‘No Runaway Prices On Indian Front': Industry Expert Rahil Shaikh On Low Sugar Production

India’s sugar inventories are low and are only adequate to meet two months’ consumption, compared to the past five-year average of sustaining four months’ consumption. Poor monsoons this year have not just affected rice, wheat, and pulses production but also sugar. 

A report published on Tuesday by rating agency CRISIL said that production of sugarcane and sugar is projected to decline approximately 9% and 3%, respectively due to lower rainfall in the key sugarcane-producing states of Maharashtra and Karnataka.

“Yields in Maharashtra and Karnataka are down sharply. They're down by about 20%... In UP (Uttar Pradesh) probably (we) will see a better yield and recovery. UP may gain a bit… Maharashtra, Karnataka and Tamil Nadu may face a problem. Because of the rain, the agricultural recovery is badly hit in the state of Maharashtra and Karnataka,” Rahil Shaikh, managing director at MEIR Commodities told The Core.

Low Sugar Production

Sugar production in Maharashtra, the country's second-largest producer of the sweetener, was lower at 1.35 million tonne in October-November as against 2.02 million tonne in the year-ago period, according to the cooperative body National Federation of Cooperative Sugar Factories Ltd (NFCSFL). Sugar production in Karnataka, the country's third-largest producing state, was also lower at 1.1 million tonnes as against 1.21 million tonnes. However, the production in Uttar Pradesh, the country's top producer of the sweetener, remained higher at 1.3 million tonnes as compared to 1.06 million tonnes in the year-ago period, NFCSFL data showed.

To tackle the problem of lower production and increasing domestic availability, the central government extended restrictions on sugar exports which were earlier imposed till October 31 this year. Additionally, last week the central government also banned the use of ‘sugarcane juice and sugar syrup’ for ethanol production in the 2023-24 supply year that began this month. The move is aimed towards keeping prices under check. India's sugar production was down by 10.65% at 4.32 million tonnes during October-November, the first two months of the ongoing 2023-24 season, according to cooperative body National Federation of Cooperative Sugar Factories Ltd. 

Following the government's directive to not divert sugarcane juice and syrup for ethanol production in the upcoming 2023-24 season, sugar stocks like Balrampur Chini, Praj Industries, Dhampur Sugar and Dwarikesh Sugar recorded about 15-20% decline in the past week.

Shaikh said that the sugar industry had estimated that production this year would be about  29 million tonnes which would have been adequate to take care of domestic consumption. “But if next year, say we produce 27 million tonnes and we still divert 4-5 million tonnes, then we technically get into a deficit zone in 2024-25. To achieve the objective to ensure that domestic supplies are available, the government has disallowed the sugarcane juice base ethanol to be produced. And this for 2023-24 will bring in about 1.7 million tonnes of sugar back,” he said. 

Stable Domestic Prices

Sugar prices have been volatile globally this year. It hit a 12-year high in the international markets this year. Retail sugar prices have so far remained stable. International sugar prices are almost 50% higher than those in India, while the average retail price of sugar in the country is about Rs 43 per kg. “As far as prices are concerned it will replicate last year's programme. I think it will remain anywhere between Rs 35 to Rs 38 during season and offseason. As the supply has increased, there will be no runaway prices on the Indian front,” Shaikh said. He also said that as far as the world market was concerned, it collapsed by about $125, and since export is not permitted, the industry is observing how international prices would perform. 

He said that by incorporating curbs and restrictions, India has been successful in holding back enough sugar in the system and thereby ensuring that the prices remain within the government’s comfort zone. The government has also been able to provide sugar farmers protection against volatility in prices by increasing the Fair and Remunerative Price (FRP) on sugar. On June 28, the Centre announced a Rs 10 per quintal hike in sugarcane FRP, the minimum price that mills have to pay to sugarcane growers, to Rs 315 per quintal for the 2023-24 season starting October. The FRP of sugarcane has been fixed at Rs 315 per quintal for the 2023-24 season, up 3.28% from the current 2022-23 marketing year (October-September).

“Cane prices are rising, the cost of production is rising. If we want to have long term sustainability, then we need proper pricing in the domestic market so that the farmer continues growing sugarcane… If we don't grow the sugar cane enough, if the pricing is not right enough, in the long term, it can hurt us more. In my opinion, I think long term, we have to have a policy which can be determined well for the sugar price,” he said. 

Impact On Ethanol

Restricting the diversion of the sweetener for ethanol production is, however, being seen as a setback for the sugar industry. Companies like Balrampur Chini Mills, Shree Renuka Sugars, Ugar Sugar Works and Nirani Sugars, have created capacities to produce ethanol directly from cane juice/syrup. Ethanol is 99.9% pure alcohol that can be blended with petrol. The all-India average blending of ethanol with petrol rose from 1.6% in 2013-14 to 11.8% in 2022-23. This diversion is expected to cause a notable drop in ethanol volume projections for FY25. The government has targeted 20% ethanol blending in petrol by ethanol supply year 2025-26. 

The central government paid mills more for ethanol that was being produced from feedstocks other than C-heavy molasses. For 2022-23, the ex-distillery price of ethanol payable by state-owned oil marketing companies (OMS) was fixed at Rs 49.41 per litre if made from C-heavy molasses, but at Rs 60.73, Rs 65.61, Rs 58.50, Rs 55.54 and Rs 56.35 if from B-heavy molasses, sugarcane juice/syrup, surplus FCI rice, broken/damaged grain and maize respectively. In previous supply years (December-November) till 2017-18, the oil marketing companies paid a uniform price for ethanol irrespective of feedstock.

“Government will have to come in with a revised pricing on C-heavy molasses and ensure that C-heavy molasses is available in the country. And B-heavy molasses prices also need to be increased accordingly, to achieve 10-11% blending. And as far as the consumer is concerned, I think we probably have no direct impact because at the end of the day petrol prices are stable with a 20% blending programme,” Shaikh said.