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    Explained: Why sugar is no longer a cyclical business

    business | IST

    Explained: Why sugar is no longer a cyclical business

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    Long considered a cyclical business, Sugar is shedding its image owing to the government's push for the blending of ethanol into fuel, in turn, helping the sugar mills and sugarcane farmers.

    India's sugar sector is no longer a cyclical business with its fortunes tied to the trends in sugar production and supply, according to Vivek Saraogi, Managing Director at Balrampur Chini Mills. His observation is telling for a sector long seen as a cyclical play by investors and indicates the gradual structural shift.
    “I’ll be surprised if anybody feels it is cyclical anymore. There is zero cyclicality and I would want you to believe it also,” Saraogi told CNBC-TV18 on Wednesday.
    Why it matters
    The well-being of the Sugar sector, an agro-based industry, plays a pivotal role in the fortunes of crores of farmers with huge political and economic ramifications. Remember election season - how sugarcane dues or insolvent sugar companies or inflation in sugar becomes a poll issue and no political party wants bad press.
    Any government of the day either at the Centre or state has twin objectives — first, to keep sugar prices stable, which explains the recent government move to place curbs on exports; and second, to protect the interests of sugarcane farmers.
    Sugar has been kept as a government-controlled commodity and sold through the public distribution system (PDS) in addition to open market shops. To ensure a smooth supply to PDS shops, the government allocates a monthly quota to each sugar factory to sell, ensure deliveries and pay farmers.
    It largely functions under the ambit of the ‘cane reservation area and bonding’ system. For instance, food ministry has reportedly floated a Cabinet note on hiking sugarcane fair price by Rs 15/100 kg. The current fair price is Rs 290/100 kg for 2021-22.
    The above arrangement, however, reduces the bargaining power of the farmer, while mills face their own set of issues such as flexibility in augmenting cane supplies, the quality of cane et al.
    Overall, the system is still not considered an efficient one as it still results in pending dues for farmers and challenges for sugar mills, as successive committees and experts including C Rangarajan committee have pointed.
     
    World’s largest consumer moves to a surplus
    Sugar prices are linked to sugar production and supply in two of the world's largest producers — Brazil and India. From a consumption perspective, the demand outlook in India matters as we are the largest consumer with total domestic consumption coming in around 2.6 crore tonnes 2020-21, as per the Economic Survey report 2021-22.
    India’s average annual production of sugarcane is around 35.5 crore tonnes which is used to produce around 3 crore tonnes of sugar, the report added.
    And from the last few years, production has outpaced consumption giving India a surplus to export as well. But the surplus production of sugarcane came with new issues as sugar mills are required to buy more sugarcane and pay farmers in a stable demand environment.
    Ethanol to the rescue
    India plans to increase the proportion of ethanol in petrol to 20 percent with effect from April 2023, as part of its National Biofuel Policy — aimed at reducing the country's dependence on oil imports and moving towards greener fuels. This helps the mills and heralds the fundamental shift and as explained by Saraogi, “The government is incentivising sugar mills to divert excess sugarcane/sugar to ethanol production”.
    "The government is saying that whatever sugar you generate, we will take care of - diversion into ethanol, a nice price, and a roadmap that says whatever you pick up, we will take. We will pay you a higher price if we increase your input cost or if your input cost increases for other reasons. We've seen how ethanol prices have changed throughout time. You do get your tweaks based on your input cost that is FRP (Fair & Remunerative Price) — if it's going up this year, you can be rest assured ethanol price is going up,” Saraogi added.
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