PROJECT REPORT

On

Indian Sugar Industry

Submitted by:

Anshul Rohit

CONTENTS

Part A- About Sugar IndustryExecutive summary

IntroductionHistory

Manufacturing ProcessTypes of sugar

Sugar BrokersSugar Producers

Part B- Indian Sugar Industry ScenarioIntroduction to Indian sugar industrySugar year 2012-2013

Recent supply and demand developmentsPolicies drive sugarcane production cycle

Central and state government price support policies for sugarcaneIndian sugar demand trends

Sugar Export Import of IndiaInternational Trade opportunity

Sugar cane production potential in IndiaDomestic Sugar policies

Sugar Industry in year 2012-13Business Roadmap-Transformation Opportunities

Indian Sugar Industry

Part-A

About Sugar Industry

EXECUTIVE SUMMARY

In an era where there is a need for inclusive growth, the sugar industry isamongst the few industries that have successfully contributed to the ruraleconomy. It has done so by commercially utilizing the rural resources tomeet the large domestic demand for sugar and by generating surplusenergy to meet the increasing energy needs of India. In addition to this,the industry has become the mainstay of the alcohol industry. The sectorsupports over 50 million farmers and their families, and delivers valueaddition at the farm side. In general, sugarcane price accounts forapproximately 70 percent of the ex-mill sugar price .The sector alsohave a significant standing in the global sugar space.

The Indian domestic sugar market is one of the largest markets in theworld, in volume terms. India is also the second largest sugar producinggeography. India remains a key growth driver for world sugar, growingabove the Asian and world consumption growth average. Globally, inmost of the key geographies like Brazil and Thailand, regulations have asignificant influence on the sugar sector. Perishable nature of cane, smallfarm landholdings and the need to influence domestic prices; all havebeen the drivers for regulations. In India, too, sugar is highly regulated.Since 1993, the regulatory environment has considerably eased, butsugar still continues to be an essential commodity under the EssentialCommodity Act. There are regulations across the entire value chain landdemarcation, sugarcane price, sugarcane procurement, sugar productionand sale of sugar by mills in domestic and international markets.

This research is an endeavour to study the International and domesticsugar industry along with India’s ethanol production feasibility and itsregulatory framework. This research is based on assumptions aboutgeneral economic conditions, agricultural policies, population growth,weather conditions, and technological changes.

The world sugar market continues to experience considerable pricevolatility. The world indicator price for raw sugar witnessed asuccession of peaks and downward corrections in 2010 before soaring toa 30-year high of USD 795.4/t in February 2011. Market fundamentalsdriving volatile prices were large global sugar deficits in the previoustwo seasons and adverse weather in a number of countries that reducedthe size of the expected rebound in production to higher prices. Worldsugar stocks, which had already been drawn down, fell to their lowestlevel in 20 years in 2010-11, supporting higher as well as more volatilemarket prices. International sugar prices are expected to ease back overin latter 2012 and into 2012-13, as production responds around the worldto recent high prices and the global balance moves into a larger surplusthat allows the start of stock rebuilding.

Brazil’s sugar production, as one of the lowest cost sugar producers withconsiderable capacity to expand sugar cane area on a large scale, alongwith the projected growth in ethanol production, will be keydeterminants of global sugar production, which is projected to reachover 209 Mt in 2020-21. Government policies that intervene in sugarmarkets, and production cycles in some major cane producing countriesof Asia, will continue to influence world sugar production and pricevolatility over the longer term. World sugar consumption is expected togrow at a lower average rate over the longer term in response to higherprices to reach 207 Mt in 2020-21.

A cyclical decline in sugar production is shifting India, the world’ssecond largest producer, from net exporter to net importer during 2009-

10 (October/September) and contributing to the current run up in globalsugar prices. The downturn in production is primarily due to a policy-induced cycle that has become increasingly pronounced. India is forecastto shift from net sugar exports of 5.8 million tons in 2007-08 to netimports of 2.8 million tons in 2008-09 and a record 6.0 million tons in2009-10. Sugar production rebounded in 2010-11, as higher governmentprice supports and open-market prices stimulated plantings andimproves incentives to deliver sugarcane to sugar mills. In the longer

term, India has the capacity to boost sugarcane output, and thegovernment and the sugar industry are considering policy measures tomoderate the increasingly sharp cycles in sugar production and trade.

The Government of India launched National Bio fuel Mission in 2003,primarily with a view to explore the potential of bio fuels as a cleanersource of energy and to partially offset the growing burden of crude oilimport bills. This paper analyzed the economic viability and long termsustainability of bio ethanol production from sugarcane molasses andcommercial feasibility of biodiesel produced from tree-borne oilseedslike Jatropha. Based on the analysis the paper observed that, given theslow growth in area and yield of sugarcane on the one hand and risingdemand for sugar, potable and industrial demand of ethanol on the other,it is highly unlikely that the blending targets of ethanol with petrolwould be met as planned by the government. To ensure long-termsustainability and economic viability of bio ethanolProduction, it is imperative to diversify the feed stock basket byincluding more crops like sweet sorghum and tropical sugar beet andencourage research on industrial production of second generation biofuels. The commercial feasibility of Jatropha based biodiesel largelydepends on evelopment of a proper supply chain by augmentingmarketing of Jatropha seeds, upgrading processing infrastructure and up-scaling biodiesel distribution.

This research also studies the ethanol blended petroleum pricingmechanism in India in comparison with the globally accepted pricemechanism. The research finds that the cost of producing ethanol varieswith molasses prices and hence cyclical variations in sugarcaneproduction largely determine the cost of ethanol production. However,given the cyclical nature of sugarcane, a periodic review of ethanolprices becomes critical. The pricing issue is also complicated by thedecontrol of petrol prices and administered pricing of sugarcane.

Introduction

Sugars are a major form of carbohydrates and are found probably in allgreen plants. They occur in significant amounts in most fruits andvegetables. There are three main simple sugars sucrose, fructose andglucose. Sucrose is in fact a combination of fructose and glucose and thebody quickly breaks down into these separate substances.

The Need for Energy

All energy stored in food is derived originally from the sun and it ismade by green plant life. The sun's energy acts upon the green chemical"chlorophyll" in the leaves of plants to produce sugars and starches fromthe carbon-dioxide in the atmosphere and the water from the roots by aprocess known as Photosynthesis. These carbohydrates (starches andsugar) acts as a plants food and energy supply. The energy need ofhuman body is largely dependent on the carbohydrates that are derivedfrom plants.

A Balanced Diet

A balanced diet can come from a variety of different foods, calculated togive the desired levels of carbohydrates, proteins, fats, vitamins andminerals. Nutritional scientists advocate that carbohydrates shouldprovide at least 50% of over energy requirements

History

The history of sugar has five main phases:

1. The extraction of sugar cane juice from the sugar cane plant andthe subsequent domestication of the plant in tropical SoutheastAsia many thousands of years ago (a firm date is unknown).

2. The invention of manufacture of cane sugar granules from thesugar cane juice in India a little over two thousand years ago,

followed by improvements in refining the crystal granules in Indiain the early centuries AD.

3. The spread of cultivation and manufacture of cane sugar to themedieval Islamic world together with some up scaling ofproduction methods.

4. The spread of cultivation and manufacture of cane sugar to theWest Indies and tropical parts of the Americas beginning in the16th century, followed by more intensive up scaling of productionin the 17th through 19th centuries in that part of the world.

5. The development of beet sugar, high fructose corn syrup and othersweeteners in the 19th and 20th centuries.

The discovery of sugarcane, from which sugar as it is known today, isderived dates back unknown thousands of years. It is thought to haveoriginated in New Guinea, and was spread along routes to SoutheastAsia and India. The process known for creating sugar, by pressing outthe juice and then boiling it into crystals, was developed in India around500 BC.

Its cultivation was not introduced into Europe until the middle-ages,when it was brought to Spain by Arabs. Columbus took the plant, dearlyheld, to the West Indies, where it began to thrive in a most favourableclimate.

It was not until the eighteenth century that sugarcane cultivation wasbegan in the United States, where it was planted in the southern climateof New Orleans. The very first refinery was built in New York Cityaround 1690; the industry was established by the 1830s. Earlier attemptsto create a successful industry in the U.S. did not fare well; from the late1830s, when the first factory was built. Until1872, sugar factoriesclosed down almost as quickly as they had opened. It was 1872 before afactory, built in California, was finally able to successfully producesugar in a profitable manner. At the end of that century, more than thirtyfactories were in operation in the U.S.

Manufacturing Process

Manufacturing Process and Technology

Sugar (sucrose) is a carbohydrate that occurs naturally in every fruit andvegetable. It is a major product of photosynthesis, the process by whichplants transform the sun's energy into food. Sugar occurs in greatestquantities in sugarcane and sugar beets from which it is separated forcommercial use. The natural sugar stored in the cane stalk or beet root isseparated from rest of the plant material through a process known asrefining.

For sugarcane, the process of refining is carried out in following steps-• Pressing of sugarcane to extract the juice.

• Boiling the juice until it begins to thicken and sugar begins tocrystallize.

• Spinning the crystals in a centrifuge to remove the syrup,producing raw sugar.

• Shipping the raw sugar to a refinery where it is washed and filteredto remove remaining non-sugar ingredients and color.

• Crystallizing, drying and packaging the refined sugar.

Beet sugar processing is similar, but it is done in one continuousprocess without the raw sugar stage. The sugar beets are washed,sliced and soaked in hot water to separate the sugar -containingjuice from the beet fiber. The sugar-laden juice is then purified,filtered, concentrated and dried in a series of steps similar to canesugar processing.

For the sugar industry, capacity utilization is conceptually different fromthat applicable to industries in general. It depends on three crucialfactors the actual number of ton of sugarcane crushed in a day, the

recovery rate which generally depends on the quality of the cane andactual length of the crushing season.

Since cane is not transported to any great extent, the quality of the canethat a factory receives depends on its location and is outside its control.The length of the crushing season also depends upon location with themaximum being in south India.

Sugarcane in India is used to make sugar, khandsari or gur. However,sugar products produced worldwide are divided into four basiccategories: granulated, brown, liquid sugar and invert sugar.

Granulated: Granulated sugar is the pure crystalline sucrose. It can beclassified into seven types of sugar based on the crystal size. Most ofthese are used only by food processors and professional bakers. Eachcrystal size provides unique functional characteristics that make thesugar appropriate for the food processor's special need.

Types of Sugar

Granulated Sugar

There are many different types of granulated sugar. Most of these areused only by food processors and professional bakers and are notavailable in the supermarket. The types of granulated sugars differ incrystal size. Each crystal size provides unique functional characteristicsthat make the sugar appropriate for the food processor's special need.

"Regular" Sugar, Extra Fine or Fine Sugar

"Regular" sugar, as it is known to consumers, is the sugar found in everyhome's sugar bowl and most commonly used in home food preparation.It is the white sugar called for in most cookbook recipes. The foodprocessing industry describes "regular" sugar as extra fine or fine sugar.It is the sugar most used by food processors because of its fine crystalsthat are ideal for bulk handling and are not susceptible to caking.

Fruit Sugar

Fruit sugar is slightly finer than "regular" sugar and is used in dry mixessuch as gelatin desserts, pudding mixes and drink mixes. Fruit sugar hasa more uniform crystal size than "regular" sugar. The uniformity ofcrystal size prevents separation or settling of smaller crystals to thebottom of the box, an important quality in dry mixes and drink mixes.

Bakers Special

Bakers Specials crystal size is even finer than that of fruit sugar. As itsname suggests, it was developed specially for the baking industry.Bakers Special is used for sugaring doughnuts and cookies as well as insome commercial cakes to produce fine crumb texture.

Superfine, Ultrafine, or Bar Sugar

This sugar's crystal size is the finest of all the types of granulated sugar.It is ideal for extra fine textured cakes and meringues, as well as forsweetening fruits and iced-drinks since it dissolves easily. In England, asugar very similar to superfine sugar is known as caster or castor, namedafter the type of shaker in which it is often packaged.

Confectioners (Powdered) Sugar

This sugar is granulated sugar ground to a smooth powder and thensifted. It contains about3% corn starch to prevent caking.Confectioners’ sugar is available in three grades ground to differentdegrees of fineness. The confectioners’ sugar available in supermarketsis the finest of the three and is used in icings, confections and whippingcream. The other two types of powdered sugar are used by industrialbakers.

Coarse Sugar

The crystal size of coarse sugar is larger than that of "regular" sugar.Coarse sugar is normally processed from the purest sugar liquor. Thisprocessing method makes coarse sugar highly resistant to colour change

or Inversion (natural breakdown to fructose and glucose) at hightemperatures. These characteristics are important in making fondants,confections and liquors.

Sanding Sugar

Another large crystal sugar, sanding sugar, is used mainly in the bakingand confectionery industries to sprinkle on top of baked goods. Thelarge crystals reflect light and give the product a sparkling appearance.

Sugar produced in India is mainly of granulated type. Granulated sugaris further classified in to various types based on colour and grain size.According to the Indian Standards Specifications (ISI), there are around20 grades of sugar based on the grain size and colors. The colour serieshas four grades designated as 30,29,28 and 27, while the grain size hasfive grades namely A, B, C, D, E. Bulk of production in the country is ofC, D and E grains, branded as large, medium and small and has colourspecification of 30. The D grade produced in the country is comparableto world standards.

Brown Sugars - Turbinado Sugar

This sugar is a raw sugar which has been partially processed, removingsome of the surface molasses. It is a blond colour with a mild brownsugar flavour and is often used in tea.

Brown Sugar (light and dark)

Brown sugar consists of sugar crystals coated in molasses syrup withnatural flavour and colour. Many sugar refiners produce brown sugar byboiling a special molasses syrup until brown sugar crystals form. A

centrifuge spins the crystals dry. Some of the syrup remains giving thesugar its brown color and molasses flavor. Other manufacturers producebrown sugar by blending special molasses syrup with white sugarcrystals. Dark brown sugar has more color and a stronger molassesflavor than light brown sugar. Lighter types are generally used in bakingand making butterscotch, condiments and glazes. Dark brown sugar hasa rich flavor that is good for gingerbread, mincemeat, baked beans, plumpudding and other full flavoured foods.

Muscovado or Barbados Sugar

Muscovado sugar, a British speciality brown sugar, is very dark brownand has a particularly strong molasses flavor. The crystals are slightlycoarser and stickier in texture than "regular" brown sugar.

Free Flowing Brown Sugars

These sugars are fine, powder-like brown sugars that are less moist than"regular" brown sugar. Since it is less moist it does not lump and is free-flowing like granulated white sugar.

Demerara Sugar

Popular in England, Demerara sugar is a light brown sugar with largegolden crystals which are slightly sticky. It is often used in tea, coffee oron top of hot cereals.

Liquid Sugars

Liquid sugars were developed before today's methods of sugarprocessing made transport and handling granulated sugars practical.There are several types of liquid sugar. Liquid sucrose(sugar) isessentially liquid granulated sugar and can be used in products whereverdissolved granulated sugar might be used. Amber liquid sucrose (sugar)is darker in color and can be used where the cane sugar flavor isdesirable and the non-sugars are not a problem in the product.

Invert Sugar

Inversion or chemical breakdown of sucrose results in invert sugar, anequal mixture of glucose and fructose. Available commercially only inliquid form, invert sugar is sweeter than granulated sugar. One form ofliquid invert was specially developed for the carbonated beverageindustry and can be used only in liquid products. This liquid sugar isactually part invert sugar combined with part dissolved granulated sugar.Another type, named total invert sugar syrup, is commercially processedand is almost completely invert sugar. It is used mainly in food productsto retard crystallization of sugar and retain moisture.

Sugar Brokers

Sugar Brokers &Wholesalers

Address Phone Number

76, RajammalA R Layout,

Chocklingam Coimbatore - 641Chettiar & Sons 001

Tamil Nadu, India

+ 91 - 422 -2470687

113, Subbiah

KesajeeCorporation

Mudaliar Street,Coimbatore - 641

001,Tamil Nadu, India

+ 91 - 422 -2395605

11 / 33A,Thadagam Road,

Lakshmi Sugar Edayarpalayam, + 91 - 422 -Merchant Coimbatore - 641 2401028

025Tamil Nadu, India

79, Subbiah

P N NelsonAgency

Mudaliar Street,Coimbatore - 641

001,Tamil Nadu, India

+ 91 - 422 -2395454

180, Race CourseSakthi Sugars

LtdRoad ,

Coimbatore - 641018

+ 91 - 422 -2210569

Tamil Nadu, India

Central Co-Op

Tamil Nadu Co-Op SugarFederation

Bank Building,State Bank Road, + 91 - 422 -Coimbatore - 641 2300573

018Tamil Nadu, India

105 / 106, OldTribhovandas Market Street,Vendravan & Tiruppur - 641

Bros 604,Tamil Nadu, India

+ 91 - 421 -2240060

23 / 63, SubaiyahMudaliyar Street,

V Hirachand Coimbatore - 641001,

Tamil Nadu , India

+ 91 - 422 -2392993

438, RangaiGowder Street,

Vellingiri & Co Coimbatore - 641001,

Tamil Nadu, India

+ 91 - 422 -2391019

Sugar Mill Machinery

Sugar MillMachinery Mfrs

Address Phone Number

167, ThirumalayamPalayam,

Aeromen Engg CoEttimadai Pirivu,Coimbatore - 641

105,Tamil Nadu, India

+ 91 - 422 - 2656495

A1, Kanakkal Street,

Doall EhgineeringProducts

K.K.Pudur,Coimbatore - 641

038,Tamil Nadu, India

+ 91 - 422 - 2447519

29-D, DharapuramRoad,

Krishna Industries Udumalpet - 641 + 91 - 4252 - 223879126

Tamil Nadu, India

12 / 15,Ammankulam

Murthy Industries Street,

Coimbatore - 641107,

+ 91 - 422 - 2654271

Tamil Nadu, India

761, MarapallamMadukkarai,

R K Industries Coimbatore - 641 + 91 - 422 - 2622378105,

Tamil Nadu, India

45, N Gounder

Sakthi Sugars LtdStreet,

Pollachi - 642 001Tamil Nadu, India

+ 91 - 4259 - 223935

1276, MettupalayamSri Sujay Road,

Engineering Coimbatore - 641 + 91 - 422 - 2442430Products 043,

Tamil Nadu, India

54, Sowripalayam

Sri VijayalakshmiIndustries

Road,Coimbatore - 641

028,Tamil Nadu, India

+ 91 - 422 - 2316202

Sugar Producers

This is some of the sugar mills in India which produce a finished sugar.

Sugar Producers Address Phone Number

BannariammanSugars Ltd

12/175 Sathy Road,Annur, Tamil Nadu, + 2354214

India

23 / 63 Subbiah

Hirachand V &Ottagee Sugars

Mudaliyar Street,Coimbatore - 641

001,Tamil Nadu, India

+ 91 - 422 - 2392983

53-54, Race CourseRoad,

Jeypore Sugar CoLtd

Coimbatore - 641018,

Tamil nadu, India

+ 91 - 422 - 2216767

338, Avinashi Road,Peelamedu,

Raasi Sugars Coimbatore - 641 + 91 - 422 - 2576746004,

Tamil Nadu, India

Rajshree SugarsD 338 Avinashi

Road,+ 91 - 422 - 2575199

Chemicals Ltd Coimbatore - 641004,

Tamil Nadu, India

95-A, VyshnavComplex, Race

Sakthi Sugars LtdCourse ,

Coimbatore - 641004,

Tamil Nadu, India

+ 91 - 422 - 2211060

818, Ranga Gounder

Sri VelmuruganTrading Co

Street,Coimbatore - 641

001,Tamil nadu, India

+ 91 - 422 - 2393381

1127, R G Street,Velan Distributors

(P) LtdCoimbatore - 641

001,Tamil Nadu, India

+ 91 - 422 - 2397733

Part-B

INDIAN SUGAR INDUSTRY

SCENARIO

Introduction to Indian Sugar Industry

Sugar is one of the oldest commodities in the world and tracesits origin in 4th century

AD in India and China. In those days sugar was manufactured only from sugar cane. But bothcountries lost their initiatives to the European,American andOceanic countries, as the 18th

century witnessed the development of newtechnology to manufacture sugar from sugar beet. However, India is presently adominant player in the global sugar industry along with Brazil interms of production. Given the growing sugar production andthe structural changes witnessed in Indian sugar industry, Indiais all set continue its domination at the global level.

Indian sugar industryis highly fragmented with organized and unorganized players.The unorganized players mainly produce Gur and Khandari, theless refined forms of sugar. Sugar industry, one of the majoragro-based industrial in India, has been instrumental in resourcemobilization, employment generation, income generation andcreating social infrastructure in rural areas. Indeed, sugarindustry has facilitated and accelerated pace of ruralindustrialization. The government had a controlling grip over theindustry, which has slowly yet steadily given way toliberalization. The production of sugarcane is cyclical in nature.Hence the sugar production is also cyclical as it depends on thesugarcane production in India. As the industry is a fragmentedone, even leading players do not control more than 4 percentmarket in India. However, the situation is changing and playersoff late are striving to increase their market share either by

acquiring smaller mills or by going for green field capacityadditions.

Indian sugar industry can be broadly classified in to two sub sectors, the organized sector i.e. sugar factories and the unorganizedsector i.e. manufacturers of traditional sweeteners like gur andkhandsari. The latter is considered to be a rural industry andenjoys much greater freedom than sugar mills. The productionof traditional sweeteners gur and khandsari is quite substantial.

Though the trends indicate a progressive shift from traditional sweeteners to white sugar over the years, they still account forabout 37% of total sweetener consumption in India. Since thesugar industry in the country uses only sugarcane as an in input,sugar companies have been established in large cane growingstates like Uttar Pradesh, Maharashtra, Tamil Nadu, Karnataka,Punjab and Gujarat. Uttar Pradesh leads the tally by contributing24% of the countries total sugar production and Maharashtrastands next with 20% contribution. The farmer’s co-operativesown and operate the largest chunk of the industry'stotal capacity.

They are concentrated primarily in Maharashtra and eastern Uttar Pradesh. The largest number of sugar companies in the privatesector is located in southern India, in the states of Tamil Nadu,Andhra Pradesh and Karnataka.

At present, there are 553 registered sugar factories havingcapital investment of Rs. 50,000 crores and annual productioncapacity of 210 lakhs metric tonnes (ISMA Report, 2008). Theannual turnover of industry is to the tune of Rs. 30,000 crores.The central and state governments receive annually Rs. 5000

crores as excise duty, purchase tax, and cess. The sugar industryin the country uses only sugarcane as input, hence sugarCompanies have been established in large sugarcane growingstates like Uttar Pradesh, Maharashtra, Karnataka, Gujarat,Tamil Nadu, and Andhra Pradesh. These six states contributemore than 85% of total sugar production in the country; UttarPradesh and Maharashtra together contribute more than 57% oftotal production. Indian sugar industry has grown horizontallywith large number of small sized sugar plants set up throughoutthe country as opposed to the consolidation of capacity in therest of the important sugar producing countries, where greateremphasis has been laid on larger capacity of sugar plants. Sugarindustry has brought socioeconomic changes in rural India byway of facilitating entrepreneurial activities such as dairies,poultries, fruits and vegetable processing, and providingeducational, health and credit facilities.

Source: FOA

Source: ISMA

Source: ISMA 2008

Sugar year 2012-13

In 2012-13, the sugar consumption reached about 22.5 mmt, asimilar level to that of the previous season. Production at around24.5 mmt allowed end-of-season stocks to rise to about 15 daysof consumption. Exports were at 2.5 mmt within the highlyregulated policy structure of the Government of India. The OGL(Open general license) scheme benefitted the mills to export atthe time when world sugar prices were at a premium overdomestic sugar prices. In 2012-13, the government had allowed2.6 mmt of sugar exports, of which 1.5 mmt were under OGL inthree equal tranches. The GOI decisions on exports timings andquantities in future shall depend upon the likely domesticdemand pattern and the crop assessment.

(In mmt, Source: Indian Mills Association)

The sugar prices, M-30, have been in the range of Rs 2400 to3200 per qtl and is expected to be in the same range due todelayed crushing in Maharashtra and UP, expected exportannouncement, lower pipeline stocks, increase in acreagecompared to last year. The cane crop should rise again in 2011-12 to reach to cross 25 mmt due to both an increase in the caneareas and regular rainfall and satisfying agricultural cane yieldssimilar to those of the previous season. In Maharashtra, sugarproduction forecasts are up and the area under cane hasincreased.

Sugar industry is the second-largest agro based industry aftertextile, employing 0.5 million people in the sugar mills and 50million farmers engaged in sugarcane cultivation. India is thelargest consumer and the second largest producer of sugar acrossthe globe. Sugar industry is largely driven by domesticconsumption. Indian sugar industry is again entering the supplyglut situation after witnessing a production shortfall in theprevious two sugar season- SS2008-09 and SS2009-10.However, allowing exports would help maintain the sugar priceswhich peaked in SS2009-10. In SS2009-10, sugar productionregistered a growth of 31 per cent to reach 24.5 mn tonnes onYOY basis. However, the consumption declined in the SS2009-10. Sharp increase in production coupled with the decline inconsumption led to increased levels of closing stock, therebydriving sugar prices downwards. The production of sugar isspread across the country. Maharashtra, Uttar Pradesh,Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh are themajor sugar producing states in the country. In SS2009-10, thesesix states together accounted for almost 94% of the total sugarproduced in India. In SS2009-10, the State of Maharashtraproduced the highest sugar at 7.0 mn tonnes followed by UPwith 5.1 mn tonnes. These two states together account for almost

64.5% of the total sugar produced in India.

Sugarcane is the primary raw material for the sugar industry. Itaccounts for almost 80-85% of the total operating cost of thesugar industry. UP is the largest sugarcane-producing state in the

country and accounted for about 36.2% of the total sugarcaneoutput in SS 2010-11 followed by Maharashtra with 23.6%.Even though, UP is the largest sugarcane-producing state in thecountry it is the second largest sugar producer in India asrecovery rates in UP are one of the lowest in India.

A cyclical decline in sugar production is shifting India, theworld’s second largest producer, from net exporter to netimporter during 2009-10 (October/September) and contributingto the current run up in global sugar prices. The downturn inproduction is primarily due to a policy-induced cycle that hasbecome increasingly pronounced. India is forecast to shift fromnet sugar exports of 5.8 million tons in 2007-08 to net imports of

2.8 million tons in 2008-09 and a record 6.0 million tons in2009-10.

Sugar production is poised to rebound in 2010-11, as highergovernment price supports and open-market prices are likely tostimulate plantings and improve incentives to deliver sugarcaneto sugar mills. In the longer term, India has the capacity to boostsugarcane output, and the government and the sugar industry areconsidering policy measures to moderate the increasingly sharpcycles in sugar production and trade.

Recent Supply and Demand Developments

Indian sugarcane and sugar production are historically cyclical,and the cycle appears to have become increasingly pronouncedin the 2000s. After soaring to 30.8 million tons in 2006-07, 39%more than previous record set in 2002-03. Sugar productiondropped to an estimated 16.1 million tons in 2008-09 and isforecast at 17.3 million tons in the current 2009-10 year. All ofIndia’s sugar is produced from sugarcane, and the swings inproduction have been driven primarily by similarly large swingsin harvested area of sugarcane. Estimated area of 4.25 millionhectares in 2009-10 is about 17 percent below the record amountin 2006-07. Although more than 90 percent of sugarcane area inIndia is irrigated, yields are affected by the share of area that isrelatively high-yielding first-year growth and, to a lesser extent,by variation in rainfall. Relatively small shares of first-yeargrowth in2008-09 and2009-10, as well as below-normalmonsoon rainfall in 2009, likely contributed to reduced averagesugarcane yields in 2008-09 and estimated yields for 2009-10.

In contrast to the volatility of production, Indian sugarconsumption has continued to expand relatively steadily due torising per capita incomes and government interventions to adjuststocks, facilitate trade, and assure adequate monthly availability.Despite the sharp drop in sugar production in2008-09 andcontinued low output in2009-10, sugar consumption hasremained relatively stable and on trend due to monthly releasesof “free-sale” sugar into the open market and allocations ofsubsidized “levy” sugar. However, despite net imports of 2.8million tons in 2008-09 and an anticipated 6.0 million tons in

2009-10, Indian sugar stocks are forecast to fall to 3.5 milliontons by October 2010, the lowest level since 1993-94.

Domestic open-market prices of sugar and gur, the primarysubstitute sweetener, remain under pressure. For the 2008-09marketing year, wholesale sugar prices averaged43 percenthigher in real terms than prices a year earlier, while gur pricesaveraged 53 percent higher.

Policies Drive Sugarcane Production Cycles

India’s sugar area and production cycles are driven largely bypolicy interventions, including sugarcane support price policiesset by the central and state governments as well as sugar storageand trade policies set by the central government. Biologicalfactors also play a role, sugarcane remains in the field for 3years once it is planted, and area and production adjustdownward slowly as price incentives fall, thus prolongingperiods of oversupply, weak market prices, and financial distressfor sugar mills. The key policy interventions are:

• Central and state government price support policies forsugarcane.

• Central government regulation of releases of levy and free-salesugar and buffer stocks.

• Central government regulation of sugar trade.• Other domestic marketing restrictions (e.g., private storagelimits).

Domestic Cycle: turning Shorter & Viscous

The average period for a sugar cycle has been decreasing overthe last 15 years. The primary reason for shorter sugar cyclesemanates from the short term cropping pattern of farmers withrespect to the widely fluctuating sugarcane prices vis-à-vissteadily rising prices for other crops.

Source: ISMA

Central and state government price supportpolicies for sugarcane

In marketing year 2008-09, the Commission on AgriculturalCosts and Prices (CACP) under the Ministry of Agriculturerecommended annual Statutory Minimum Prices (SMP) basedprimarily on estimated costs of production. State governments insome of the major producing states then set higher State AdvisedPrices (SAP) that mills in the state are required to pay sugarcanegrowers. The substantially higher SAPs set by some stategovernments account for regional variations in the productivityand profitability of sugarcane, as well as pressures from localsugarcane growers. The central government financed the cost ofsupporting the SMP, but sugar mills were required to pay thedifference between the SMP and the higher SAPs and incur anyresulting financial losses.

There is strong but lagged relationship between changes in theSAPs for sugarcane and changes in area harvested. Drops in areaharvested in 2003-04 and 2004-05 were preceded by declines inreal SAPs, and higher SAPs in2004-05 and2005-06corresponded with increased area in 2005-06 and 2006-07. Mostrecently, the drop in area in 2008-09 was preceded by sharplylower real SAPs in 2007-08. The fall in sugarcane area in 2008-09 was likely also influenced by the unusually large increases in

Minimum Support Prices (MSPs) for wheat and rice, whichcompete with sugarcane for irrigated land, in 2006-07 and 2007-08. Unlike the SMPs for sugarcane, the MSPs set by the centralgovernment for wheat and rice are good indicators of pricesreceived by growers because a large share of the marketedsurplus of wheat and rice is purchased at the MSPs. The SAPpolicy also affects the volatility of sugarcane area when itimposes financial losses on sugar mills that prevent them fromhonouring the SAP. During periods of surplus, SAPs cancontinue to rise without any specific link to sugar marketconditions. These price hikes catch the mills between the fixedSAPs they are required to pay and weakening market prices theyreceive for their refined sugar. The resulting financial losses leadto deferral or default by mills on payments to growers thatundermine incentives and contribute to volatility in sugarcaneplanting and production.

With higher open-market sugar prices in 2009, as well ascentral and state government measures to assist the mills, thefinancial health of the mills has been largely restored and is notexpected to affect processing or grower payments for the 2009-10 sugarcane crop. Government regulated releases of levy, free-sale, and buffer stock sugar. The central government regulatesall releases of refined centrifugal mill sugar into the market bysugar mills. Marketing of khandsari and gur, which are producedby farmers and small-scale enterprises, is unregulated. Mills arenow required to sell 10 percent of their production at a fixed,

below-market levy price to the Public Distribution System forsale to consumers determined to have incomes below thepoverty line. The remaining 90 percent of mill production is soldat market prices, but the amounts that can be sold are determinedby quarterly quotas set by the central government.

Indian Sugar Demand Trends

In contrast to the volatility of sugar production and prices, sugarconsumption in India has grown relatively steadily, increasingabout 3.7 percent annually (2.0 percent per capita) since 1990-91.While Policies have been associated with considerablevolatility in sugar production, trade, stocks, and prices,government distribution programs have led to relatively stablegrowth in per capita sugar availability. The stable growth inconsumption is also reflective of both the robust growth inaggregate demand and the price inelasticity, or unresponsivenessto changes in prices, of sugar demand. These factors stem fromsugar’s importance as an ingredient in tea, coffee, soft drinks,and traditional sweets that play a central role in Indian diets.

Refined centrifugal sugar from sugarcane is the dominantsweetener in India, with the two traditional sugarcane-basedsweeteners, gur and khandsari, accounting for smaller shares ofoverall use. Khandsari has been declining in terms of productionand consumption, and it now accounts for only about 3 percentof the market, but gur maintains a significant, albeit variable,25-percent share of the market. Gur production and consumptionare unregulated and tend to rise in years when higher gur pricesor payment arrears by sugar mills create incentives for farmersto divert sugarcane to production of gur. During 2008-09 and2009-10, gur’s share of the market rose to about 35 percentwhen growers diverted sugarcane from the financially distressedmills, magnifying the drop in centrifugal sugar productioncaused by reduced sugarcane plantings. Although India doeshave an ethanol-petrol blending program using ethanol producedfrom sugarcane, the program does not, so far, affect the supply

of sugarcane for the production of sweeteners. Unlike Brazil,India produces all of its ethanol from molasses, which is anormal by product of India’s centrifugal sugar milling process.As a result, there is no trade off between sugar and ethanolproduction.

India’s current goal is to require a 10-percent blend of ethanolwith petrol in 20 states and 4 union territories, subject to itscommercial viability. The drop in sugar production in 2007-08and 2008-09 has led to reduced supplies and higher prices formolasses and mills have been unable to deliver ethanol at thecurrently negotiated price of Rs21.5/litre.

Sugar Export-Import of India

Like sugar production, sugar trade in India is cyclical, withexports of primarily refined sugar during periods of surplus andimports of mostly raw sugar during periods of deficit. Consistentwith the increased volatility of sugar production since the early2000s, swings in sugar trade have also become more volatile.Since 2000, India’s sugar trade has fluctuated between averagenet exports of 1.3 million tons during 2000-01 and 2002-03, netimports of 1.2 million tons during 2003-04 and 2004-05, netexports of 3.3 million tons during 2005-06 and 2007-08, andforecast net imports of 4.3 million tons during 2008-09 and2009-10.

The shifts in India’s sugar trade are increasingly significant forworld markets, contributing to periods of both under supply andover supply. India’s record 2007-08 exports accounted for about11 percent of global exports, and record imports in 2009-10 areforecast to account for 12 percent of world imports. India’scurrent shift to large net importer is further tightening a worldsugar market that continues to adjust to European Union (EU)sugar policy reforms begun in 2006. The EU reforms, includingreduced price supports, are due to be completed in 2009-10 andhave led to sharp declines in sugar production and exports bymember nations.

During 2006-07 and 2007-08, the EU-25 averaged net sugarexports of 4.6 million tons, but by 2008-09, the EU-27 became anet importer of 2.1 million tons of sugar. The major sugarimport markets affected by the instability of Indian supplies aremostly nearby countries in South and Southeast Asia and theMiddle East, including Bangladesh, Sri Lanka, the United ArabEmirates, Pakistan, Malaysia, Indonesia, and Yemen. India is asmall supplier of sugar to the U.S. market, with annual exportsaveraging 8,082 tons during 2000-01 to 2007-08. Brazil, theworld’s largest sugar exporter, is India’s major supplier duringyears of deficit.

International trade opportunity

International trade is of strategic importance to India as it canhelp maintain stability in the domestic market, despite thecyclicality in production. If there is a sugar surplus either due toexcess production or due to greater economic attractiveness ofcane for ethanol and cogen in the future, exports could be used ifthe surplus cannot be managed in the domestic market.Acceptability as a credible exporter will provide the Indiansector an alternate set of markets for diverting surplusproduction. Similarly, in case of deficits, raw sugar importscould help bridge the supply gap.

India has the potential to export to major Indian Ocean markets,due to freight competitiveness with respect to key competitors,Brazil and Thailand. With EU exports reducing by 4.5 millionMT, world prices per MT of sugar are expected to increase inthe range of USD 50 to USD 100. This could potentially makeexports more viable for India. However, due to the increasingemergence of destination refineries, key markets are importinggreater share of raw sugar, and India's competitiveness for rawexports is relatively lower as of today. Currently, India'scompetitiveness is higher in markets, where share of white sugarimports as percentage of cumulative imports is higher. Goingforward, India would need to build the capability to produce rawsugar and refined sugar of international quality standards, inorder to leverage the export opportunity.

The target markets are estimated to import 10 million MT ofsugar by 2017. India would be able to leverage this opportunitythrough productivity improvements and alignment of cane andsugar prices in the domestic market. India's competitiveness canalso be increased by enhancing export infrastructure like loadingrates and draft in Indian ports. Since the current cost structure ofthe Indian industry is uncompetitive for exports, in case of alarge sugar surplus, the government could consider using WTOcompliant subsidies to enable exports while creating stability inthe domestic market. The industry could also explore ways ofcollectively sharing losses due to exports, if any, since exportswould enable lower stocks in the domestic market, thusbenefiting both mills and farmers through higher sugarrealization.

Sugarcane Production Potential in India

India likely has significant potential to expand sugarcaneproduction by increasing both planted area and yield. WhileIndia’s area planted to sugarcane, averaging about 4.5 millionhectares per year of primarily irrigated land, is the secondlargest in the world after Brazil, it accounts for a relatively smallShare of India’s cropped area (about 142 million hectares) andnet irrigated area(about60 million hectares). Sugarcane,however, is a year-round crop that typically remains in the fieldfor3 years, and returns to sugarcane production must becompetitive for irrigated land on which two and in some areasthree, crops are taken in one year.

Above figure provides gross returns from sugarcane, wheat-paddy double crops common in irrigated areas of north India,

and paddy-paddy double crops common in irrigated areas ofsouth India over a10-year period. A comparison showsgenerally higher returns to sugarcane, based on both averageSAPs and the lower SMPs, although there has been aconvergence in recent years due to the relatively large increasesin wheat and paddy MSPs. However, cost of cultivation dataindicate that labour costs for sugarcane are roughly double thosefor wheat and paddy, suggesting that labour availability andcosts may be constraints to growth in sugarcane area.

India also appears to have the potential to improve sugarcaneyields, and the average sugar content of harvested sugarcane,through a continued shift of planted area from northern states,where the climate is subtropical, to southern states, where theclimate is tropical and conducive to higher sugarcane yields andsugar recovery rates. Sugarcane yields in India average about 68tons per hectare, about the same as China but below other majorproducers, such as Australia, Brazil, and Mexico. But, anincreasing share of India’s sugarcane is being planted insouthern states, where yields average about83 tons/hectare,rather than in north India, where yields average about58tons/hectare. Although the northern state of Uttar Pradesh thehistorical center of the Indian sugar industry still accounted forabout 46 percent of sugarcane area and 39 percent of outputduring 2005-06 and 2007-08, the southern state of Maharashtra,where both average yields and the sugar content of sugarcaneare higher, is now the largest producer of sugar. Most Indiansugarcane is grown under irrigation in all major producingstates, providing favourable conditions for improving averageyields.

Domestic Sugar Policies

Sugar industry has two stages of policies

• Sugar cane price policy• Sugar price policy

Sugar cane pricing policy

Sugar cane pricing is politically sensitive in India. Every yearcentral government announces Statutory Minimum Price (SMP)for sugarcane. The sugar cane producing states also announcetheir own State Advised Price (SAP), which is many times muchhigher than SMP. The difference in SMP and SAP has resultedin market distortions and huge pile of arrears with sugar mills tobe paid to farmers.

As per Sugarcane (Control) Order, 1966, sugar mills have to paycane price to farmers within 14 days of delivery of sugarcaneand any failure in this regard could attract penal interest rate of15% per annum.

Government has been increasing SMP over the years except for2008-09. Sugarcane production remained stable for three yearsafter record output in 2006-07. Stable SMP from 2006 to 2008-09 and stagnant rainfall kept production lower. The sugar pricesstarted rallying from 2008 followed by fall in output in 2008-09.It is observed that in 2009-10, production showed marginal rise,despite huge increase in SMP (32.7%), because of fall in rainfall(down by 20.5 percent from normal). The sugar cane output

estimated to increase by over 15 percent in 2010-11, favouredby higher SMP and better rainfall. So, SMP and rainfall hasdirect impact on production, but rainfall seems to be moreinfluential factor.

Apart from following price intervening policy in sugar cane,Government also has price policy on consumption side.Government has been following dual and partial sugar pricingsystem for decades. Despite efforts from various industry to doaway with price intervention, Government continue to followdual price model to balance this highly sensitive market.

• Levy sugar• Non-levy (free sale)

Levy Sugar-Under this policy, certain percentage of sugarproduced by mills has to be given to government as compulsorylevy at a price fixed by Government in every sugar season fordistribution in Public Distribution System (PDS).

Non-levy sugar (free sale)- Under this policy, sugar is allowedto be sold in the market as per the quantity fixed by thegovernment. The free sale quota is mostly fixed on monthlybasis and also quarterly. In order to decontrol the sugar industryin phased manner, Government reduced levy obligation of sugarfactories from 40% to 30% from January 1 2000. It furtherreduced compulsory levy sugar to 15 percent from February 12000.

Sugar Industry in year 21012-13

Excessive availability of sugar this year is unlikely to deterIndian exporters to intensify supplies to global markets andincrease realisation this year. Reeling under severe financialstress, Indian sugar companies are looking for opportunities forhigher realisation from overseas markets with permission fromthe local government.The government of India had allowed one mt of exports underopen general licence so far.

An increase in India’s exportable surplus and strong productionprospects in key Northern Hemisphere producers will limit theupside on prices. The important questions for the sugar marketin 2012 will be whether cane output in Brazil recovers after aproduction setback, when and how much Brazilian cane will beconverted into ethanol instead of sugar, and the outlook forIndian sugar exports.

Here I am attaching State wise production and stock of allsectors factories, factory wise production & stock of sugar ofcooperative sugar factories at the end of March 2013 and statewise average realisations from sale of non-levy sugar up toFebruary 2013 during the season 2012-13.

Data is maintained by NATIONAL FEDERATION OFCOOPERATIVE SUGAR FACTORIES Ltd.

BIBLIOGRAPHY

o http://faostat.fao.org/default.aspx

o http://agricoop.nic.in/Agristatistics.htm

o http://dacnet.nic.in/eands/costofcultivation.pdf

o http://eaindustry.nic.in/

o www.sugarindustry.com

o http://coopsugar.org/notification.php

(National Federation of Cooperative Sugar FactoriesLtd.)