INDIAN CHALLENGES FOR

THE NEW DECADENarendra Murkumbi

Vice-Chairman & Managing Director, Shree Renuka Sugars Ltd

President, Indian Sugar Mills Association

Agenda

Decadal Perspective of Indian Sugar

The Indian Sugar Industry

Challenges for Sugarcane Farming in India

Challenges for the Indian Sugar Industry

2

Decadal Perspective of Indian Sugar Industry

Indian Sugar Production, Consumption & Trade

4

0

5

10

15

20

25

30

-5

-3

-1

1

3

5

Suga

r P

rod

uct

ion

& C

on

sum

pti

on

in

mill

ion

MT

Suga

r Tr

ade

in m

illio

n M

T

Export Import Production Consumption

Sr.Particular

(in million MT)1991-92 2010-11 (P) Growth Rate (%)*

1 Sugar Production 13.40 24.39 2.4%

2 Sugar Consumption 10.76 21.66 3.8%

* CAGR for 20 years for 3-year moving average of Sugar Production & Sugar Consumption

Area under Cane & Cane Production in India

5

3,844

3,572 3,422

3,867

4,147 4,174 3,930

4,055 4,220 4,316 4,412

4,520

3,938

3,661

4,202

5,151 5,055

4,415 4,175

4,944

254

228 230

276 281 278 280 289 299 296 297 287

234 237

281

356 348

285 292

339

0

50

100

150

200

250

300

350

400

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

In m

illion

MT

In ‘00

0 h

ect

are

s

Area under cane Cane Production

Sr. Particular 1991-92 2010-11 (P) Growth Rate (%)*

1 Area under cane (ha) 3,844 4,944 1.3%

2 Cane Production (million MT) 254 339 1.5%

* CAGR for 20 years for 3-year moving average of Area Under Cane & Cane Production

Cane Yield & Sugar Recovery

6

6664

67

71

6867

71 71 7169

67

64

59

6567

69 69

65

7069

10.0%10.3%

10.0%

9.9%9.4%

9.9%

10.0%

9.9%

10.2%

10.5%

10.3%

10.4%

10.2%

10.2%

10.2%

10.2%

10.6%

10.0%

10.2%

10.2%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

50

60

70

80

90

100

in M

T/h

ect

are

Cane Yield Sugar Recovery (as a % of Cane)

Sr. Particular Average *

1 Cane Yield (MT/ha) 67.4

2 Sugar recovery (as a % of cane) 10.1%

* Simple Average taken for Cane Yield and Sugar Recovery for a 20-year period from 1991-92 to 2010-11

Cane Production, Cane Crushed & Drawal Rate

7

254

228 230

276 281 278 280289

299 296 297 287

234 237

281

356 348

285 292

339

134

103 98

148

175

130 129

158

178 177 180 194

133 125

189

279

250

145

186

240

53%

45% 43%

54%

62%

47%46%

55%

60% 60% 61%

68%

57%

53%

67%

79%

72%

51%

63%

71%

20%

40%

60%

80%

100%

50

100

150

200

250

300

350

400

in m

illion

MT

Cane Production Cane Crushed Drawal Rate

Note: Cane diversion for Gur & Khandsari results in a Drawal rate of about 70% for sugar production

Major Sugar Producing States

Maharashtra, Uttar Pradesh, Karnataka, Tamil Nadu and Gujarat are the

major sugar producing states in India

8

500

1,000

1,500

2,000

2,500

0

1

2

3

4

5

6

7

8

9

in '000 M

T o

f ca

ne c

rush

ed p

er

day

in m

illion M

T o

f Sugar

Sugar Producing Capacity of Major States in India

Cane Crushing Capacity in India (TCD) Maharashtra Uttar Pradesh Karnataka Tamil Nadu Gujarat

* TCD is tonnes of cane crushed per day

Sugar Production in Major Indian States

9

0

5

10

15

20

25

30

0

2

4

6

8

10

in m

illion M

T

in m

illion M

T

India Maharashtra Uttar Pradesh Karnataka Tamil Nadu Gujarat

Projected Indian Sugar Supply and Demand in 2020:

18.5

24.426.4

15.8

21.7

31.3

0

5

10

15

20

25

30

35

2000-01 2010-11 2020-21 (E)

In m

illion M

T

Production

Consumption

Indian Sugar in 2020

10

•Growth in sugar production and consumption estimated as the 20-year CAGR from 1991-92 to 2010-11

Key Observations

Amplitude of the Indian Sugar Cycle has become much larger

Slow rise in cane area of 1.3% per year and stagnant farm

productivity for last two decades

Major problems with manual harvesting of cane

India could have a major gap in supply by 2020 as:

Per capita consumption of sugar will increase due to GDP growth and

lifestyle changes which encourage use of processed foods

Limited availability of irrigated land and lack of progress in farm

productivity stunts expansion of production

11

Indian Sugar Industry Dynamics

Overview of Indian Sugar Industry

2nd largest producer of sugar in the world

Small & marginal farmers with average farm of less than 2 hectares

Three states Maharashtra, Uttar Pradesh & Karnataka account for 3/4ths of

India’s total sugar production

13

Sr. For Season 2010-11 Value

1 No. of Sugar Mills in India 664

2 Installed Sugar Production Capacity 31 million tons/year

3 Cane Crushed 230 million tons

4 Sugar Produced 24.3 million tons

5 Industry Revenue Rs. 750 Billion

(US$ 14.42 billion)

6 Cane Payment Rs. 520 Billion

(US$ 10.00 billion)

The Infamous Indian Sugar Cycle

Indian sugar production follows a

5 year cycle:

2-3 years of high production

Followed by 2-3 years of low

production

Causes of Cyclicality:

Fluctuations in sugar prices

Falling sugar prices against a

stable or at times unaffordable

cane prices

Weather conditions

Competition from other crops

14

Decline in

Sugar Prices

Lower Profitability

High Cane Arrears

Decline in Area under Cultivation

Lower Cane Production

Lower Sugar Production

Improved Profitability

Low Cane Arrears

High Cane Production

High Sugar Production

Sugar Production & Cane Arrears

15

6.274.18

2.15

6.12

15.11

10.65

5.98

8.92

11.98

18.72

27.18

32.04

25.63

6.32 6.88

36.67

56.07

7.09

20.84

31.71

13.4

10.6 9.8

14.6

16.5

12.9 12.9

15.5

18.2 18.5 18.5 20.1

13.5

12.7

19.3

28.4

26.4

14.5

18.9

24.4

0

5

10

15

20

25

30

0

10

20

30

40

50

60

in b

illion R

s.

in m

illion M

T

Cane Arrears Sugar Production

Note: Cane Arrears as on 30th April of each crushing season

Financial Condition of the Indian Sugar Industry

Sr. Particular Unit

Co-op Sugar

Mills

(2008-09)

Private Sugar

Mills

(2008-09)

Private Sugar

Mills

(2009-10)

1 Revenues Rs. Million 111,670 155,499 227,699

2 Profit after Tax Rs. Million 3,150 11,357 191

3 Net Worth Rs. Million 11,170 92,026 101,438

4 Net worth to Revenues % 10%

5 Return on Net Worth % 12.3% 0.2%

* Data has been calculated for 84 Cooperative Sugar Mills and 25 private sugar companies

16

Cross-border Sugar Trade

Indian Sugar Industry has during the last decade:

Managed imports without direct intervention of the Government

Managed large exports during surplus sugar years

Shown flexibility to manage cyclical surplus/deficit of sugar (ALS)

17

0.6 0.4 0.0 0.1

1.0 0.4

0.1 0.0 0.1

1.0 1.1 1.8

0.3 0.0

1.1 1.7

5.0

0.2 0.2

2.6

(2.0)

(0.2)(0.9) (1.0)

(0.4) (0.1)(0.6)

(2.1) (2.4)

(4.1)-5-4-3-2-1123456

In m

illion M

T

Indian Sugar Trade

Sugar Exports Sugar Imports

Minimum

Distance Criteria

of 15 kms between

mills

Levy Sugar

Obligation on

mills

Restrictions on

Export of Sugar

Fair &

Remunerative

Price

(FRP)

Regulated

Monthly Release

Mechanism

Cane Area

Reservation

GOVTPOLICY

Jute Packing

Order

Government Regulations for Sugar Industry

18

Challenges for Sugarcane Farming in India

Land and Water

Land prices in several areas around major cities pulling fertile

land out of cultivation for urban and leisure uses

Soil degradation due to unbalanced use of nitrogen fertilizers

No new major irrigation dams being built in India

Rapid ground-water depletion with several states in critical

condition

Electricity supplies free or very cheap but increasingly

restricted in time and quality

20

Productivity

Stagnant yields and marginal rise in sugar content of cane

Most Indian cane varieties support only 1 or 2 ratoons

Farmers are not paid based on the sucrose content of cane, hence no

incentive to switch to better varieties

Fertilizer shortages rising and subsidy system makes nitrogenous fertilizers

much cheaper than Potash and Phosphatic fertilizers

99% of cane is manually harvested in green condition

Labor shortages rising rapidly , especially in peninsular India

Farm mechanization difficult due to small fields & lack of coordinated

planting

21

Challenges for Indian Sugar Industry

Challenges Facing the Indian Sugar Industry

Cane pricing is often irrational and driven by politics

North India and Tamil Nadu (about 50% of production) are governed by State

Advised Prices

Complete dependence on small farmers for cane leads to poor capacity

utilization in many years

Government controls on domestic sales and exports make commercial

planning very difficult

Erratic financial returns have made the business less bankable

Strong sugar refining and inventory financing capacities needed to

smoothen the sugar cycle

23

Inflating Away the Problem

24

Source: National Commodity Derivatives Exchange

Spot Price of Sugar as quoted in Muzaffarnagar (Uttar Pradesh)

10,000

20,000

30,000

40,000

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

In R

s. p

er

MT

Spot Price of Sugar in India

Spot Price 6-month Spot Price Moving Average

Some Solutions for the Future

A Durable Cane Pricing Mechanism

Price linkage between sugarcane and

product revenues (sugar + by-products)

Move sugarcane price fixation from political

to economic domain

Mechanism to allow farmers to fix forward prices for

sugarcane for upto two seasons at the time of planting

26

Inventory Management : Exporting Sugar within the Season

Monthly Inventory Build-up of Sugar in India

Can export sugar during season between January to May . . .

27

0

2

4

6

8

10

12

14

16

Oct

-09

Nov-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Apr-

10

May

-10

Jun

-10

Jul-

10

Aug-1

0

Sep

-10

Oct

-10

Nov-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Apr-

11

May

-11

Jun

-11

Jul-

11

Aug-1

1

Sep

-11

in m

illi

on

MT

Sugar Closing Stock

Sugar to be retained in India Sugar that could have been exported Mean Closing Stock

ExportExport

. . . and Importing Sugar in the Off-season

Potential

Substantial savings in inventory carrying cost

Continuous presence in world sugar markets

28

0123456789

10

Oct

-09

Nov-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Apr-

10

May

-10

Jun

-10

Jul-

10

Aug-1

0

Sep

-10

Oct

-10

Nov-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Apr-

11

May

-11

Jun

-11

Jul-

11

Aug-1

1

Sep

-11

in m

illi

on

MT

Stock that could be retained in India Stock to be imported in India Mean Closing Stock

. . . Import & Refine raw sugar in the Off-Season , June to October

Dismantling Product-Side Controls

Abolition of Levy Sugar Mechanism

Only industry in India to bear the burden of a social welfare program

Govt. should buy sugar for distribution in the Public Distribution

system through an auction process

Abolition of Regulated Release Mechanism

Removes govt. interference in sales

Enables mills to sell sugar as per their cashflow needs

Reduces high inventory burden on sugar mills

29

Thank You