For The Indian Sugar Industry Bitter Times Could Soon Be History 

Union Transport Minister Nitin Gadkari, speaking at the Sugar Conclave 2020 in Pune on 7 July, said that it would be impossible for the National Democratic Alliance (NDA) government to extend support to the sugar industry that is currently battling with surplus production and higher input costs.

Gadkari almost ruled out anymore help, saying the government has tried to help the sugar industry as much as possible. He also suggested to the industry to seriously consider producing ethanol from sugarcane rather than sugar.

One is not sure if Gadkari, who is otherwise well informed, is aware of the latest developments in the sugar sector.

On 24 May this year, Business Standard reported that stocks of quite a few sugar companies have rallied after the January-March quarter. Sugar stocks increased by 8-18 per cent compared with the Sensex’s rise of 1.1 per cent. For example, in its presentation for the fourth quarter as well as 2018-19 fiscal, Balrampur Chini Mills Ltd, said it had registered a 79 per cent growth in profit before tax at Rs 595.03 crore in 2018-19 compared with Rs 332.18 crore the previous fiscal. The firm reported higher sugar and molasses sales besides increased co-generation of power.

If sugar companies, particularly the ones operating in Uttar Pradesh, can report good results in 2018-19 fiscal during a bad year when carryover stocks increased, then imagine how well they will perform next year when production is projected to be lower, according to an executive of a sugar company based in the northern State.

Those following politics or the sugar industry failed to take note of a couple of developments in the sugar industry and belts in the last couple of quarters. In the run up to the Lok Sabha elections, reports said that sugarcane farmers in Uttar Pradesh and Maharashtra were upset with the government in view of the situation in the sugar industry and they could vote against the Narendra Modi government.

But the Bharatiya Janata Party (BJP) and its allies swept the polls in these belts. How? That is where the experts and analysts missed the wood for the trees. One, in the current sugar year that runs to September 2019, the per acre yield of sugarcane has increased. Two, sugar recovery from the cane has also been higher. These two factors have helped farmers get better returns.

According to the sugar firm executive, at least 85 per cent of the arrears for purchase of sugarcane by the mills from farmers have been cleared. This was possible because the BJP government chipped in with building a sugar buffer stock of three million tonnes (mt).

Actually, the centre came forward to reimburse Rs 1,175 crore to sugar mills for maintaining sugar buffer stocks. Second, the Narendra Modi government offered to help mills in transport, freight and handling charges for exporting sugar. It also chipped in with direct assistance to farmers on behalf of the mills to clear the dues pending to them.

A major reason for the centre needing to lend a helping hand to the sugar industry was because of surplus production. During the 2018-19 season, sugar production is estimated at 32.95 mt against 33 mt last season. The government intervention helped sugar companies to realise Rs 31-32.50 per kg of sugar they sold, depending on the states where they operated from.

According to the Indian Sugar Mills Association (ISMA), sugar consumption in the country is projected at 26 mt, while 3 mt could be exported. This will result in the country being left with a carryover stock of 14.7 mt at the end of the season in September, including 10.7 mt carried over from last year. Such a huge carryover stock, that can meet the country’s demand for the next six months, should worry the industry. But it is not worried over the current situation.

Before we come to the reasons why the sugar industry is not unduly worried about the huge carryover stock, there are two other reasons for the sugar companies performing well in the last fiscal --- besides government support, sugar mills gained from selling molasses and power.

So, why is the industry not worried about the 14.7 mt carryover stock? One, production for next season is estimated lower at 28 mt by ISMA as planting of sugarcane has been affected by prolonged dry conditions, including in Uttar Pradesh.

Second is the outlook for global sugar. The International Sugar Organisation sees a 3 mt global sugar deficit during 2019-20, up from 1.3 mt deficit estimated at the end of this season. The global deficit will mean an opportunity for Indian sugar mills to export. The industry is confident that it would be able to achieve the export targets next season. Sugar prices are likely to go up as a result and the mills realisation could be around Rs 35 or higher per kg. This will also bring down the carryover stock by September-end 2020.

Third, the mills will gain from the demand for molasses. In the last couple of years, capacities of distilleries have gone up tremendously. According to the All India Distillers Association, the country has a capacity to produce 4.2 billion litres of alcohol a year with most licences concentrated in Uttar Pradesh, Maharashtra and Tamil Nadu.

The increased capacity of distilleries has resulted in prices of molasses zooming from Rs 100 a tonne a few months ago to Rs 4,000 a tonne now. According to the sugar industry executive, prices of molasses have increased sharply in view of supply shortfall. Higher prices for molasses will provide an additional cushion for the sugar mills.

The sugar industry will also stand to gain from the government decision to make blending of ethanol mandatory with petrol. Currently, the centre has mandated 10 per cent ethanol blending with petrol. But the sugar industry’s ethanol supply is helping to meet only 8.5 per cent blending. Thus, the 1.5 percentage supply gap in ethanol blending will stand the sugar firms in good stead.

According to Balrampur Chini, it realised Rs 41.68 per litre for supplying ethanol to oil marketing companies in 2018-19 as compared to Rs 39.46 per litre the previous fiscal. The upbeat prospects on ethanol is that the government has set a target of 20 per cent ethanol blending. Once the sugar industry meets the 10 per cent target, it would be asked to meet a target of 15 per cent ethanol blending and then 20 per cent ethanol blending by 2030.

Co-generation of power is another factor that will help sugar industries to earn more. Currently, states such as Uttar Pradesh buy power from sugar mills, which realise nearly Rs 5 per unit of power. All these incomes mean good times for the sugar industry in the 2019-20 season.

But before that, the centre will have to reimburse the industry to the tune of nearly Rs 1,500 crore for the payment offered for exports and related expenses, other than for buffer stocks. States like Uttar Pradesh owe nearly Rs 1,000 crore for the power they bought from sugar companies.

The outlook for 2019-20 is certain to usher in better times for sugarcane growers, especially in Uttar Pradesh and Maharashtra. Indian sugar industry could continue to do well in the following couple of years too. Growers in western Uttar Pradesh can expect at least 95 per cent of their arrears being paid in the next season. And this could result in the ruling NDA continuing to have an upper hand in the sugar belts.