Nov 14, 2010

Article on Sugar Sector

SUGAR –
INTRODUCTION TO SUGAR:
Sugar is an informal term for a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose characterized by a sweet flavor. In food, sugar almost exclusively refers to sucrose, which primarily comes from sugar cane and sugar beet.
Other sugars are used in industrial food preparation, but are usually known by more specific names—glucose, fructose or fruit sugar, high fructose corn syrup, etc.

SUGAR PLANTS CULTIVATION:
Sugar cane is a hot weather plant, which is why the largest growing areas are in South Asia, Brazil, the Caribbean Basin and the southern United States. Sugar beets are grown in cool temperate zones such as the northern Great Plains, Germany and France. Both cane and beets must be processed into raw sugar very soon after the plants are harvested or else their sugar content will drop precipitously.


SUGAR HISTORY:
Word sugar is originated from Arabic word ‘shakar’ also frequently used in hindi language. In turn the Arabic shakkar word is derived from Sanskrit word ‘sharkara’.
Sugar cane plantation started in guinea. From there it came to india and made way to Arabic nations.
It is said that Columbus brought sugar plant to Caribbean and from there in Brazil large scale cultivation started using slave labor.
India was the1st country to extract natural cane juice to make the first crude sugar. it is believed that sugar cane was produced some 2500 yrs ago in India. However the advent of modern sugar industry in India dates back to mid 1930's when a few vacuum pan units were established in the sub-tropical belts of Uttar Pradesh and Bihar.  Until the mid 50s, the sugar industry was almost wholly confined to the states of Uttar Pradesh and Bihar. After late fifties or early sixties the industry dispersed into Southern India, Western India and other parts of Northern India.

In the mid-1700's, a German scientist developed an substitute to sugar, through the use of sugar beets. Since then, the sugar beet has become the main source of sugar in Europe.

RAW SUGAR VS. REFINED SUGAR:
Refined sugar is also known as white sugar.
The basis of the international benchmark ICE Sugar contract no.11.
Large importers of refined sugar such as Middle-East who previously used to import refined sugar, now imports raw sugar and refines locally. This has led to relatively stronger raw sugar prices than refined sugar prices.

SUGAR PRODUCTION:
Sugar crop year is from 1 September to 30 October every year throughout the world.
Sugar production from sugar cane=70%.
Sugar production from sugar beets=30%.
Sugarcane is produced in around 120 countries of the world and the world’s total production of sugar figures around 135 to 145 million tons. Brazil stands at the top regarding the production level followed by India and the European Union.
Over 3/4ths of the total sugar produced is consumed domestically in the countries in which it is produced, and the rest is traded around the globe which is often termed as World Sugar. The world exports of sugar hover around 40 million tons.
The main exporter Brazil exports more than 50% of its produce. As of now European Union, Thailand, Cuba, and Australia follow the list after Brazil. This top five exporting countries consists more than 50-60% of the total world exports.
Almost 100 odd countries import sugar for domestic consumption due to deficit. Needless to mention that the sugar import stands around 40 million tones as said regarding exports. Russia is the biggest importer followed by Indonesia, Korea, Japan etc.
India, Brazil, China, Thailand, Cuba and Mexico are among the leading sugar cane producers. European Union nations, the Russian Federation and Ukraine produce the majority of all sugar beets.
The European Union, Brazil, Thailand, Australia, Cuba and Ukraine are leading sugar exporters.

2007-2008 world sugar production map (Source-F.O Licht statistics)
Country
% in total production
Europe
15
Africa
6
Oceanic
3
North and central America
14
South america
23
asia
39
total
100



SUGAR FOR ETHANOL DISTILLATION:
Sugar cane is by far the most efficient converter of solar energy into useable plant carbohydrates, at about 8% versus just over 1% for corn. This efficiency derives from a biochemical quirk involving the photosynthetic arrangement of four carbon atoms (instead of three), and allows the sugar cane to pull vast quantities of carbon dioxide out of the air. The ability of the sugar cane plant to capture so much of the sun’s energy makes it the most efficient feedstock for ethanol distillation. This is why Brazil, which ironically is now on its way to becoming a major petroleum producer, has steered its domestic vehicle fleet towards ethanol since the late 1970s.
Sugar’s role in ethanol production increasingly make it both an energy and food commodity,

SUGAR-CORN CONNECTION:
In international arena sugar is linked to the price of corn-derived ethanol, and hence to the price of the corn itself.


SUGAR TRADE ISSUE AND PROBLEMS: Sugar Economics, Demand, Supply, Price Moves
The sugar sector world over has been widely subsidized and remain a protected sector.
Amongst other problems depressing international prices are Trade blocs, import restrictions, long term supply and consumption contracts are as well.
Import restrictions and subsidies to growers has been a big reason of long term suppressed and down trend pressure on international sugar prices.
Due to various trade pacts, import restrictions, EU sugar policies, USA Sugar Acts etc. almost more than 50% world sugar trade occurs under controls and devoid of free market.

Most sugar is either consumed in the country where it is produced under government controlled pricing arrangements or moved from one country to another under long-term supply agreements. The sugar not subject to such agreements is freely traded among a number of nations, corporations and individuals. This makes the market for sugar a "residual" market - a market in which freely traded sugar is only a fraction of worldwide production. Since the free market may be only 20-25% of world production (or less than 50% as mentioned in previous paragraph)
Industrialized nations account for most sugar consumption. The European Union, Russian Federation, United States, China and Japan are among the world’s largest sugar importers.
An imbalance between world consumption and production in 1980 again sent sugar futures prices skyward - from around 15 cents per pound at the beginning of the year to about 45 cents per pound in the fall. By 1982, however, sugar futures prices had fallen back to their 1977-79 range, averaging over 8 cents per pound for the year. Ample supplies and an evolving geo-political scene have led to prices in the 2 cents/pound to 16 cents/pound range since then.
Price moves:
A small change in production or consumption can translate to a much larger change in free market sugar supply. The delicate supply/demand balance is a main reason for sugar futures prices/ historical price volatility.
The increase in consumption is associated with rising per capita income, strong demand from the food and beverage sectors and weaker competition from alternative sweeteners.
The sugar industry closely monitors the level of sugar stocks relative to sugar consumption as a measure of available supply. In the past, small changes in the ratio have led to large sugar futures price movements in the opposite direction.
Beyond price, other factors influencing sugar demand include: refinery activity; consumer income; candy and confectionery sales; changing eating habits; and sugars use in new technologies, such as ethanol production for automobile fuel. Many South American countries use sugar and corn based ethanol in their unleaded gasoline and diesel engines. An unexpected increase in demand can lead to much higher sugar futures prices.
The possible India Impact:
India's poor crop and import pressure always takes the raw prices up. In 2009 it is said that raw prices almost doubled due to Indian import due to poor crop.

THE CURRENCY LINK
Sugar, like so many commodities, is priced globally in U.S. dollars. This creates currency risk for growers whose expenses may be in a currency strengthening against the dollar but whose revenues are denominated in dollars. So in case Indian producers produce surplus and exports they will face this problem in case Indian rupee is strengthening against dollar. They can also hedge by trading in dollar index. This will add derivative exposure.

SUGAR FUTURES TRADING OVER WORLD AND INDIA:
Sugar futures have traded in New York since 1914,

There are mainly two types of Sugar Futures contracts traded worldwide.
  1. New York traded,  Intercontinental Exchange’s Raw Sugar Futures Contract No.11, and
  2. London LIFFE/Euronext traded White Sugar Futures contract

Link of benchmark ‘white sugar futures contract in London

Link of benchmark ‘raw sugar futures contract no.11’on ICE (intercontinental exchange) https://www.theice.com/productguide/ProductDetails.shtml?specId=23
Contract size is 1,12,000 pound, and thus the $ price quoted is for 1,12,000 pounds.
Lets take prices from Spot Exchanges of NCDEX.
NCDEX SPOT EXCHANGE-SUGAR TRADING
Two type of contracts:
  1. Sugar- M Grade, and
  2. Sugar- S 30 Grade
Both are spot contracts for 10,000 kgs and price are quoted for 1 Rs. Per quintal.
Below is the link to view historical charts of raw sugar contract no.11 from 1973=
also,

LIST OF LISTED SUGAR COMPANIES IN INDIA:
SR. NO.
NAME OF LISTED SUGAR COMPANIES
SHARE PRICE
IN RS.
(CLOSE 2010)
1
BANNARI AMMAN SUGARS LTD

2
DWARIKESH SUGAR INDUSTRIES LTD

3
RAJSHREE SUGARS & CHEMICALS LTD

4
RANA SUGARS LTD

5
SHREE RENUKA SUGARS LTD

6
UPPER GANGES SUGAR & INDUSTRIES LTD, k.k birla group

7
OUDH SUGAR MILLS LTD, k.k.birla group flagship

8
BAJAJ HINDUSTHAN LTD

9
BAJAJ HINDUSTHAN SUGAR & INDUSTRIES LTD

10
BALRAMPUR CHINI MILLS LTD

11
ANDHRA SUGARS LTD

12
DHAMPUR SUGAR (KASHIPUR) LTD

13
DHAMPUR SUGAR MILLS LTD

14
DHAMPURE SPECIALITY SUGARS LTD

15
DHARANI SUGARS & CHEMICALS LTD

16
K.M.SUGAR MILLS LTD

17
TRIVENI ENGINEERING & INDUSTRIES LTD

18
RAVALGAON SUGAR FARM LTD

19
SAKTHI SUGARS LTD

20
E.I.D.-PARRY (INDIA) LTD

21
DCM SHRIRAM INDUSTRIES LTD

22
KCP SUGAR & INDUSTRIES CORPORATION LTD

23
SIMBHAOLI SUGARS LTD

24
UGAR SUGAR WORKS LTD

25
THIRU AROORAN SUGARS LTD

26
UTTAM SUGAR MILLS LTD.

27
EMPEE SUGARS & CHEMICALS LTD

28
INDIAN SUCROSE LTD

29
JEYPORE SUGAR COMPANY LTD

30
KESAR ENTERPRISES LTD

31
PONNI SUGARS (ERODE) LTD

32
RIGA SUGAR COMPANY LTD

33
SBEC SUGAR LTD

34
SIR SHADI LAL ENTERPRISES LTD

35
MAWANA SUGARS LTD

36
KAKATIYA CEMENT SUGAR & INDUSTRIES LTD

37
VENUS SUGAR LTD

38
SHREE VAANI SUGARS AND INDUSTRIES LTD



INDIAN SUGAR INDUSTRY
Indian sugar industry is 2nd largest agro industry.
It is estimated that there are more than 5 crore sugar cane farmers and around 7% of the rural population is engaged in this.
Indian sugar consumption is rising at a rate of 3%. Indian per capital consumptions is estimated at 18kg, which is lower than world average of 22 kg per capita.
As to the statistics there were a total number of 571 sugar factories in India as on March 31,2005 compared to 138 during1950-51. Almost 50% of the production is controlled by co-operative and public sector mills. According to an estimate around 100 mills are not operative while almost half of the operative mills are in Maharashtra state alone. However, UP ranks second in production after it. The number of cane growers are expected to be at around 4-5 crores.

MAP OF SUGAR PRODUCTION IN INDIA:

THE DEMAND OF INDUSTRY: The Indian sugar Industry wants open revenue sharing with farmers. They want freedom from sale control and change in existing levy mechanism. They are ready to supply all sugar they needed to PDS system govt supplies below poverty line, all they want it to be subsidized by the govt from budget like petrol, and they must be paid market price. They will give priority to govt demand. The industry people also say that they are in favor of well being of farmers, and even after possible decontrol/reform they will be oblige with a minimum stipulated price set by the govt on sugar cane. They also want the govt to do away with the monthly release mechanism.

SHORTAGE AND IMPORT DUTY: Since last two years, sugar has been in shortage in India, and thus the import duty is also brought down almost to zero. The govt is considering increasing this duty. Especially on white sugar which is not processed or which has no value addition in the country. The industry is also in favour of duty protection when there is no enough supply in the country.
Sometimes the state govt increased sugar cane prices abnormally, which hurts sugar mills.
Indian sugar industry benefits if domestic production is higher and international prices are attractive, and exports are freely permitted.
The sugarcane growing areas may be broadly classified into two agro-climatic regions—subtropical and tropical.
Sub- Tropical zones
Tropical zones
  • Uttar Pradesh (UP)
  • Uttaranchal
  • Bihar
  • Punjab
  • Haryana
  • Maharashtra
  • Andhra Pradesh (AP)
  • Tamil Nadu (TN)
  • Gujarat
  • Karnataka

MECHANISM IN INDIA:
The sugar sector is controlled by Government of India under the Sugarcane (Control) Order, 1966, under the Essential Commodities Act, 1955.
The production of sugarcane in India has increased during the last ten years and is still on an increasing trend. The productivity of sugarcane in the northern areas of the country is lower than the productivity in southern areas. In India, sugar is grown over 4 million hectares of land.
India’s domestic demand remains between 18-22 mmt.
Currently, the government has a levy mechanism under which sugar mills are required to sell 20% of the sugar they produce every year to the union govt at a price fixed by the govt. irrespective of the market price.
The government distributes these sugar to BPL (below poverty line) families throughout the country under PDS (public distribution) system.
This mechanism usually results into year over year losses to the sugar mills/companies.
The Directorate of Sugar, is the authority who works overlooks the matters related to sugar. It works under the Department of Food and Public Distribution, under Ministry of Consumer Affairs, Food and Public Distribution.
According to present system the mills are allotted levy sugar quota and mandated to sell the specified sugar quota within a month time.
The sugar mills are also required to mandatorily report the weekly sale of sugar to the Directorate of Sugar. This was brought in by a notification in 2006, after finding alleged mispractice and delays by mills in releasing ordered monthly quota.
SMP-statutory minimum price, are the govt administered prices which acts as floor price. his statutory Minimum Price is designed through the consent of Commission for Agricultural Coast and Prices (CACP) and respective state Governments. (The CACP works under the Ministry of Agriculture - http://dacnet.nic.in/cacp/)

SAP-state advised price are cane price set by states. Historically are set higher than the SMP.
FIELD OWNERSHIP: The sugar mills are not allowed to own sugar cane farms. Also new sugar mills cannot be set up near 15 km of existing mills. This licensing requirement was brought in in 1998.
SUGAR MILLS’ SEARCH FOR PROFITS: The sugar mills have started looking for profits by focusing on by products and co-gen projects.
INDIAN DEMAND PROJECTION: It is expected that by 2018, the Indian demand for sugar will touch 30 million ton mark.
COMMAND AREA: the concept of command area binds Cane farmers and Sugar mills to sell and buy from each. Sugar mills have to purchase all the Cane sold to them, even if it exceeds their requirement.


ETHANOL PRICE ISSUE IN INDIA:
The ethanol prices are also controlled and determined by the government in india.
India is 4th largest producer of ethanol in the world.
Since 1993 the regulations have been progressively eased. The key regulatory milestones include de-licensing of the industry in 1998 and the removal of control on storage and distribution in 2002.

BY PRODUCTS:
MOLASSES:
Molasses is a byproduct of the processing of sugar cane, or sugar beets. Its original meaning in latin means honey. It is a thick, brown to deep black, honey-like substance. It is used as food additive. It is also used in chemical, industry, energy, horticulture and other food and consumption derivatives. It is common ingredient in baking.
BAGASSE:
Bagasse is the fibrous residue remaining after sugarcane or sorghum stalks are crushed to extract their juice.It is currently used as a biofuel and as a renewable resource in the manufacture of pulp and paper products and building materials. The word bagasse came originally from a Spanish word meaning ‘rubbish’.
Researches suggests, our country is has been lacking in its efforts for an effective utilization of by-products derived in the manufacture of sugar. It extracts only 40% of the alcohol capacity, and the potential for co-generation of power using bagasse is enormous.

OTHER BY PRODUCTS: Other by products includes press mud and fly ash.

FARM MINISTER PAWAR’S STATEEMENTS:
On 13 july 2010, farm minister sharad pawar said the suggestion for decontrolling the sugar domain shall be all set within next 10 days and passed on to other ministries for discussions.
28 Jul 2010-
Food Minister Sharad Pawar today said that any decision on decontrolling the sugar sector will be taken only after assessing the likely production for the next year and keeping the interest of the consumers in mind. 

"I will collect the information about total production by the end of August. It (decontrolling the sugar sector) depends upon what is the area availability in the country. Then it will depend upon what is the production,"

CLOSING COMMENTS-
Investment in sugar stocks is a tricky business. You will not see a lot of entrepreneurial interest into this business. The most mills today in India are either cooperatives or they were cooperatives. The reasons are quite obvious. Government policies and sugar being perishable and internationally impacted commodity.
Warren Buffet doesn’t like investing into commodities and so do we. At least not into any of our Indian sugar stocks. Big investors and mutual funds also avoid sugar stocks for longer term and always keep sell window open on their sugar sector holding stock quotes. Speculators and traders like it because it gives them free rides. They say fertilizer and sugar to be brotherhood sectors. Although we have slightly different opinion on it. Thus, at present there is not anything big to read into this. The bottom line is that any investor if anyhow is having sugar stocks constituting big part of his portfolio, then it is time to shuffle. See, we are not bearish, but neither are we bullish. Many times it is not about bullish or bearish, but about investiblity or non-investibility. You need a state of mind of sound rational and logic, more than a state mind of bullishness or bearishness.

USEFUL LINKS AND SOURCES:
Indian sugar mills association http://www.indiansugar.com
National Federation of Cooperative Sugar Factories Limited, http://coopsugar.org/
Ministry of consumer affairs, Department of Food and PDS http://fcamin.nic.in
International sugar organization http://www.isosugar.org
www.Sugaronline.com, news on sugar and ethanol
http://www.sugartech.co.za/news/, sugar industry global news
http://www.isosugar.org/, international sugar organization
http://www.beetsugar.org/, USA beet sugar association
http://www.sugartraders.co.uk/, the sugar traders association of UK
http://www.sugarassociation.co.uk/, the sugar association of London
Vasantdada Sugar Indtitute, http://www.vsisugar.com/index.html
http://www.sbreb.org/,  the Sugarbeet Research and Education board Minnesota and North Dakota.
http://www.ers.usda.gov/, USA Dept. of Agriculture Service, Economic Research Service.
© Megha Investments & Research, 2010.

1 comment:

  1. Thanks for sharing the important points of view with us. It is really very nice blog which describes how to SAP in sugar industry

    ReplyDelete