7th October, 2010

SUGAR
The wheel that squeaks the loudest is the one that gets the grease
-Josh Billings

Presented by: Subhranil Dey

CONTENT
1. 2. 3. 4. Concept of sugar cycle India's sugar season 2010-11 A snap shot Cane pricing Production scenario a. India 3 3 4 4

b. Brazil 5. 6. 7. 8. 9. Powering up supply & re-affirming exports potential India Price Movement-comparison of pre and post ban period Seasonality of sugar prices in India International price movement Highlights of quarterly market outlook August 2010 - INTERNATIONAL SUGAR ORGANIZATION a. b. 10. 11. 12. 13. World India 9 11 11 11 6 6 7 7 7

Business opportunity - Ethanol Blended Petrol (EBP) Programme De-regulation of Sugar Industry Recent developments Conclusion

Graphics in report
Sugar cycle Snapshot of Indian sugar industry Year-on-year percentage change in sugar production Comparison of fourth advance estimate of sugarcane production Rainfall map on sugar producing regions Comparison on price movement (Pre & post ban period) International price movement Seasonality index World sugar balance Cane & sugar prices in India Fuel ethanol production in Asia

Adding every grain of sugar, sweetens the dish a bit more. But, every piece of sugar cane grass land adding makes the price bitter

Starting with the sugar cycle, it follows a 3-4 years cycle with a bumper harvest resulting in higher inventory levels. Going around the downtrend in the sugar cycle starts with increased availability of sugars, decline in sugar prices. This prompts the farmers to switch over to other crops resulting in lower cane production. All these leads to higher sugar prices and the cycle turns around.

SNAPSHOT
India's sugar production in 2010-11 expected to rise to 25.5 million tonnes. The opening stock of sugar on October 1, 2010, will be 5.8 million tonnes as against 3.2 million tonnes on October 1, 2009. Domestic demand of sugar is about 22.5-23 million tonnes.

Source: USDA, FAS, PSD database

Cane Pricing
After a two-year freeze, India in June 2009 raised the MSP by a third to INR1,077.60/tonne from INR811.80/tonne in the previous two seasons. Last December, that was increased further to INR1,298.40 (USD1=INR 46.47) per tonne. For 2010/11, the minimum price has been set higher at INR 1,319.12/tonne.

Source: SMC Research & Reuters

As per the latest sugar balance sheet prepared by the Indian Sugar Mills Association (ISMA):
Production in 2009-10 crop season that will end in September 30, is

projected to be around 18.8 million tonne

Added to 5.3 million tonne of imports (both raws and refined) and Opening stocks of 3.2 million tonnes. Ensured supplies to around 27.3 million tonne. This year projected demand to be around 21.4 million tonne.

COMPARISON OF FOURTH ADVANCE ESTIMATE FOR SUGARCANE PRODUCTION

Lakh tonnes 4000.00 3500.00 3000.00 2500.00 2000.00 1500.00

RAIN GOD's BLESSING

Weather conditions in Brazil and India are a factor behind the price increase in recent weeks. Two consecutive years of below-average production drew down Indian stocks and forced the country to become a significant net importer in the 2008/09 and 2009/10 marketing years, which put stress on the world supply and demand balance and pushed up prices in 2009/10.

1000.00 500.00 0.00 1998-99 1999-2000 2000-2001 2001-02 2002-03 2003-04 2004-05 2005-06 2007-08 4th Final Targets Advance Estimate estimate 2008-09 4th Advance estimate

2009-10

Source: Agricultural Statistics Division

MAHARASHTRA - During this season the rain gods have been very kind to Maharashtra. In the last two months, out of the 35 districts, 29 have received over 100 per cent rainfall. Maharashtra expects to produce 86.50 lakh tonnes (lt) of sugar during the 2010-11 season starting October. Total cane area = 10.22 lakh hectares
Average yield of 81 tonnes/ hectare Production = 827.36 lakh tonnes Crushing by mill = 752.15 lakh tonnes Average recovery of 11.5 per cent Sugar output = 86.50 lt for the new season

UTTAR PRADESH - Sugar output in India's top cane producing state of Uttar Pradesh is likely to be 9-12 percent below previous estimates after floods ravaged plantations. The estimate of 6.0-6.2 million tonnes for the season beginning in October is still above this season's 5.8 million tonnes. The state government had initially forecast output of 6.8 million tonnes. USDA PROJECTIONS The US Department of Agriculture (USDA) has pegged India's sugar production at 23.6 million tonnes in the ensuing 2010-11 sugar year, making an increase of over 26 percent from last year (19 million tonnes). According to USDA projection, India''s leading sugar producing state Maharashtra is expected to produce a record 9.5 million tonnes of sugar this year, against 7 million tonnes last year. Sugar production in Uttar Pradesh, the country''s second biggest sugar producing state, may rise to 6.2 million tonnes from 5.18 million tonnes in the review period. Barring Karnataka, sugar output is seen to rise in almost all sugar producing states like Andhra Pradesh, Bihar, Haryana, Punjab, Gujarat, Tamil Nadu and others. KARNATAKA
The area under cane has gone up by 125 per cent as against the

normal planting of 315,000 hectares as on August 9.

Mills in the state achieved a sugar recovery rate of 10.79 per cent

as against 10.43 per cent in the previous year.

The total cane crushed would touch 22.8 million tonnes by

September as against 15.4 million tonnes crushed last year, a growth of 48 per cent.
For the next sugar season commencing in October 2010, mills in

southern Karnataka have already announced advance payment of `1,800 a tonne, which is 28 per cent more than the fair and remunerative price (FRP) announced by the Centre.

BRAZILIAN CROP In terms of the October/September season, in 2010/11 Brazil's sugar production is expected to grow to 39.585 mln tonnes as against estimated production of 39.374 million tonnes, raw value, during 2009/10.

OVERVIEW FOR SEASON 2010/11 Country Brazil India Beginning stock 3747 6606 Production 39585 27445 Consumption 12670 25900 Change stock 0 600 Ending stock 3747 7206 Import 25 Export 26915 970 Total Exports 26915 945

Figures in thousand tonnes, raw value - October/September Year

Source: International Sugar Organizational

In the overall, considering the stock figures along with the production, the supply is estimated to remain more than the consumption. These figures depicts that once again the sugar price may fall in stream line.

POWERING UP SUPPLY & RE-AFFIRMIMG EXPORTS POTENTIAL

The Government has just reduced by nine months the time allowed for the re-export of white sugar under the ALS T4T. The deadline is now 31st March, 2011 instead of 31st December, 2011. After several months of export ban, India has recommenced exports. Around 25000 tonnes have been shipped to Sri Lanka and another 300000 tonnes are understood to be in line for export to Pakistan and Bangladesh. The exports, however, are expected for the present under the re-export policy for raw sugar imports under the Advanced License Scheme (ALS).

The cost of production had been worked out to `30-31 a kg, as

because sugarcane price has moved to `22-24 a kg from `15-16 last year.
The average realization was `21 a kg. The food ministry had cut down the sugar quota for release in the

open market to 14.50 lt for July, which is 0.4 lt lower than in last July and will include a carry-over of 2lt from the June quota besides white sugar processed out of raw's in May (1.85lt) and imported white sugar (0.50lt) in addition to a normal quota of 10.15 lt. The price rise in domestic market, made imports viable once again. The union government has allowed duty-free import of raw sugar to tide over the domestic production shortfall. In the 2008-09 season domestic sugar output fell 42 per cent to 15 million tonnes, causing retail sugar

To the FUTURES MARKET. A Long-lasting vapor

Futures trading have always made a positive impact on price discovery. Trading in Sugar futures was introduced at NCDEX and MCX on 27th July 2004 and 18th August 2004, respectively. The ban was imposed in May 2009. The suspension of futures trade was valid upto September 2010. In recent days, the sugar prices had seen some mind-boggling prices on the retail level. There were many reasons for the upstream.

prices to more than double. Sugar producers and traders imported 2.29 million tonnes of raw sugar and 225,000 tonnes of white sugar in the 2008-2009 season to bridge a deficit & jack-down the prices. The country purchased 480,000 tonnes of lentils in the year started April 1, the ministry said. Of the imports, 297,000 tonnes arrived at ports until November 5, 2009. Later, by the year end, govt. passed a bill that introduced a new sugarcane price regime, that enabled the government to pre-empt the sugar industry's claim of about `14,000 crore on it on account of levy price fixation.

Pre-Ban & Post-Ban Period

5000.00 4500.00 4000.00 3500.00 3000.00 2500.00 2000.00 1500.00 1000.00 500.00 0.00 Post-Ban period After ban of futures trade, May 2009 sugar price rises by 78% (approx.) to Govt. control

Spot Prices (Muzzafarnagar)

Futures (NCDEX)
Source: SMC Research

The Big Downshift In India

Domestic prices have slumped to `25 a kg from record highs of around `46 a kg in January mainly due to stockholding limit on bulk consumers. The Food Ministry has decided to relax the stockholding limit for bulk users and now they can store sugar equivalent to 90 days of their requirement. In August last year, the government had imposed the stockholding limit on bulk consumers, asking them to refrain from stocking sugar for more than 15 days. Later, in February this year, the government had reduced the stockholding limit to 10 days, which was again brought back to 15 days in May.

harvesting delay in Australia and flood in Pakistan are the major price drivers and created a global supply concern. About $3.27 billion valued sugarcane crop is got damaged in Pakistan due to floods and about 50% cane harvesting being lagged due to rains in Australia.
`/Quintal 2500.00

Seasonal Index v/s Monthly Price Movement

4500.00 4000.00

2000.00

3500.00 3000.00

1500.00

2500.00 2000.00 1500.00

Seasonality Indian Scenario

Analyzing the seasonal index of Indian sugar prices, the prices remain under the pressure till the third quarter of the year. The fourth quarter is a seasonal buying period, as the market witness a recovery because of the festive season.

1000.00

500.00

1000.00 500.00

0.00 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0.00
Source: SMC Research

Price Movement - International

Sugar rose to a five-month high in New York and extended gains in London after the U.S. Department of Agriculture signaled that domestic supplies are dwindling. The U.S. will allow one extra month for sugar imports for the current fiscal year, through Oct. 31, because of increased tightness in the U.S. raw-sugar market. There is a new bullish target for New York sugar as an ascending channel remains intact. ICE raw sugar futures for nearby October delivery climbed to a seven month high of 0.75 cent higher at 26.84 cents a pound amid on concern that adverse weather will curb output in Brazil and Australia by which signs of strengthening demand and supply concerns. Sugar is still climbing within a big channel with a bullish target at 30 cents, which could be achieved in days to come. Dry weather in Brazil, cane

Price Index

Monthly Price

Source: SMC Research & Reauters

QUARTERLY MARKET OUTLOOK 2010 - INTERNATIONAL SUGAR ORGANIZATION HIGHLIGHTS

For World
The first forecast of the world sugar balance for the period from Surplus crop (if projection by ISO is validated by crop developments

in the course of 2010/11) price advances are likely to be capped.

Global sugar consumption in 2010/11 is put at 167.154 million tonnes,

October 2010 to September 2011 puts world production at 170.375 million tonnes, 3.221 million tonnes higher than world consumption.
The 2010/11 picture contains two major elements of a surplus

raw value (including 2.986 million tonnes of adjustment for unknown net trade). Growth rate of consumption increase by 2.06%.
Global white sugar export availability is also forecast to shrink to

18.673 million tonnes, down 1.280 million tonnes from 2009/10.

The increase of export availability in Brazil (+925 thousand tonnes)

market:
Projected world production is higher than consumption; Export availability exceeds import demand (50.557 and 48.625

is not sufficient enough to cover numerous decreases projected for nearly all other major exporters including Thailand (-475 thousand tonnes), Australia (-325 thousand tonnes), South Africa (-275 thousand tonnes), Mexico and Swaziland (-200 thousand tonnes each).
7

million tonnes, correspondingly).

in mln tonnes, raw value 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 -20,000 9,520 55,171 43.87%

WORLD SUGAR BALANCES (October/September)

163,779 158,830 170,375

in % 50

167,154 45 40

135,278

33.52% 125,758

33.62%

35 30 25

54,903

56,192

20 15 10 5 0

-4,949

3,221

Production

Consumption

Surplus/deficit

End stocks

Stocks/consumption ratio in %
Source: SMC Research

For India
India is expected to re-join the exporters' camp with estimated net-

exports of 945 thousand tonnes as against estimated net-imports of 3.3 million tonnes in 2009/10.
In 2010/11, for India it is expected that the indicative gap between cost

and realization will be the highest in history.

A statistical surplus is currently projected at 1.445 million tonnes, but the

ISO suggests that some of the surplus may be used for re-building the stocks depleted during the past two seasons of acute deficit. At this early stage of the season India's export availability is put at 0.970 million tonnes.
Source: International Sugar Organization

The highest growth rate of consumption @ 4.44% is projected for Indian subcontinent. Sugar use in the region is forecast to grow by 1.277 million

tonnes or 4.02%. Consumption is projected to reach 31.430 million tonnes or 19.8% of global use of sugar.
India's fuel ethanol consumption is forecasted to rise to 140 million litres as against an estimated 90 million litres last year. Molasses production is presently expected to rise massively in 2010/11 on the back of a forecasted 25% increase in sugar output. This would likely

ensure India returns as the largest exporter of cane molasses in 2011.

OTHER TOPICS RELATED TO INDUSTRY

BUSINESS OPPORTUNITY - Ethanol Blended Petrol (EBP) Programme The national demand for ethanol is 100 crore litres per year. Assessing the huge market, the cabinet committee on economic affairs (CCEA) cleared a thought to approve the proposal for implementation of ethanol blended petrol (EBP) programme. The panel recommends the blend percentage up to a limit of 10 percent in the states and union territories, except North- Eastern States, J&K, Andaman, Nicobar and Lakshadweep. The committee also raised the price of ethanol for blending with petrol at `27 per litre from existing `21.50 per litre. India has 330 distilleries which produce 4 billion litres of rectified spirit (alcohol) per year. Of the total distilleries, about 115 distilleries have the capacity to distill 1.8 billion litres of conventional ethanol per year sufficient to meet the 5% blending mandate. The brief details of the proposal are: (i)
Source: International Sugar Organization

Fixing of an ad-hoc uniform ex-factory price throughout the country at `27/- per litre for ethanol procured by Oil Marketing Companies (OMCs) from the date of communication of the order till the time price is recommended by the expert committee and a decision taken thereon by the competent authority. The price of `27/- per litre would be purely interim in nature and subject to adjustment from the final price so determined.

(ii) Noting the order for constitution of Expert Committee for pricing of ethanol, under the Chairmanship of Dr. Saumitra Chaudhury, Member Planning Commission, with Principal Advisor (Energy), Chairman, CACP, Joint Secretary from Ministry of Petroleum and Natural Gas, Joint Secretary Sugar), a representative of Sugar Industry, and a representative from Oil Industry, as members. The committee would follow the procedure to determine the formula/ principle for pricing of ethanol. The Committee will submit its recommendations expeditiously. (iii) Instructing the OMCs to close all existing tenders and begin procurement of ethanol at the uniform ex-factory ad-hoc price of `27/- per litre from indigenous sources only. Thereafter the procurement would be done at the price approved on consideration of the recommendation of the Expert Committee. (iv) The procurement would be done under supply contracts with penalties on sugar industry for default in supply and on oil industry for not lifting ethanol. (v) The suppliers would need to fulfill all contractual obligation under existing supply contracts including for extended period. (vi) The OMCs will bear the transportation charges from the factory to the depot on the same rate at which the OMCs transport their products. The actual transportation would be done by the sugar factories. The OMCs would also bear the cost of import/ export-fees, taxes etc. as applicable. (vii) Constitution of a Working Group of officers which shall apart from allocating quantities and locations amongst suppliers, ascertain the availability of ethanol and recommend the blend percentage in the States and UTs up to a limit of 10%.

A Study: According to a 2007 report from the Institute of Defence Studies and Analyses (IDSA), 80 million litres of petrol could be saved annually in India by blending petrol with 10 percent biofuel.

Projected Benefits
Enhancing benefits to the sugarcane farmers. Ensure that there is no adverse impact on oil or the sugar industry. The proposal relating to variable percentage of blending would ensure that surplus of ethanol available in different states is adequately absorbed in

the EBP Programme at the same time, deficit in supply in some parts of the country does not adversely affect the programme on all India basis.

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For every tonne of cane crushed, mills produce roughly 100 kg of sugar, 45 kg of molasses and 300 kg of bagasse (of which 210-220 kg is used to meet a mill's steam consumption requirements, leaving a surplus of 8090 kg).

RECENT DEVELOPMENTS
After several months of export ban, India has recommenced

exports. Around 25000 tonnes have been shipped to Sri Lanka and another 300000 tonnes are understood to be in line for export to Pakistan and Bangladesh.
The govt. had given an extension till August 31 to complete the

SUGAR DE-CONTROL
Weeks after an announcement to decontrol petrol, the government hinted at a possible decontrol of the sugar sector, where output is set to rise.
It would mean professional functioning and not having to keep

sale of sugar quota released for the month of July. Millers could not sell the entire July quota of sugar within the stipulated time owing to poor offtake from bulk consumers, who account for 60% of the country's annual sugar demand of 23 million tonnes.
The Union Government relaxed the stockholding norms for bulk

approaching the government for loan guarantees

Having the market determine the price would benefit both mills

consumers from 15 days to 90 days. This announcement stabilised the price at a lower level. Good quality white sugar was in demand. Mills were reluctant to sell, expecting good premium compared to the regular quality.
The Indian state of Maharashtra yesterday banned imports of

and sugarcane growers

After decontrol, mills would not need government guarantees or

various packages.
Also enable cane growers to plan better. Post de-control, the sugar prices will be linked to international

sugarcane from other states to tackle a 30% surplus in production.

The state of Maharashtra also plans to press into service 20

prices
Decontrol may well exert a downward push on prices as a result of

additional sugar mills in new season beginning from October 1, 2010 for which the state government will stand as a guarantor for bank loans. The state has about 190 mills, mostly co-operative. The government plans to operate 163 mills in 2010-11 season.

the freedom that factories will get to offer for sale any amount of sugar that they wish to offload from their buffer stocks
The industry now needs freedom, for value-added diversification

into bio-fuels, cogeneration of power and bioengineering of crushed cane bagasse into organic fertiliser.
Global capital will flow into domestic sugar industry as it is

WRAP UP
The fall in international sugar prices along with improved international & domestic supply scenario following higher crop in India, sugar prices may feel renewed pressures. As far as the medium to long-term outlook is considered, the price trends in international markets would be the key determinants of future profitability with the crude oil price trends, which determine the diversion of cane crop to ethanol.

happening in Brazil. Large money flows into any deregulated sector.

However the ministry made it clear that the right to fix the support price of cane for farmers will definitely be with the government. The objectives of sugar decontrol will be served fully only if the contentious system of cane price fixation by the Centre and the states is also done away with.

At the SPOT MARKET.

In the Vashi sugar market: (`/Qtl.) S-30 grade @ `2,630-2,650 S-grade sugar @ `2,600-2,630 (Naka delivery) M-30 @ `2,660-2,720 M-grade at `2,640-2,690(Naka delivery).

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For further any queries, please contact Subhranil Dey Ph.: 011-30111000 Extn.: 6953 Research Analyst subhranildey@smcindiaonline.com

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