Sugar Industry On The Verge Of Profitability

Introduction 

Sugar Industry in India has been a key driver of Indian rural economy's growth and has contributed steadily to the overall economic growth for India by supporting over 500 million farmers and their families, along with workers and entrepreneurs of almost 682 plus mills.  Sugar industry is the second largest agro based industry in India. 

Indian sugar industry is unique when compared to other large sugar producing nations as there is large domestic market for sugar in India. Australia, a major sugar exporting country, exports more than 70 per cent of its total sugar production and is heavily dependant on the international markets. After five years of surplus sugar production it is estimated that the sugar production will be lower than the domestic consumption in India and the sugar stock will see a YoY decline of 20 per cent. 

Sugar Production :-

ICRA estimates domestic sugar production for sugar year (October to September) 2016 to be at 25.2 million metric tonnes (MT). The estimates indicate a 11 per cent decline over the previous year. The decline in sugar production and exports will most likely bring down the stock level for sugar and this decline in sugar stocks is a positive, being instrumental in improving the domestic sugar realisations since August 2015.  With lowering sugar stocks and demand being stable, as also on the increase for sugar in domestic market, the sugar prices can be expected to sustain the improved price levels in the near to mid term. 

There is a visible decline in sugar production in Maharashtra and Karnataka mainly due to severe drought conditions. In Maharashtra alone, due to lack of sugar cane availability, the production is estimated to decline by almost 20 per cent to around 8.4 million MT as per the ICRA report. While the fear on prices remains due to the contingency of reduction in import duties on sugar, which will bring the prices down, the increase in sugar realisations can improve the contribution margins for sugar in sugar year 2016. All the developments clubbed with higher recovery rate can significantly improve sugar mills' profitability. Higher sugar cane prices may affect the profitability for several mills especially in Maharashtra and Karnataka as there is less sugar cane produce owing to the droughts over two years.  In addition to rising sugar prices the improved realisations for the by-products will provide support to the profitability of the mills. 

Sugar prices :-

Sugar prices reached a three year low of Rs. 23000 /MT in July 2015 owing to surplus sugar in the domestic market along with sugar surplus scenario  and muted sugar prices in International markets. Government notification on mandatory exports in the month of September 2015 and the announcement made on the cane production subsidy in December 2015 helped improve the sugar realisations. Sugar realisations' rising trend is visible since August 2015. The prices as on May 2016 for sugar are at Rs. 34,000/MT levels higher by almost 48 per cent over a 9 month period. The higher prices may sustain and may even inch higher, given the supply correction and further anticipated production decline. 

"The sugar Industry in India have seen amazing turnaround & recovery after 2013, the credit of which goes to the Government for the policy interventions which helped in reducing the arrears . The FRP (fair & Remunerative Price) regulation introduced, helped the farmers to sustain & protect their income. "

"Going ahead, with the regularization in the policies being made by the Government, fixation of MSP of ethanol prices, which has benefitted the sugar Industry, as witnessed in past two years (after liberalization in policy) & prediction of good monsoons, there is expectation that the sugar sector would also perform well. "

- Manali Bhatia - Sr. Research Analyst : Rudra Sharea & Stock Brokers Ltd. 

FRP &SAP :-

For sugar year 2016, the Fair and Remunerative Price (FRP) recommended by the Commission for Agricultural Costs and Prices (CACP) is at Rs. 230/quintal of cane taking into account the 9.5 per cent recovery. Previous year the FRP which is administered by the central government was at Rs. 220/quintal. The State Advised Price (SAP) which is usually higher than the FRP for UP government, is at Rs. 280/quintal for sugar year 2016. The SAP is at Rs. 285/quintal for Tamil Nadu. 

By products :-

There remains a healthy demand for the by-products such as bagasse and molasses, from the power, paper and alcohol sector which will keep the prices steady for such by-products. 

Forward integration for the sugar mills works extremely well as the distilleries and power generations provide healthy returns for the sugar mills aided by the friendly regulatory framework. 

Global consumption :- 

US Department of Agriculture has forecasted global consumption at a record 174 million metric tons (raw value) for the year 2016-17 which exceeds the production levels globally. The sugar stock is down to the lowest level since 2010-11 even as production is up in Brazil and Euro zone, offsetting the decline in production in India. 

The historical low levels of sugar stock explains increase in sugar prices globally. The rise in sugar prices can be attributed primarily due to increase in consumption across various countries including US , China and India and not solely due to decline in production. 

Conclusion :- 

With increasing consumption of sugar both locally in India and globally in various countries promising to keep sugar prices at higher levels, sugar mills may continue, in near to medium term, to remain profitable. Strong support from the saleability of the by-products and the forward integration in terms of distilleries and power generation will help sugar mills and hence sugar industry to remain healthy - profit wise. 

In the long run though, the sugar prices and the profitability of sugar companies is bound to be cyclical and will be derived from domestic and international supply-demand trends. Crude oil prices which will determine the diversion of cane crop to ethanol and agro-climatic conditions will explain the supply demand condition internationally which will be the key determinant of profitability for the Sugar Industry in the long run. The alignment of cane prices and sugar price in local markets in India remains an issue that needs to be ironed out for the sustainability of the industry at the earliest.