This week shares of sugar-producing companies rallied as much as 10% in a single day and while many people have asked us to cover these stocks, we thought maybe we could start by giving a brief overview on the sector. So in this week’s Finshots Markets, we talk about the dynamics of the sugar industry.
India is the second-largest producer of sugar. We contribute about 20% to the global supply. We have 5 crore farmers and thousands of mills churning out sugar each year and we also have a sweet tooth. Meaning, we are also the biggest consumers of sugar. So it should come as no surprise that we have a burgeoning sugar industry in this country. However, that doesn't mean it's all nice and dandy either.
First, we have the clustering issue. Sugarcane is a sturdy crop, sure. But the moment you harvest it, its shelf life starts tanking precipitously. It’s perishable and you have to put it to good use as soon as possible. So millers set up their production and crushing plants in close proximity to the farmlands. They do this in a bid to reduce the cut-to-crush time and as a result, the industry has emerged in tight clusters. There are over 530 sugar mills in the country but a significant chunk of sugar production (80%) happens in UP, Maharashtra, and Karnataka. So if floods ravaged one of these states for instance, then you’ll start seeing a supply crunch soon enough, at which point prices tend to shoot up rather disproportionately.
But it’s not just the supply crunch you have to worry about. Sugarcane farming is also seen as a lucrative enterprise. For instance, the cash crop commands a relatively high minimum support price. Also, government policies mandate sugar mills to buy from producers within a specific radius. This acts as a safety net for farmers who know they’ll always have a market to tend to. So it makes sense for people to grow sugarcane if nothing else. Besides, as we already noted, it’s a sturdy crop. It can withstand fluctuations in weather and you don’t have to tend to them frequently. In fact, it's one of the reasons why sugarcane is called the ‘lazy crop’. So there’s every reason for you to grow this stuff and when you do it in abundance, you can have a glut in supply — excess sugar.
Consider what happened in 2014–15. A bumper production aided by a strong monsoon season gave way to excess supplies. Within just six months sugar prices crashed 25–30% to Rs 25/kg. The cost of sugar production for most millers at the time stood at Rs 30–32/kg. And as they were forced to sell their products below cost, losses started accumulating en masse. Under terrible financial stress, they did the only thing they could. Cut Output. But this gave way to a supply crunch soon enough and in 2016–17 sugar prices reached a high of Rs 45/kg. Profit margins improved and the newfound confidence meant production was now back on track. It’s a pattern that keeps repeating over and over — Cyclicality. Prices fall, mills scale back production, you see acute scarcity, prices rise once again and mills ramp up production.
However, in between, the stress can get to multiple stakeholders in the industry. For instance, when sugar mills don’t make money, they don’t pay farmers. These delayed payments turn into arrears and the debt can build up. By 2019, sugar cane arrears reached a whopping Rs 19,000 crores. UP mills alone were responsible for over 50% of the arrears built up. So then the only way to solve the problem is to divert supplies elsewhere.
And it’s not like we haven’t been trying to do something about this. We’ve been shipping excess sugar to countries like Bangladesh and Sri Lanka. Unfortunately, the global price of sugar is far lower than prices in India. So there’s not a lot of incentive for us to look at the export markets. An alternative solution is to pursue the ethanol program.
India has been working hard to reduce its dependency on foreign oil. The conventional solution would probably entail seeking resources internally to ween off these interdependencies. But considering the precarious nature of fossil fuels, that probably won’t happen. Instead, India is looking at an alternative — Ethanol.
It burns clean, it burns well and in theory, we could produce enough ethanol to meet our needs. Because, unlike petrol, ethanol isn’t a byproduct of crude oil. It’s a complex derivative you extract while processing sugarcane.
Therefore, the government has made a concerted effort to promote ethanol as an alternative fuel option, and all of this culminated in the final unveiling of the ambitious National Policy on Biofuels (2018). The plan is simple — Ramp up ethanol production, slowly start blending it with petrol and get to a point where we could reduce oil imports by a rather substantial amount. The government wants to achieve a target blend rate of 10% by 2022 i.e. 10% ethanol, 90% petrol. By 2030, they want to push it to 20%. And if everything works out, we could actually reduce the volatility endemic in the sugar industry.
Think about it — When sugar prices start tanking, mills could turn to ethanol to boost their financial prospects. The overproduction problem we cited earlier could finally be a thing of the past. So yeah, the sugar industry can be very exciting for those who want to bet on it. But having said that, you have to know the various intricacies endemic to the sector. Anyway, that’s it from us this week. Hopefully, you found this story insightful. Until next time…
Let us know your thoughts on Twitter.
One of our most-read stories this year. We chronicle the rise of a new kind of currency and how China is beating the world to it.