1

SUGAR SITUATION: 2006-07

Introduction:

India is the largest consumer of sugar in the world and Indian sugar industry is the 2

nd largest agro-industry located

in the rural India. With 453 operating sugar mills in different parts of the country, Indian sugar industry has been a focal point for socio-economic development in the rural areas. About 50 million sugarcane farmers and a large number of agricultural labourers are involved in sugarcane cultivation and ancillary activities, constituting 7.5% of the rural population. Besides the industry provides employment to about 2 million skilled/semi skilled workers and others mostly from the rural areas. 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. The average cane crushing capacity in India, Brazil and Thailand is given below:

Country Avg. Capacity (TCD)

Thailand 10300

Brazil 9200

India 3500

Growth in Capacity: Indian sugar industry has grown horizontally with large number of small sized sugar plants set up throughout the country as opposed to the consolidation of capacity in the rest of the important sugar producing countries, where greater emphasis has been laid on larger capacity of sugar plants. Following table gives the details of impressive contribution of the Indian sugar industry to the national economy.

2

Table I

NATIONAL ECONOMY

No. of Working Sugar Factories

453

Cane Price Per Tonne US$ 20

Cane Price paid annually US$ 3700 Million

No. of cane farmers 50 Million

Sugar Production 20.0 Million Tonnes (Raw Value)

Annual Tax contribution to exchequer

US $ 500 Million

Employment including ancillary activities

2 Million People

Fuel Ethanol of 5% blend (Value)

US $ 200 Million per annum

Current export of Co-generated power (Value)

US $ 100 Million per annum

The Government of India licensed new units with an initial capacity of 1250 TCD upto 1980s which was subsequently increased to 2500 TCD. Government de-licensed the sugar sector in August 1998, thereby removing the restrictions on expansion of existing capacity as well as on establishment of new units, with the only stipulation that a minimum distance of 15 Kms would continue to be observed between an existing sugar mill and a new mill. The number of sugar mills and the growth in capacity over decennial period 1980-81 to 2000-01 and in the year 2001-02 to 2003-04 is given in Table No. II.

3

Table No. II

GROWTH IN AVERAGE CAPACITY OF SUGAR MILLS

Decennial period ending

No. of Units Average Capacity Per Unit (TCD)

1980-81 299 1650

1990-91 377 2030

2000-01 423 3000

2001-02 437 3200

2002-03 433 3350

2003-04 453 3500

Table III

SUGARCANE AREA AND PRODUCTION

FROM 1980-81 TO 2000-01 & UPTO 2003-04

Year Area under cane (Million hectares)

Cane Production (Million tonnes)

1980-81 2.67 154

1990-91 3.69 241

2000-01 4.32 296

2001-02 4.41 297

2002-03 4.36 282

2003-04 3.99 236

Cane Acreage & Production

Sugarcane occupies 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

4

other crops to sugarcane by the farmers for economic reasons. The cane area has, however, declined in the year 2003-04 mainly due to drought and pest attacks.

Unlike sugarcane, where the farmers are assured of a minimum price by way of a statutory order issued by the Government, in respect of all other agricultural crops including food grains, the Government of India only announces the minimum support prices (MSP). On the other hand, with statutory protection, sugarcane farmers receive the price as statutorily notified from the sugar mills even when it resulted in sizable loss to the sugar undertakings.

Apart from fixation of statutory minimum price for sugarcane, the industry is also required to share 50% of the extra realisation on free sale sugar over the levy price with the cane farmers. Delay in making the cane price payment over 15 days also attracts 15% penal interest. For the season 2003-04, the average sugarcane price paid being Rs.950/- per tonne, is much higher than the cane prices, paid in the major sugar producing and exporting countries, where it is linked to sugar sales realisation and is also disbursed in 2 to 3 installments.

Tempted by such securitisation of price, farmers preferred to increase area under cane causing spurt in cane acreage and sugarcane production significantly. From a level of 154 million tonnes in 1980-81, the cane production increased to 241 million tonnes in 1990-91 and further to 296 million tonnes in 2000-01. Since then it has been hovering around 300 million tonnes until last year. In the season 2003-04, however, sugarcane production declined to 236 million tonnes mainly due to drought.

5

Cane Utilisation

Not only cane acreage and cane production has been increasing, even drawal of cane by the sugar industry has also been increasing over the years. For, in India sugarcane is utilised by sugar mills as well as by traditional users like gur and khandsari producers. In early 1980s, the proportion of cane drawn by the sugar industry was hovering around 35% which went upto to 50% in 1990s and to as high as 69% in the year 2002-03. In the year 2003-04, percentage drawal of cane, however, declined a bit due to more intense competition from the alternate sweeteners gur and khandsari. The table No. IV gives data on cane production and cane utilization for different purposes.

Consumption Trends

Apart from white sugar, India also consumes alternate sweeteners - jaggery and khandsari, which are placed at about 9 million tonnes per annum. Taking into account all the 3 sweeteners i.e. white sugar, jaggery and khandsari, on a per capita basis, Indian consumption stands at a reasonably high figure. This would be evident from data of per capita consumption of sugar in various countries given in the

Table No. V.

The consumption of white sugar in India is generally urban based, in rural areas the alternate sweeteners gur and khandsari are consumed predominately. The consumption of sugar in urban areas in some of the states of Indian union with higher GDP and income levels, matches favourably with various developed countries as given in Table No.VI.

6

Table No. IV

% Cane utilisation for

Year White sugar Gur and khandsari

Seed, feed and chewing

1980-81 33.4 54.8 11.8

1990-91 50.7 37.4 11.8

2000-01 59.7 28.8 11.5

2001-02 57.4 31.5 11.1

2002-03 68.9 20.1 11.0

2003-04 56.1 32.5 11.4

Table No. V

PER CAPITA CONSUMPTION OF SUGAR IN VARIOUS COUNTRIES

(Kilogram, Raw value)

Country 2000 2001 2002 2003

Australia 63.5 55.2 55.8 54.9

Brazil 57.5 57.7 60.2 58.0

E.U. 37.5 36.0 38.4 37.2

U.S.A. 32.6 31.5 32.4 30.3

Thailand 29.1 31.0 31.2 32.6

Japan 19.0 18.4 19.1 18.9

World Average 20.7 21.0 21.7 22.1

INDIA |Sugar| 16.5 17.5 17.5 18.0

INDIA |Cane based Alternate Sweeteners|

10.0 9.0 9.0 9.0

Source: ISO Year Book

7

Table No.VI

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

All India

31.5

Cogeneration

Cogeneration of power by sugar mills in India began a decade back in the year 1993-94 with the Ministry of Non-conventional Energy Sources (MNES) formulating its guidelines for fixation of the rate of power supplied by sugar mills to the Electricity Boards. With a small beginning by 8 sugar mills generating 50 MW power, today, 48 units have set up their power plants generating 680 MW power.

According to information currently available, an equal number or say 50 sugar mills are in the process of putting up power plants to produce yet another 700 MW, taking the total generation to about 1400 MW against an assessed full

8

industry potential of 3500 MW. The State-wise breakup of installed cogeneration capacity is given in Table No.VII.

Though, there have been problems mainly related to acceptance and continuation of the power rates as per the MNES guidelines as also with regard to actual payment against power supply to the Electricity Boards. Yet as would be evident, there has been appreciable growth and this trend is likely to continue in future as well because of growing demand for power in the country.

Table No. VII

STATEWISE ANNUAL INSTALLED COGENERATION CAPACITY

State Number of Units

Installed Capacity MW

Andhra Pradesh

10 130

Karnataka 11

160

Tamil Nadu 14 255

Uttar Pradesh

9

100

Punjab 1 10

Maharashtra 3 25

Total 48 680

Fuel Ethanol

Encouraged by the success of the pilot projects in the year 2000-01, the Minister for Petroleum and Natural Gas

9

announced in Indian Parliament in December 2001, the Government's decision to implement the mixed fuel programme with ethanol in three phases. The implementation of first phase (5% blends) was further sub-divided into two parts, it has been taken up first in 9 States and 4 Union Territories with effect from 1

st October, 2003,

where sugarcane crop is being extensively grown. In the second part, the rest of the country is to be covered. Under this programme the requirement of fuel ethanol worked out to roughly 350 million litres to go upto 500 million litres when the entire country is covered. The Government have also indicated the second and third phases of the ethanol programme. In the second phase, the objective is to increase the blending of ethanol to 10% with petrol. Apart from ethanol, work had also begun on blending ethanol with diesel.

Enough capacity has been created for production of ethanol within a short period. Mostly, distilleries attached with sugar mills have taken up this programme. Out of 295 distilleries, as many as 118 distilleries are attached with sugar mills, of them 70 have added new ethanol plant with production capacity of over 700 million litres sufficient to meet 5% blend for the entire country. The state wise position is given in Table No. VIII.

Besides 128 million litre capacity is under implementation in UP and about 200 mln. litre capacity is under various stages of implementation in Maharashtra and other states making the total capacity to over 1000 million litres sufficient to meet the requirement at 10% ethanol blend under the second phase. Following table gives the details of Ethanol production at 90% utilisation of molasses for distillation from 2001-02 to 2003-04 and estimates upto 2006-07.

10

Table No. VIII

The state wise installed Ethanol production capacity

State/UT Requirement of Oil Marketing Cos.

Availability in the State & UT

Uttar Pradesh 51 190

Punjab 32 Nil

Haryana& Chandigarh 24 Nil

Maharashtra 70 350

Gujrat, Daman Diu & Dadra & Nagar Haveli

40 30

Goa 5 Nil

Andhra Pradesh 40 30

Karnataka 35 58

Tamil Nadu & Pondicherry

48 52

Total 345 710

SEASONAL ETHANOL PRODUCTION AT 90 % UTILISATION OF MOLASSES FOR DISTILLATION

Year Million litres

2001-2002 1620

2002-2003 1755

2003-04 1215

2004-05* 1140

2005-06* 1600

2006-07* 18 70

*Projected

However, the pricing of ethanol is an important issue which needs further consideration particularly in view of the steep

11

decline in sugarcane and sugar production in the year 2003-04 and 2004-05, thereby affecting the output of byproduct molasses, which is being used for production of fuel ethanol in India. Moreover, the recent budget proposal for the year 2005-06 to hike the excise duty on molasses from Rs.500/- to Rs. 1000/-per tonne is a matter of serious concern and needs immediate reconsideration by the Government.

Fortunately, the use of ethanol as a blend fuel adopted by most of the countries producing / exporting sugar is a healthy development, which provide flexibility for the sugar industry in those countries to absorb cane supplies for production of ethanol, thereby balancing the sugar economy and also ensuring the reasonable price structure for sugar. Such corrections in the future will ensure a healthy growth of the sugar industry.

India in the World Market

Indian approach towards export of sugar is vastly different and market friendly. India has been exporting sugar occasionally in periods of sugar surpluses. Whereas, most other countries dump their excess sugar in the International market despite easy accessibility to funds carrying low rate of interest, the Indian sugar industry has observed considerable constraint by limiting its exports. In the last five years it exported 4.07 million tonnes sugar. India had an average exportable surplus of 6.23 million tonnes during the last 5 years. As against this, on an average, the sugar exported was only 0.81 million tonnes or 7.69% of the total exportable surplus as would be evident from the data given in Table No. IX.

12

Table No. IX

Exportable surplus, sugar stock & actual exports

Year

Closing Stock

(Million Tonnes)

Exportable surplus

(Million Tonnes)

Actual Export

(Million Tonnes)

% export of surplus

stocks

1999-00 9.38 5.38 0.07 1.30

2000-01 10.4 6.4 1.2 18.75

2001-02 11.3 7.3 1.1 15.06

2002-03 11.6 7.6 1.5 19.73

2003-04 8.5 4.5 0.2 4.44

Average 10.23 6.23 0.81 7.69

Sugar exports, in a limited manner, were mostly confined to the neighbouring countries. If India were to liquidate its huge stocks in the international market, the world sugar prices would have nose-dived effecting all exporting nations. Disciplined Indian approach towards exports deserves consideration so as to bring about order in the world sugar market, rather than resorting to subsidized exports.

Current Scene (2006-07)

Indian sugar sector having a large stake in the world sugar economy, like on several occasions in the past, once again found itself at cross roads. From an era of large production, high surpluses and virtually unmanageable stocks, India has turned into an importer of sugar, albeit of raw sugar, to meet the gap between supply and demand thereof, following two consecutive years of exceptionally low sugar output. Reasons for this are not far to seek. Severe drought

13

conditions in Southern and Western India, in particular, coupled with attack of pests and diseases, took heavy toll of sugarcane crop during the year 2003-04 and the current year 2004-05, with sugar output plummeting from over 20 million tonnes to 14 million tonnes in 2003-04 and to 12.5 million tonnes in 2004-05. Notwithstanding such a steep decline in production, large opening stock of sugar once considered as unbearable burden came in handy to reduce the real deficit to around two million tonnes, which has been met with raw sugar imports of equivalent quantity.

As would be evident from the above table, after meeting adequately the projected demand for sugar, the carry forward stocks at the end of sugar year 2004-05 would stand at a reasonable figure of 4.5 million tonnes, equal to broadly three months' consumption requirement for the initial period of 2005-06 sugar year.

However, for the first time, the new Government with its farmer and rural area centric approach, evolved a policy for import of raw sugar that has not only helped the sugar economy, but has also helped to crossover the period of aberrations in a manner that has protected all the three major stake holders - sugarcane farmers, sugar industry as well as the consumers.

14

Table X

SUPPLY AND DEMAND POSITION OF SUGAR

FOR THE SEASON 2003-04 AND ESTIMATES FOR 2004-05 & 2005-06

(Figures in million tonnes)

2003-04 2004-05 2005-06

Opening stock 11.6 8.5 4.5

Production 14.0 12.5 17.5

Imports 0.55 2.0 1.5

Total availability 26.15 23.0 23.5

Off-take for

1. Internal consumption 17.45 18.5 19.0

2. Export 0.2 - -

Total 17.65 18.5 19.0

Closing stocks 8.5 4.5 4.5

Import of raw sugar, in fact, began in the previous season 2003-04 itself - 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.

15

Under the impetus of this scheme, sugar factories in Southern India, Northern India as well as Western India imported significant quantities of raw sugar to increase availability of sugar for domestic consumption during the sugar year 2004-05. Thus, availability of additional sugar supply was fairly wide spread, although in Southern India with higher imports, larger additional supplies of white sugar became available. However, this did not cause any regional imbalance considering the larger deficiency in supply in the Southern and Western India.

In the table No. XI, the estimates for import of raw sugar regionwise for the years 2003-04 to 2004-05 has been given.

Future outlook

With reports of far more satisfactory sugarcane plantations, sugar production for the season 2005-06 is likely to show a quantum jump to about 17.5 million tonnes. Even so, fairly significant quantity of raw sugar import will continue in the coming year provided the price of raw sugar in the international market continues at reasonable levels. Import of raw sugar under 'Advance Licensing Scheme' limits the sugar industry alone to process the same to fulfill the export obligation. Thus, imports more or less correspond with the actual additional requirement of sugar to meet the projected deficit in supply.

In the past, inadequate availability of sugar arising out of decline in production was supplemented by way of additional supplies through import of white sugar from the world market. It is for the first time that the Government have instituted the new policy of facilitating import of raw sugar thereby placing greater reliance on the ability of the sugar industry to process raw sugar and make additional supplies

16

of refined white sugar available for consumption in the domestic market.

Table XI

REGION-WISE RAW SUGAR IMPORT

(Figures in Lakh Tonnes)

2003-04(Oct.-

Sep.)

2004-05 (Oct. 2004 to 10th

Mar.2005)

Addl. Qty. expected by

30th

Sept. 2005*

Karnataka 0.49 3.79 1.60

Tamil Nadu 3.65 2.78 1.30

Andhra Pradesh

0.89 1.84 0.60

Uttar Pradesh 0.50 4.82 1.80

Maharashtra - 0.57 0.80

Bihar - 0.07 -

Total 5.53 13.87 6.10

*Projected

Sugar industry on its part has also responded to the needs of the situation and discharged satisfactorily its consequential obligation. The success of the new policy clearly underlines that in future too whenever any such occasion arises, emphasis would be laid on raw sugar import rather opening up white sugar imports. Thus, a new demand driven policy has taken shape in the large interest of all concerned within the sugar sector.

On the other hand, sugar has a long established international market with sizeable volumes of over 45 million tonnes being traded each year. Asian continent, Far East and the Middle East region importing around 15 million

17

tonnes of sugar annually, provides an excellent means of increasing our exports, specially in view of the steep increase in the ocean freight in the recent past. Moreover, India has a great potential to increase sugarcane and sugar production as the sugarcane crop merely occupies about 3% of our cultivable area. What is needed is a fresh outlook i.e. sugarcane pricing policy based on sugar prices and a trade policy akin to the one followed by other regular sugar exporting countries. Larger production and higher sugar exports on a regular basis may provide incidental added value to the sugar sector and enable setting up of large sugar complexes - producing clean energy i.e. ethanol and power beside sugar, thereby ensuring adequate and timely payment of sugarcane price to the millions of sugarcane farmers.