Lower production sweet for sugar companies

Given the inelastic demand for sugar, a sharp jump in the selling price in a slump year can more than recompense for the volume decline.



Conventional wisdom suggests that growth in volumes should translate into higher profits. But, there are exceptions to this logic. The sugar industry is a classic example. A bad sugarcane crop and lower sugar production have actually accelerated profit growth for the industry.

Given the inelastic demand for sugar, a sharp jump in the selling price in a slump year can more than recompense for the volume decline.

There may be many factors influencing profitability of the sugar industry. But, empirical data points to a strong relationship between sugar cane production, closing stock of sugar at the end of the season, sugar prices and profitability of the sugar producers.

Stock levels

Let us understand this better with the data for the period 2008- 09.

Sugarcane production slipped to 285 lakh tonnes during October 2008-September 2009 from 348 lakh tonnes in 2007-08.

Consequently, the sugar stock available at the end of the season, as a percentage of the total consumption, fell to an abysmally low 19 per cent.

This compares to the stock levels of 48 per cent in 2007-08. A fall in the sugar stock levels and strong demand led to spiralling sugar prices in the spot market.

The average sugar realisations leapt almost 52 per cent that year. Despite a lower production, higher realisation enabled a five times jump in the net profits for the sugar industry.

Similarly, in 2009-10, lower sugarcane production at 292 lakh tonnes and inventory at 27.2 per cent of the total sugar consumption helped a robust 35 per cent rise in sugar prices. The profitability of sugar companies rose by 125 per cent during the same year.

Production forecast

So what is the outlook for the current year? According to the industry body, Indian Sugar Mills Association (ISMA), sugarcane acreage may increase by 2 per cent in 2012-13.

This is based on the satellite data and inputs from farmers in Maharashtra and Karnataka.

But, thanks to the delayed monsoon, the sugar production is likely to soften to 240 lakh tonnes compared with 262 lakh tonnes last year.

Sugar price in the Indian market gained 17 per cent since July and are currently ruling at Rs 3,414/tonne.

In addition to a lower production forecast, recommendations by the C. Rangarajan committee have also helped to keep sugar prices buoyant.

The committee’s suggestions include opening up of sugar trade by freeing imports and exports, removal of the current 10 per cent levy obligation, uniform fair and remunerative price (FRP) and profit-sharing formula, wherein farmers will get a 70 per cent share of the total profits of the sugar mills (including profits from all the by-products).

These suggestions, if implemented, can lend stability and boost the industry’s profitability.



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