Sustainable Sweetness – Uncovering the Economics of India’s Sugar Sector

Did you know that after cotton, India’s sugarcane and sugar sector ranks second among the country’s agriculture-based industries? The industry plays a crucial role in supporting the livelihoods of sugarcane farmers in rural areas and employs around 5,00,000 workers in sugar mills. 

As of April 30, 2024, data from the National Federation of Cooperative Sugar Factories Limited (NFCSF) suggests that 3,129.75 lakh metric tonnes (LMT) of sugarcane have been crushed to produce 315.90 LMT of sugar. 

During this crushing season, 534 sugar mills took part, and 511 have now stopped operations. Last season, the participation was the same, with 468 mills closing down during the equivalent period. 

Though sugarcane crushing this season is a bit lower than before, sugar recovery is higher. The average sugar recovery this season is 10.09%, compared to 9.84% in the previous season. 

This season, Maharashtra is the leading producer of sugar, followed by Uttar Pradesh and Karnataka. Sugar production in Maharashtra stood at 109.95 LMT, while in Uttar Pradesh, sugar output reached 103.35 LMT. About 80% of the total sugarcane production in India comes from Uttar Pradesh, Karnataka, and Maharashtra. 

According to NFCSF, Indian sugar production is expected to hit 321.35 lakh tonnes, down from 333.90 lakh tonnes last year. 

History of Sugar

Sugarcane has been cultivated in Indian lands for centuries. It was during the Mughal period that sugarcane cultivation became more widespread, and sugar became an integral part of various dishes, further embedding its presence in our culinary traditions. During British rule, mills and factories were set up in regions ideal for sugarcane farming. 

After Independence, the government recognized the importance of sugar to the rural economy and livelihoods. This led to the formulation of policies and the establishment of research institutions to foster the industry’s development. The sugar crop contributed ₹80,600 crores to the nation’s economy. 

Types of Sugars & Profitability 

India is known to manufacture four types of sugar which are: 

• Granulated Sugar: Granulated sugar is one of the most commonly used sugars. It’s made from sugarcane or sugar beets, resulting in fine, white crystals. With a neutral sweet taste, it finds its way into baking, cooking, and sweetening beverages. 

• Brown Sugar: Brown sugar is known for its caramel-like flavor, due to the presence of molasses. Light brown sugar has a milder molasses taste, while dark brown sugar is richer. It is used in baking, sauces, and marinades. 

• Liquid Sugar: Liquid sugar, also called invert sugar syrup, is made by breaking down granulated sugar into equal parts glucose and fructose. It is sweeter than granulated sugar and has a sticky consistency. It is used in wide food applications. 

• Invert Sugar: Invert sugar is formed by splitting table sugar (sucrose) into its individual glucose and fructose components. Sweeter than granulated sugar, it is used in pastries, confectionery, and beverages. 

The profitability of these sugars can fluctuate based on various factors, but the order of profitability is as follows: 

Invert sugar > Liquid sugar > Brown sugar > Granulated sugar 

How Does the Government Decide the Price of Sugarcane? 

The Fair and Remunerative Price (FRP) is the base price that sugar mills must pay farmers for their sugarcane.  

This price is set by the central government, following recommendations from the Commission for Agricultural Costs and Prices (CACP), in consultation with state governments and the sugar industry.  

However, certain states like Uttar Pradesh, Haryana, and Punjab offer higher prices for sugarcane through State Advised Price (SAP), which sugar mills in those states must follow. 

How Does it Affect the Minimum Selling Price (MSP)? 

The Minimum Selling Price (MSP) is the minimum price at which sugar mills are permitted to sell sugar in the market. Introduced by the central government, the MSP ensures that the sugar industry recovers at least the minimum cost of sugar production, enabling them to settle outstanding payments owed to sugarcane farmers. The MSP is calculated by incorporating the FRP and adding the minimum conversion cost incurred by sugar mills operating at peak efficiency. 

Consider this example, Balrampur Industries, in its investor presentation, mentioned how the increased State Advised Price (SAP) of sugarcane by the Uttar Pradesh government poses challenges for the industry, especially against the backdrop of surplus sugar. 

Top Sugar-Producing Countries 

The above table shows the sugar production of countries in the year 2023-2024. Brazil & India lead the pack and contributed to 42% of the global sugar production. Brazil’s sugar production stood at 41 million metric tons followed by India with 36 million metric tons. The top ten countries accounted for 77% of the total global sugar production. 

Here is a table to depict the export data for the biggest Sugar exporters in the world 

According to global trade data for sugar exports in 2022, Brazil stands as the largest sugar exporter in the world with USD 11.23 billion in sugar exports, followed by India and Thailand.  

• Brazil’s sugar export value stands at 19.3%  
• India exported $6.32 billion worth of sugar, accounting for 10.9% of global exports
• Thailand and Germany contribute to 6.4% and 6% of global exports, respectively 

Historical Performance vs Current Performance of the Sugar Sector 

The above data represents the sales of the top 9 companies in the sugar sector. It clearly indicates the cyclical nature of the companies’ sales, with this cyclicality being more pronounced before FY17. 

After FY18, sales of companies became much more stable compared to the FY12 to FY17 period. This stability is attributed to companies venturing into ethanol production, power generation, and value-added products. 

In FY12, the total sales of the nine companies stood at Rs 38,546 crore, expanding to Rs 71,934 crore in FY23, displaying a Compound Annual Growth Rate (CAGR) of 5.8%. 

EID Parry registered sales of Rs 12,491 crore in FY12, reaching a sales figure of Rs 35,244 crore in FY23, reflecting a CAGR of 9.9%. 

Over the eleven-year period, Dalmia Bharat Sugar, Triveni Engineering & Industries, Balrampur Chini, and Dhampur Chini showed CAGRs of 14.8%, 10.6%, 6.6%, and 7.4%, respectively. 

Bajaj Hindusthan grew at a pace of 3.5%, while Shree Renuka Sugars and Mawana showed a decline of -2.8% and -1.75%, respectively. 

Why is the Sugar Sector Cyclical?

Here’s why the sugar sector is considered cyclical in nature. 

• Demand – Supply Cycle: The sugar industry is cyclical in nature, affected by cane supply and sugar demand, mainly driven by supply dynamics. Increased production leads to surplus sugar, leading to lower prices and company profitability, thus delaying farmer payments. This prompts farmers to switch crops, reducing sugar cultivation. As sugar availability decreases, prices rise, profitability improves, and arrears decrease, forming a continuous cycle. The Indian sugar industry is fully supply-driven, as steady growth is observed in sugar consumption. 

• Regulatory Risk: India’s sugar industry is subject to extensive government regulation, from cane procurement to sugar sales. Mills must procure the entire sugarcane from designated areas, leading to challenges in inventory and working capital management. Additionally, the government controls cane prices. 

What Lies Ahead for Sugar Companies? 

The future of India’s sugar sector has its own sets of challenges and opportunities. Let’s see what lies ahead for the sector: 

Ethanol Production and Blending 

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.  

Sugar mills are encouraged to divert excess sugarcane into ethanol production, reducing sugar surplus and supporting cleaner energy sources. 

As the demand for ethanol increases, this shift could stabilize the sector and provide additional revenue streams for sugar mills. 

Diversification and Value-Added Products 

Sugar mills are exploring diversification beyond sugar and ethanol. They are investing in value-added products such as specialty sugars, confectionery, and bio-based chemicals. By tapping into niche markets, mills can reduce dependence on traditional sugar sales and enhance profitability. 

Technology Adoption 

Modernizing sugar mills through technology adoption is crucial. Efficient processes, automation, and waste reduction can improve productivity and competitiveness. 

Global Trade and Export Opportunities 

India is a major sugar producer, but it faces competition from other countries. Exploring export markets and maintaining quality standards will be essential. Bilateral trade agreements and export incentives can boost India’s sugar exports. 

Climate Resilience 

Climate change poses risks to agriculture, including sugarcane cultivation. Developing climate-resilient varieties and sustainable farming practices will be crucial. Water management, soil health, and pest control are areas that need attention. 

Policy Support and Farmer Welfare 

Government policies related to sugarcane pricing, subsidies, and farmer welfare will shape the sector’s future. Ensuring timely payments to farmers and addressing their concerns will maintain a healthy ecosystem. 

Consumer Trends and Health Awareness 

Consumer preferences are shifting toward healthier alternatives. Sugar consumption patterns may change, impacting demand. The industry must adapt to consumer awareness about health and nutrition. 

To conclude, the sugar sector in India is at a crossroads. Strategic decisions, sustainable practices, and policy support will determine its path going forward. While challenges exist, innovative approaches can lead to a more resilient and profitable industry.  

Listed Sugar Companies 

EID Parry (India) Ltd 

EID Parry is the largest sugar company in India in terms of turnover. In FY23, Its sales stood at Rs 35,244 crore, which is close to four times of the next largest player. It generates 70% revenue from the sugar segment, 22% from the distillery and the rest comes from cogeneration – power & nutraceuticals. 

EID has delivered a good sales growth of 9.9% over the period of FY12 to FY23. 

Shree Renuka Sugars Ltd 

Incorporated in 1995, Shree Renuka Sugars Ltd does manufacturing and refining of sugar, ethyl alcohol, ethanol, generation and sale of power. It generated a revenue of Rs 9,017 crores in FY23. 

Revenue Breakup – FY23 

Manufactured sugar contributes to 80% of the company’s sales. Ethanol & allied products constitute 13.3% of the sales. The rest of the sales comes from trading sugar, coal, sale of power & others. 

Capex Plans 

The company is in the process of doubling its distillery capacity to 1,400 KLPD from 720 KLP by FY2024. 

Balrampur Chini Mills Ltd 

BCML is one of the largest integrated sugar companies in India. The allied businesses of the Company comprise distillery operations and cogeneration of power. BCML is one of the most efficient integrated sugar producers in the country. The Company has grown its capacity by well-planned capacity expansion projects and the acquisition of existing companies over recent years. 

Capex 

The company has commissioned a refinery at the Kumbhi plant, in line with the growing demand for refined sugar. This plant will manufacture superfine sugar for the export market and help the company achieve its refined sugar target of 50% of its overall sugar output.  

Conclusion 

The sugar industry holds significant importance for India in the context of the rural economy and exports. Recent advancements, particularly in ethanol production, have brought some positive changes to the industry. However, one needs to be watchful of the trajectory of these developments and their long-term implications.