ME Project

PRICE ELASTICITY OF SUGAR INDUSTRY

AND ITS IMPLICATION ON TOTAL
REVENUE

ASHOK KUMAR
ASHUTOSH BURNWAL
ASHUTOSH MAHAJAN
ATISHAY KUMAR JAIN
ARPIT KHULLAR
ANKUR JAIN
BHAUMIT PATEL
 Beginning of Sugar Industry in India

Sugar is made from sugarcane, which was arguably

discovered thousands of years ago in New Guinea.
From there, the route was traced to India and
Southeast Asia.
It was India which began producing sugar following
the process of pressing sugarcane to extract juice and
boil it to get crystals.
 Government of India’s roles

It was in 1950-51, the government of India made

serious industrial development plans and set the
targets for production and consumption of sugar.
It projected the license and installment capacity for
the sugar industry in its Five Year Plans.
Government of India fixes Statutory Minimum Price
(SMP) for sugarcane.
This statutory Minimum Price is designed through the
consent of Commission for Agricultural Coast and
Prices (CACP) and respective state Governments.
Organized and Un-Organized Sugar Industry

The sugar industry can be divided into two sectors

including organized and unorganized sector.
The unorganized players mainly produce Gur and
Khandari, the less refined forms of sugar.
As the industry is a fragmented one, even leading
players do not control more than 4 percent market in
India.
Sugar Industry in India is well developed with a
consumer base of more than billions of people.
 Key Characteristics of Sugar industry

• Capital intensive
• Government regulated
• Seasonal fluctuation in the industry(demand
increases during festive season)
• Raw materials constitute major cost
• No proper substitutes
Manufacturing Process followed in Sugar Industry in India

Several steps are usually followed to produce sugar.

These steps can be mentioned as below:

Extracting juice by pressing sugarcane

Boiling the juice to obtain crystals
Creating raw sugar by spinning crystals in extractors
Taking raw sugar to a refinery for the process of filtering
and washing to discard remaining non-sugar elements and
hue
Crystallizing and drying sugar
Packaging the ready sugar
 Sugarcane Statistics

The share of India in the total production of sugarcane in the

world is 37% (second largest producer of sugar in the world
with 10 to 12% production of the world).
The quality of sugarcane of our country is not so good and
researchers are trying to update it, due to lack of interest and
proper attention from the government side, not much success
has been achieved yet.
Per hectare production of the sugarcane is also not improving
due to lack of land fertility and lack of irrigation facilities.
The production of sugarcane is only 15 tones per acre in India
whereas in Java it is 56 tones and in
Hawaii it is 52 tones
 ELASTICITY

P E R C EN T A G E C H A N GE IN T H E
QUANTITY DEMANDED DUE TO
P E R C E N T A G E C H A N GE I N P RI C E
E= ( Q/ P)X P/Q
 Regression Analysis

WITH THE HELP OF REGRESSION ANALYSIS

ON INDEPENDENT VARIABLES, FINDING OUT
A RELATION BETWEEN SUGAR’S DEMAND
AND PRICES OVER THE YEARS AND
ELASTICITY PATTERNS.

WE HAVE TAKEN INTO CONSIDERATION

DATA FROM YEARS 2001 TO 2009.
• Sugar Consumption Dependent
• Price of Sugar
• Per Capita Income Independent
• Population
Variables
 THE DATA

in '000
tonnes Rs/quintal Rs in lacs 000 tonnes Rs/quintal

Sugar Prices of
Consu sugar(Medium per capita Populatio Sugar Prices of
mption Grade) income n Production jaggery
2001 16101 1543 16688 10096 18200.3 1145.42
2002 16201 1586 17782 10286 18511 1220.83
2003 16781 1425 18885 10476 18528 1187.5
2004 18384 1665 20871 10666 20145 1008.33
2005 17285 1825 23198 10856 13555.8 1274.17
2006 18500 1922 26003 11046 12690.1 1570.42
2007 18500 1471 29524 11236 19266 1590.42
2008 20000 1707 33283 11426 28364 1447.92
2009 22200 2700 37490 11616 26357.4 1485.42
 THE EQUATION

REGRESSION EQUATION:
QS =C+A1PS + A2I+A3N
WHERE
QS: QUANTITY DEMANDED OF SUGAR
C: Y-INTERCEPT
PS: PRICE OF SUGAR
I: PER CAPITA INCOME
N: POPULATION OF THE COUNTRY
A1,A2,A3: CONSTANTS
 P-VALUE

P-VALUE IS A PERCENTAGE WHICH TELLS US

HOW LIKELY IT IS THAT THE COEFFICIENT
FOR THAT INDEPENDENT VARIABLE
EMERGED BY CHANCE AND DOES NOT
DESCRIBE THE REAL RELATIONSHIP.

EG-P=0.05 MEANS A 5%CHANCE THAT

RELATIONSHIP EMERGED RANDOMLY AND A
95% CHANCE THAT RELATIONSHIP IS REAL.
 STANDARD ERROR

The standard error of a method of measurement or

estimation is the standard deviation of
the sampling distribution associated with the
estimation method
 T-statistic

A t-test is any statistical hypothesis test in which

the test statistic follows a  Student's t distribution if
the null hypothesis is supported. It is most
commonly applied when the test statistic would
follow a normal distribution if the value of a scaling
term in the test statistic were known
 F-statistic

n=9, d.o.f=3
Critical F-statistic value = 5.41 at 5%significance level
Calculated F-statistic value=37.24

As calculated > critical F-statistic value,

We accept Alternate hypothesis.
 Multi-Collinearity Problem

Jaggery Price and Sugar Price are highly correlated

Since both are derived from sugarcane
When Jaggery price is included, its coefficient comes
out to be negative.
A negative coefficient suggests that demand will
decrease with an increase in jaggery price,which is
illogical.
The next slide shows the difference in the
coefficients and the p-value.
 COMPARATIVE DATA ANALYSIS

With Jaggery Without Jaggery

Coefficien Coefficie
  ts P-value   nts P-value
Intercept -26007.5 0.252845
Intercept -21652.3 0.599355
Prices of
Prices of sugar 2.119099 0.031354
sugar 1.966669 0.22027

per capita per capita

income -0.09628 0.825946 income -0.14768 0.44741

Population 3.425999 0.414696 Population 3.831286 0.137846

Prices of
jaggery -0.46264 0.891683
 Coefficient of Determination(R2)

Adjusted R2 takes into consideration the degrees of

freedom with an increase in no of independent
variables

Value: .94771

This suggests a good fit( greater than 80 %)

 DATA ANALYSIS

YEAR 2004 DECREASE 2005 DECREASE 2006

SUGAR PRODN. 20145 32% 13555 6% 12690

(‘000 QUINTALS)

REASON FOR THE DECREMENT-RISE IN CRUDE OIL

PRICES,UNEVEN AND INADEQUATE SOUTH-WEST
RAINFALL,HIGH INFLATION AT YEAR’S START
 Variations in Total Revenue

Total Revenue in Millions

700000

600000

500000

400000
Total Revenue in Millions

300000

200000

100000

0
2001 2002 2003 2004 2005 2006 2007 2008 2009
 Variations in Price Elasticity

Arc Elasticity of Price

1.5

0.5
Arc Elasticity of Price

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

-0.5

-1
 DATA ANALYSIS(2007)

2006 2007
CONSUMPTION( 18500 18500
in ‘000 tonnes)
PRODUCTION(in 12690 19266 INCREMENT(50
‘000 tonnes) %)
PRICE(Rs/quintal 1922 1470 DECREMENT(9%
) )
 Annual Production Pattern

4500

4000

3500

3000

2500

2000

1500

1000

500

0
Jan/05 Feb/05 Mar/05 Apr/05 May/05 Jun/05 Jul/05 Aug/05 Sep/05 Oct/05 Nov/05 Dec/05
 OBSERVATIONS:-

Sugar –a necessity.elasticity more or less

inelastic,except year 2006 due to govt policy.
Demand increases with population
TR curve increasing except in year 2007.
TR maximum in the year 2009.
Effect of per capita income on sugar demand-low
correlation
THANK YOU