INDIAN CHALLENGES FOR THE NEW DECADE

Narendra Murkumbi
Vice-Chairman & Managing Director, Shree Renuka Sugars Ltd President, Indian Sugar Mills Association

Agenda
2

Decadal Perspective of Indian Sugar

The Indian Sugar Industry Challenges for Sugarcane Farming in India Challenges for the Indian Sugar Industry

Decadal Perspective of Indian Sugar Industry

Indian Sugar Production, Consumption & Trade

4

5 3

25 20 15 10

1
-1 -3 -5

5
0

Export Sr. 1 2 Particular (in million MT) Sugar Production Sugar Consumption

Import

Production

Consumption

1991-92 13.40 10.76

2010-11 (P) 24.39 21.66

Growth Rate (%)* 2.4% 3.8%

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

Sugar Production & Consumption in million MT

Sugar Trade in million MT

30

Area under Cane & Cane Production in India

5

7,000

6,500
6,000

356 278 280 289 299 296 297 287 234 4,520 4,316 4,412 4,220 3,938 3,661 237

400
348 339

350 300

In 000 hectares

276 254 228 230

281

281
5,151 5,055

285 292 4,944

4,415 4,175

5,000 4,500 4,000 3,500 3,000 2,500 2,000

3,844

250 200

4,147 4,174 3,867 3,572 3,422

3,930

4,055

4,202

150
100 50 0

Area under cane Sr. 1 2 Particular Area under cane (ha) Cane Production (million MT) 1991-92 3,844 254

Cane Production 2010-11 (P) 4,944 339 Growth Rate (%)* 1.3% 1.5%

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

In million MT

5,500

Cane Yield & Sugar Recovery

6

100 90
10.0% 10.3% 10.0% 9.9% 9.4% 9.9% 10.0% 9.9% 10.2% 10.5%

10.6%

11.0%
10.2% 10.2%

10.3%
10.4%

10.2% 10.2%

10.2% 10.2%

in MT/hectare

10.0%

10.0% 9.0%

80
71 71
68 67 71 71

70 60 50

66

67 64

69

67 64 59

65

67

69

69 65

70

69

8.0% 7.0% 6.0%

Cane Yield

Sugar Recovery (as a % of Cane)

Sr. 1 2

Particular Cane Yield (MT/ha) Sugar recovery (as a % of cane)

Average * 67.4 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

400
356

100%
348 292 339 285

350

in million MT

300 250 200

254 228 230

276

281

278

280

289

299

296

297

287

79%
281 234 237

279

80%
71%
240

72%
250

68%

67%

62%
54% 55%
175 47%

60% 60% 61%

178 177 180 194

63%

53%
45% 43%
134

57% 53%
133

60%
189

51%
145

186

150
100 50

148

46%
129

158 125

130

103

40%

98

20%

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

8

Maharashtra, Uttar Pradesh, Karnataka, Tamil Nadu and Gujarat are the major sugar producing states in India
Sugar Producing Capacity of Major States in India
in '000 MT of cane crushed per day 2,500 2,000 1,500

9 8 7 6 5 4 3 2 1 0

in million MT of Sugar

1,000
500

Cane Crushing Capacity in India (TCD)

* TCD is tonnes of cane crushed per day

Maharashtra

Uttar Pradesh

Karnataka

Tamil Nadu

Gujarat

Sugar Production in Major Indian States

9

10

30

8 in million MT

25
20

6 15 4

10
2 5 0

India

Maharashtra

Uttar Pradesh

Karnataka

Tamil Nadu

Gujarat

in million MT

Indian Sugar in 2020

10

Projected Indian Sugar Supply and Demand in 2020:

35
31.3 26.4 24.4 21.7 18.5 15.8

30
25
In million MT

Production

20 15 10 5 0

Consumption

2000-01

2010-11

2020-21 (E)

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

Key Observations
11

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

Indian Sugar Industry Dynamics

Overview of Indian Sugar Industry

13

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 Indias total sugar production
Sr. 1 2 3 4 For Season 2010-11 Value

No. of Sugar Mills in India Installed Sugar Production Capacity Cane Crushed Sugar Produced

664 31 million tons/year 230 million tons 24.3 million tons

Rs. 750 Billion (US$ 14.42 billion)
Rs. 520 Billion (US$ 10.00 billion)

5
6

Industry Revenue
Cane Payment

The Infamous Indian Sugar Cycle

14

Indian sugar production follows a 5 year cycle:

Decline in Sugar Prices High Sugar Production Lower Profitability

2-3 years of high production Followed by 2-3 years of low production

High Cane Production

High Cane Arrears

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
Low Cane Arrears Decline in Area under Cultivation

Improved Profitability
Lower Sugar Production

Lower Cane Production

Sugar Production & Cane Arrears

15

60
28.4

56.07 26.4 24.4

30

50
40
16.5 18.2 18.5 14.6 12.9 12.9 10.6 9.8 15.11 10.65 6.27 4.18 6.12 2.15 5.98 11.98 8.92 6.32 6.88 15.5 32.04 18.72 18.5 20.1 19.3

25
20

18.9 36.67 31.71

in million MT

27.18 13.5 12.7 25.63 14.5 20.84

30 13.4

15

20
10 0

10
7.09

5 0

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

Sugar Production

in billion Rs.

Financial Condition of the Indian Sugar Industry

16

Sr. 1 2 3 4 5

Particular Revenues Profit after Tax Net Worth

Net worth to Revenues Return on Net Worth

Unit Rs. Million Rs. Million Rs. Million % %

Co-op Sugar Mills (2008-09)

111,670 3,150 11,170

Private Sugar Mills (2008-09)

155,499 11,357 92,026

Private Sugar Mills (2009-10)

227,699 191 101,438

10% 12.3% 0.2%

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

Cross-border Sugar Trade

17

Indian Sugar Industry has during the last decade:

6 5 4 3 2 1 -1 -2 -3 -4 -5

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) Indian Sugar Trade
5.0 2.6 0.6 0.4 1.0 0.1 (0.2) (2.0) 0.4 1.0 0.1 0.0 0.1 (0.4) 1.1 1.8 0.3 (0.1) 0.0 1.1 1.7 0.2 0.2

In million MT

0.0

(0.9) (1.0)

(0.6) (2.1) (2.4) (4.1)

Sugar Exports

Sugar Imports

Government Regulations for Sugar Industry

18

Minimum Distance Criteria of 15 kms between mills

Regulated Monthly Release Mechanism

GOVT
Cane Area Reservation Fair & Remunerative Price (FRP)

POLICY

Levy Sugar Obligation on mills

Restrictions on Export of Sugar Jute Packing Order

Challenges for Sugarcane Farming in India

Land and Water

20

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

Productivity
21

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

Challenges for Indian Sugar Industry

Challenges Facing the Indian Sugar Industry

23

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

Inflating Away the Problem

24

Spot Price of Sugar in India

40,000

In Rs. per MT

30,000

20,000

10,000 Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Spot Price

6-month Spot Price Moving Average

Source: National Commodity Derivatives Exchange Spot Price of Sugar as quoted in Muzaffarnagar (Uttar Pradesh)

Some Solutions for the Future

A Durable Cane Pricing Mechanism

26

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

Inventory Management : Exporting Sugar within the Season

27

Monthly Inventory Build-up of Sugar in India

Sugar Closing Stock
16 14 12 10 8 6 4 2 0 Jan-10 Nov-09 Dec-09 Oct-09 Mar-10 Apr-10 Feb-10
Export Export

in million MT

Jun-10

Jul-10

Jan-11

Jun-11

Jul-11

Sep-10

Nov-10

Dec-10

Mar-11

Aug-10

Apr-11

May-10

Sugar to be retained in India

Sugar that could have been exported

Mean Closing Stock

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

May-11

Aug-11

Sep-11

Oct-10

Feb-11

. . . and Importing Sugar in the Off-season

28

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

10 9 8 7 6 5 4 3 2 1 0 Jun-10 Jan-10 Jul-10 Nov-09 Mar-10 Sep-10 Nov-10 Jun-11 Jan-11

in million MT

Jul-11

Dec-09

Dec-10

Mar-11

Apr-10

Feb-10

Aug-10

Apr-11

May-10

Stock that could be retained in India

Stock to be imported in India

Mean Closing Stock

Potential

Substantial savings in inventory carrying cost Continuous presence in world sugar markets

May-11

Aug-11

Sep-11

Oct-09

Oct-10

Feb-11

Dismantling Product-Side Controls

29

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

Thank You