7/14/2021 Understanding the Sugar industry

SUBSCRIBE

16 APRIL 2021 / MARKETS

Understanding the Sugar

industry

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.

Sugar

The Story
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
https://finshots.in/markets/understanding-sugar-industry/ 1/8
7/14/2021 Understanding the Sugar industry

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
https://finshots.in/markets/understanding-sugar-industry/ 2/8
7/14/2021 Understanding the Sugar industry

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.

https://finshots.in/markets/understanding-sugar-industry/ 3/8
7/14/2021 Understanding the Sugar industry

https://finshots.in/markets/understanding-sugar-industry/ 4/8
7/14/2021 Understanding the Sugar industry

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.

https://finshots.in/markets/understanding-sugar-industry/ 5/8
7/14/2021 Understanding the Sugar industry

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.

Until then…

Share this Finshots Markets on WhatsApp or Twitter.

Finshots Daily

Digital Yuan
One of our most-read stories this year. We chronicle the rise of a
https://finshots.in/markets/understanding-sugar-industry/ 6/8
7/14/2021 Understanding the Sugar industry

new kind of currency and how China is beating the world to it.

What is China's Digital Yuan?

Read more

Share this Finshots Markets on WhatsApp or Twitter.

Join 3,50,000+ Subscribers

Enter Your Email address

SUBSCRIBE

Be a part of our ever growing community.

Join us on
Twitter

— Finshots —

Archive

https://finshots.in/markets/understanding-sugar-industry/ 7/8
7/14/2021 Understanding the Sugar industry

The Zomato IPO

Marico’s incredible run

Should you bet on beer?

Weekly Wrapup - Crusades

and Digital Currencies
A Finshots weekly wrapup explaining
the biggest stories this week

See all posts → 17 April 2021 3 MIN READ

The Vaccine Scaling Problem

An explainer on why scaling Vaccine production is becoming such a challenge

3 MIN READ
16 April 2021

https://finshots.in/markets/understanding-sugar-industry/ 8/8