Exploring the Rise of the Sugar Industry and the Recent Rally in Sugar Prices

Introduction

Sugar is one of the most widely consumed commodities globally, and it has India has the most significant consumer. But it also has India as the second-largest producer in the world. But why read about Sugar? What's so interesting? We'll come to that in a bit but first, let's understand the path and the slow treads that this large industry has taken and the journey it is on.

Early History and Development 

Sugar entered the Indian Marketplace in the late 1860s through the Dutch, though this was an unsuccessful attempt. The first successful attempt of bringing Sugar in India was made by the British, of course! But it came almost half a decade after the Dutch did. Although Sugar, as in the "processed sugar", came to India only in the early twentieth century, its other forms have existed and have had themselves rooted in our culture for centuries. We have a very long tradition of growing Sugar in the form of Gur and Khandsari (Fun fact, India is the largest producer of Gur and Khandsari). The productions of Gur and Khandsari have been referenced as long back to the ages of the Atharv Veda.

 

 

The Indian Sugar Industry

Well, as I mentioned before, India is the largest consumer of Sugar in the world while holding the place as the second-largest producer in the world as well. As per The Department of Food and Public Distribution, India produces about 339 Lakh MT of Sugar every year! The livelihoods of over 50 million Farmers depend on Sugar production and over 5 Lakh employees in the sugar processing industry, which we'll get to in a bit. Our country's Sugar Industry pushes about RS.80,000 Cr worth of revenue on an average every year. It's a lot!

 

You see, Sugarcane is one of the sturdiest crops out there. It doesn't require much attention, and it's so easy to grow that it's been nicknamed the "lazy crop". We've all seen those famous Babool toothpaste ads; IT'S A TOUGH CROP! Hence to an average farmer, growing Sugarcane would be a much better alternative to all the crops. However, it does have its demerits as well. It's perishable, much more than the rest of the crops, hence why the Sugar Processing units are established much closer to the farms as its low shelf life can cost expensive. This short-lived nature of Sugar can cause a few problems, and we'll see why later.

 

 

The Surplus and Deficit Cycle

Processing Sugar as soon as it is harvested is exceptionally crucial if we don't want it to waste. Hence, processing and storage units are set up very close to the farming units. Due to this, a supply crunch is very plausible. The price determination of Sugar is based on the market forces of Demand and Supply. A significant state holding a lot of sugar stock and farming units like Maharashtra experiences a negative externality that causes a drastic decrease in the supply of produced Sugar and raw Sugarcane. If such a situation arises as it has before, the supply of Sugar would not be able to match the Market Demand for it.

 

And the other side of the coin comes towards excessive production. A case of bumper production in Sugar, like one that happened in 2014 due to a heavy monsoon, can also cause a problem. A hefty surplus in Sugar can cause a fall in sugar prices due to the excessive supply. In 2014-15 Sugar companies massively overproduced, causing a steep fall in prices by about 25-30% to Rs. 25 per Kg. We can see this pattern repeat over and over again in terms of Cyclicity.

 

But this doesn't stop here; India has been slowly experiencing a fall in consumer demand for Sugar due to the increasing number of Health Conscious people and the general shift of society towards a healthier lifestyle. The Indian Sugar Mill Association has even started a program to regain consumer confidence in Sugar with "Mitha.org", advertising the benefits of consuming Sugar. 

Partner the falling consumer demand with a steady rise in Surplus amounts of Sugar globally, the sugar industry's future does not look good. There is also not much scope in the export of Sugar due to the lower international prices of Sugar compared to India. However, the Government of India brought up export subsidies that aided export.

The Ethanol Solution

Sugar processing has a lot of byproducts. The entire value chain of the Sugar Industry includes Sugarcane, Sugar, Molasses, and Ethanol. But the product that I'm most excited to talk about is Ethanol, so let's look at why Ethanol could be such an essential factor to consider for the bailing out of Sugar from the recent demand shocks.

 

Ethanol is a derived fuel that burns clean and efficiently. India's biofuel industry is starting to take a significant turn like the rest of the world. The recent development in the global ethanol market has caused an emergence of Ethanol as a globally traded commodity, and a demand-led growth is sure for Ethanol. Moreover, it is also supported by rising fuel and energy prices.

 

Recent measures bringing back the Ethanol Blending Program after 2003 have given a boost to ethanol production and tackled the excess supply problem.

The Ethanol blending objective of 5% was achieved in FY21 and is expected at 8% in FY22, with the government aiming for 20% blending by 2025.

 

If you think about it, Ethanol production could solve all the major problems faced by the Demand and Supply of Sugar Industries. Indian Mills would not have to worry about the excess supply when Sugar prices start falling as direct ethanol production could absorb the excess supply and bring equilibrium.

 

 

Rally in Sugar Stocks 

The month of June and August in 2021 experienced a significant rally in sugar prices, which boosted consumer confidence in Sugar. 

The sugar index rallied around 8% on BSE Intra-trading on Thursday, June 3, when the government announced the extension of the Ethanol Blending Program to 2023. Sugar-producing and processing companies saw a rise in their share prices. Various investing firms and brokerage firms mentioned that such a decision by the government would lead the sugar-producing companies to add to their sugar and ethanol production capacity. It is a big positive for these firms.

 

Source: The Economic Times

Sugar Prices touched peak rate on August 18, 2021, when there was a fall in the supply of Sugar; the fall in the availability was due to the fall in the produce of Brazil; hence exports have also increased, reaching an all-time high at 5.11 Mt as per AISTA.

 

Accompanying this with a lower supply globally of Argentina, Brazil, and other countries, India could significantly raise its stakes in the Global Sugar and Ethanol market through export.

 

 

The Conclusion

India has had a long cultural and economic history associated with the Sugar Industry. The industry wasn't spared by the COVID 19 pandemic as production and processing numbers fell along with prices. Although we can see the functions of the demand and supply playing out their game, the prospects of the Sugar Industry look good with the Ethanol Blending Program being extended and further looking at goals set by the government.

SugarCAN!

 

Resources

Chand, S. (n.d.). Sugar Industry in India: Growth; Problems and Distribution. YourArticleLibrary. https://www.yourarticlelibrary.com/industries/sugar-industry-in-india-growth-problems-and-distribution/14144

Department of Food and Public Distribution. (n.d.). Sugar. Department of Food and Public Distribution. https://dfpd.gov.in/sugar.htm

ET Bureau. (2021, August 18). Supply shocks add more fuel to Sugar Rally. The Economics Times. https://economictimes.indiatimes.com/markets/stocks/news/supply-shocks-add-more-fuel-to-sugar-stocks-rally/articleshow/85413229.cms

Finshots. (2020, November 08). Issue 28: On Boostings sugar consumption and airline tickets. Finshots. https://finshots.in/brief/on-boosting-sugar-consumption/

Finshots. (2021, April 16). Understanding the Sugar industry. Finshots. https://finshots.in/markets/understanding-sugar-industry/

Is the sugar industry finally coming? Is the sugar industry finally coming of age? (2021, July 08). Business Line. https://www.thehindubusinessline.com/opinion/is-the-sugar-industry-finally-coming-of-age/article35218956.ece

Manganello, K. (2018, August 23). Sugar's Uneven Supply and Demand. Thomas. https://www.thomasnet.com/insights/sugar-s-uneven-supply-and-demand/

Ministry of Agriculture, Government of India. (n.d.). India’s Sugar Industry: Analysing Domestic Demand and Recent Trends. http://agritrade.iift.ac.in/html/Training/ASEAN%20–%20India%20FTA%20%20Emerging%20Issues%20for%20Trade%20in%20Agriculture/India’s%20Sugar%20Industry.pdf

Press Trust of India. (2021, August 12). India's sugar exports touch 5.11 mn tonnes so far this year: AISTA. Business Standard. https://www.business-standard.com/article/economy-policy/india-s-sugar-exports-touch-5-11-mn-tonnes-so-far-this-year-aista-121081200947_1.html

Reporter, S. (2021, June 3). Sugar shares rally up to 8% as the ethanol blending programme advanced to 2023. Business Standard. https://www.business-standard.com/article/markets/sugar-shares-rally-up-to-8-as-ethanol-blending-programme-advances-to-2023-121060300218_1.html

Singh, P. S. (2021, June 08). Global sugar market stares at supply deficit in 2020-21. Business Line.