>Sugar sector at a critical juncture

The Indian sugar sector stands at a cross road. The sector awaits to hear advance estimates of production from both Brazil and India as we enter the crushing season in a few of months in Brazil coupled with the advance estimates on acreage for India for the next sugar season. The Brazilian output estimates will be watched very closely, as the country emerges out of two consecutive years of bad weather conditions, which adversely impacted the production. The extent of recovery in production will be watched closely, as far as international sugar price expectations are concerned. On the domestic front, acreage increase/decrease will be watched closely, as arrears have started building up in the key cane growing states and the impact of the same on acreage will play a critical role, as far as expectation for the next years sugar cycle is concerned.


On the regulatory front, the Indian sugar millers are closely awaiting any incrementally positive news flow, as far as de-regulation is concerned. Given the pace of activity lately, partial de-control seems likely, though we are of the opinion that it would largely be in a phased manner. We are, hence, of the view that any news flow emerging out of India or Brazil which points towards lower production in the next sugar season would be incrementally positive coupled with positive news flow on the de-regulation front. On the negative side, higher than expected production and acreage gains in Brazil and India, respectively, may put pressure on sugar prices.


Key Highlights
■ Global sugar markets: Regional dynamics at play
The sugar industry globally is dominated by two key producing countries — India and Brazil. Together the two countries account for ~38% of the total global production. While India is the key sugar consuming market globally, with total consumption being pegged at ~22-23 mn tonnes per annum (mtpa), Brazil is the largest exporter of sugar accounting for 46% of the total sugar exports in 2010-11. The global sugar market balance is largely determined by the policy measures at play within the various countries. In India, the sugar industry is largely protected and controlled by the government regulations ranging from fixing of minimum support price (MSP) of sugarcane to distribution of sugar. The European Union (EU) markets also adopt a similar policy for protecting the domestic sugar industry, however, post World Trade Organisation (WTO) negotiations in mid 2000; EU has started importing sugar from preferential countries. Further, as per the agreement signed between the WTO and EU, the EU’s total out of quota sugar sales (i.e. sugar exports) are capped at 1.35 mtpa. The Brazilian sugar industry, on the other hand, largely operates in a free market system with large government focus on development of ethanol, since the early 1980s. Hence, the prices in the world sugar markets are largely determined by the forces of demand and supply along with the government responses towards the sector within different countries and regions.


■ Global ethanol market: US and Brazil, the two dominant players Ethanol, also known as ethyl alcohol, is produced through the hydration of ethylene and via fermentation of agricultural produce such as sugarcane and corn. Ethanol is a low carbon emitting fuel as compared to hydrocarbons and has found its use world-wide as clean energy. Ethanol is used both as a blend and direct automotive fuel globally with countries promoting the fuel primarily on two counts (i) to reduce dependence on oil imports and (ii) to reduce carbon emissions. US and Brazil are the largest suppliers of the fuel contributing ~86.5% of global ethanol supply. The Brazilian ethanol market received a push, post the 1973 oil shock, wherein the government started the pro-alcohol programme with a view to reduce dependence on imported oil. Further, the government also provided tax incentives for the use of flexi fuel cars, which can run on 100% ethanol and gasoline.


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