Beruflich Dokumente
Kultur Dokumente
August 2018
Submitted to
SBM, NMIMS
2. Objective
The project intends to assess the factors that affect the supply and demand of the sugar industry in India
and analyze how additional factors, like government intervention impact the market price of sugar.
Further, the project intends to analyze how fluctuating prices affect sugar suppliers and the industry as a
whole. The project also entails discussion on how bulk buyers like, ice cream and beverage makers,
bolster prices in the market and how sugar producers use different channels to sell their sugar-produce.
3. Background
Sugar is an essential commodity across the world.
Sugar can be produced from sugarcane, sugar-beet,
or any other crop which has some sugar content. In
India, however, sugarcane is the primary source for
sugar production.
The sugar industry is a sector of significant importance to the Indian economy. Sugarcane is the major
cash crop, and provides source of livelihood and income for the farmers. There are several industries
based on sugar and its by-products, and they provide livelihood opportunities to a large proportion of
population – around five crore farmers and their families are directly impacted by this industry4. The
industry also provides employment to around two million people in the country5. In this way, the
industry renders a direct positive impact on the rural Indian economy.
The sugar industry is regulated by the government in India. The industry is monitored by the
government to keep sugar price in check as well as to ensure that there is minimal supply-demand
mismatch in the economy. The government controls various aspects of the industry like regulating sugar
price, licensing, import and export quotas and duties.
1
International Sugar Organization: http://www.isosugar.org/sugarsector/sugar
2
The Hindu Business Line: https://www.thehindubusinessline.com/economy/agri-business/sugar-production-
surpasses-31-mt-till-april-isma/article23758950.ece
3
Care Ratings: http://www.careratings.com/upload/NewsFiles/SplAnalysis/Indian%20Sugar%20Industry%20-
%20An%20Update%20-%20June%202015.pdf
4
Indian Sugar Mills Association presentation
5
Indian Sugar Mills Association presentation
4. Analysis
Sugar millers are generally established in and around areas of sugarcane cultivation in India. This is
because sugarcane is a low value, weight losing, and a perishable raw material. Hence, transportability
of sugarcane to mills for processing sugar becomes an issue. For the reason that sugarcane’s sucrose
content dries up fast, and also the fact that increased transportation cost would ultimately elevate the
cost of producing sugar, sugar mills are concentrated in majorly two regions in the country – north and
south. The northern region encompasses the states of Uttar Pradesh, Haryana, Punjab, and Bihar,
whereas the southern region includes the states of Maharashtra, Karnataka, Tamil Nadu, and Andhra
Pradesh.
Concentration of the sugar millers in sugarcane abundant regions would mean that institutional buyers,
which constitute almost 65-70% of sales of sugar millers, would purchase sugar (as an ingredient to be
used in further production) from millers situated at proximity in order to keep freight and transportation
costs on the lower end.
The sugar industry is an ideal example of a perfect market competition in India. There exist numerous
producers in the market, and the nature of the product i.e. sugar is such that there is negligible scope of
difference between products by the market players, hence pointing to the fact that the sugar industry is
essentially a price-taker.
are in private sectors and 62 are in the public sector.
Exhibit 2 – Equilibrium in Perfectly Competitive Sugar Market
30 30
25
25
20
20
15
15
10
5 10
0 5
100 200 300 400 500 600 0
Quantity demanded and supllied of sugar 1 2 3 4 5
Quantity of output
Source: academia.com
The industry is highly fragmented with numerous organized and unorganized players. The organized
players include sugar factories and the unorganized sector includes manufacturers of traditional
sweeteners like gur and khandsari.
The industry is marked by the presence of various sugar producing companies like Shree Renuka, Bajaj
Hind, Balrampur Chini, Dwariskesh Mills, Dalmia Sugar, and DCM Shriram to count a few. A synopsis of
these major players in the sugar industry is enlisted in the table below.
Agro-Climatic risk
The sugar industry is dependent on the sugarcane crop. Now, sugarcane being an agricultural crop is
vulnerable to climatic risks. The climatic conditions like the monsoons have a direct influence on the
operational efficiency in terms of sugar production. Besides, the intensity and dispersion of monsoon
across the sugar growing regions also have a bearing on the sugar production in different regions of the
country.
Regulatory risk
The sugar industry in India is highly regulated by the government. The government intervenes in the
market to control sugar prices in order to curb food inflation in the country and thereby stabilize sugar
prices in the domestic economy. The government also employs import export quotas to smoothen out
the sugar availability in the country. The most recent government policy interventions and its impact are
tabulated below-
To ensure sustainability of farmers in the country, the central government controls sugarcane prices.
Consequently there exist two pricing regimes in the country - Fair and Remunerative Price (FRP) and
State Advised Price (SAP). This pricing reflects the price below which no sugar mill can produce
sugarcane from the farmers. The cane pricing is highly influenced by political environment in the
country, and not by economics, thereby pointing to the fact that there is little relationship between cane
costs and sugar realizations of the sugar millers. So in times of subdued prices of sugar in the domestic
market, the millers face high costs of production, reducing their profitability and also leading to
mounting debt levels to fund their incremental working capital requirements.
35
30 Price
decline
Rs./kilogram
25
20
15
Apr-17
Oct-13
Jan-16
Apr-14
Apr-15
Apr-16
Apr-18
Oct-14
Oct-15
Oct-16
Oct-17
Jan-14
Jan-15
Jan-17
Jan-18
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Source: IndexMundi
Recently, sugar prices have dropped drastically from ~Rs. 22/kg in January 2018 to ~Rs. 17/kg in April
2018 in the domestic economy following a supply glut. Sugar millers are ready to sell sugar under
pressure at lower prices to reduce their inventory. Indian Sugar Mills Association (ISMA) has reported a
45% increase in domestic sugar output to 28.2 million tonnes (MT) as of March 31, 2018 from 18.9 MT
as of March 31, 2017. Consequently, sugar prices are expected to remain subdued throughout 2018
following this supply glut. This can be inferred from the exhibit below as well – sugar prices fell by 28%
yoy to Rs. 20.6/kg in FY2018 as domestic surplus (closing inventory) more than doubled to 32.0 MT yoy
in the aforementioned period.
35.0 12.0
28.7
30.0 10.0
23.4
25.0 22.1
19.3 20.6 8.0
Million Tonnes
20.0
Rs./kg
6.0
15.0
4.0
10.0
5.0 2.0
7.2 8.9 7.7 4.1 10.8
0.0 0.0
FY2014 FY2015 FY2016 FY2017 FY2018
1. Chocolates
The Indian chocolate market is growing at a rate of 20% currently and is expected to grow by 30% by
the year 20206. Although, 70% of India’s chocolate consumption takes place in the urban areas,
consumption in rural areas is also expanding. This bodes well for the sugar millers, as chocolate
companies (institutional buyers) like Cadbury India, Nestle India, and Amul, which buy sugar in bulk from
millers, will increase their sugar purchase in order to meet the growing demand for chocolates in the
Indian market.
2. Soft drinks
6
Business Wire: https://www.businesswire.com/news/home/20170717005883/en/Assessment-Indias-Chocolate-
Market-2017---Forecasts
Soft drinks revenues were around ~US$3000 million in the year 2017. Going forward, the market is
expected to grow annually at 10% till 20217. Sugar being used as a major ingredient in soft drinks by
companies like Pepsi and Coca Cola, such growth in the soft drinks industry will catalyze demand for
sugar.
3. Confectionery
The confectionery market in India is presently valued at $1.5 billion8. As per Nielsen India, this industry is
growing at a CAGR of 9% every two years. With such growth rates, sugar industry will benefit as sugar is
a key ingredient in production of confectionery products. Companies like Parle India, Wrigley, Lotte,
Perfetti Van Melle, to meet the rise in demand will increase their production, which will consequently
require incremental level of sugar input, thereby leading to increased purchases from sugar millers.
4. Traditional Sweets
Traditional sweets in India enjoy a high demand, despite the fact that there are substitutes like
chocolates. The market for traditional Indian milk-based sweets is growing, and the innumerable
festivals and young consumers are the primary growth drivers of this industry in India. This market is
primarily in the unorganized sector.
5. Other than the above mentioned industries, sugar is sold in the unorganized sector. Sales to the
unorganized sector comprises approximately 30% of the sugar millers’ sales. Sugar millers sell sugar
through dealers to retailers or directly to retailers.
Gur and Khandsari producers (traditional sweeteners used as substitutes for sugar) pose competition to
the sugar millers. Competition for sugar millers mushrooms from the fact that the government imposes
restriction on sugar millers on the quantity they can sell in the market. On the other hand, gur and
khandsari producers are free to sell in the market. However, with increased per capita income of
consumers and easy availability of sugar at competitive rates, use of these substitutes is witnessing a
downward trend and is mostly restricted to rural areas. Hence, the threat of substitutes is low in the
sugar industry.
7
https://www.statista.com/outlook/20020000/119/soft-drinks/india
8
Financial Express: https://www.financialexpress.com/lifestyle/indian-candyland-a-market-of-riches/1157023/
Market is regulated by the government influencing distribution, and the free sale quota releases for
sugar. Hence, buyer’s power is highly restricted in this sector.