. In order to support ailing sugar industry, Indian Government made it mandatory that petrol will be blended with 5% of ethanol with effect from October 2007 and proposed to increase it to 10% by October 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. Present Situation and Outlook World agriculture agencies have projected lower world sugar production in United States Department of Agriculture has projected the production at million tons, down by 2.28% from million tons produced in The major decline has been projected in world s top two producing countries Brazil and India. With the surge in Crude Oil prices, Brazil is planning to divert more cane for ethanol production from sugar production. In , Brazil had used 55% of cane for ethanol production and this share is likely to increase in the current year. Along with Brazil, other developed and developing countries are showing keen interest in use of bio fuel, which is environment friendly and cost advantageous over petroleum products. Production in India, world s second largest sugar producer, is likely to fall dramatically due to lesser acreage and unfavourable weather condition. Farmers are reluctant to plant more sugarcane following last year s cane pricing war between the government and the mills and delay in payment. According to latest Weather Watch Report released by Union Ministry of Agriculture, till July 25th area brought under cane cultivation was 4.4 million hectares compared to 5.3 million hectares planted in the same period a year ago.

12 Price Outlook Sugar prices in spot as well as futures market are forecast to trade on positive note in medium to long term due to following fundamental factors 1. Global production is likely to fall by around 3% compared to last year led by Brazil and India 2. Consumption demand is expected to rise manifold 3. Higher Crude Oil prices may prompt major world economies to scout alternate energy source and cane based ethanol may act as best alternate 4. Higher bio fuel demand may lead to diversion of more cane for ethanol production thereby resulting into lower sugar production 5. On domestic front, unfavourable weather condition and farmers unwillingness to grow more cane because they are unhappy over last year s cane pricing war 6. Last year Government of India made it 5% mandatory blending of ethanol in petrol from October 2007 and proposed to rise this to 10% from October It also permitted the mills to produce ethanol directly from sugarcane, which was not permitted earlier 8. If the government implement 10% mandatory blending, mills have to divert more cane for ethanol production thereby reducing cane crushing for sugar production 9. Lower production projection in the range of million tons against 25.4 million tons produced last year 10. Commencement of festival season from Mid August will support the uptrend in prices Risk Factor The only risk factor that can halt uninterrupted rally in sugar price is higher availability of the produce for sale in the month of August and September. While announcing free sale quota for the current quarter of 3 million tons, government asked the mills to release additional sugar of 2.25 million tons from remaining 3 million tons of buffer created last year. During this time, prices are expected to fall by Rs.100 per quintal. Price Target We are expecting sugar prices will touch levels by November and December

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