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7th October, 2010

SUGAR

Presented by:

Subhranil Dey

The wheel that squeaks the loudest

is the one that gets the grease-Josh Billings

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CONTENT

1. Concept of sugar cycle 3

2. India's sugar season 2010-11 A snap shot 3

3. Cane pricing 4

4. Production scenario 4

a. India

b. Brazil

5. Powering up supply & re-affirming exports potential India 6

6. Price Movement-comparison of pre and post ban period 6

7. Seasonality of sugar prices in India 7

8. International price movement 7

9. Highlights of quarterly market outlook August 2010 - INTERNATIONAL SUGAR ORGANIZATION 7

a. World

b. India

10. Business opportunity - Ethanol Blended Petrol (EBP) Programme 9

11. De-regulation of Sugar Industry 11

12. Recent developments 11

13. Conclusion 11

Graphics in report

Sugar cycle

Snapshot of Indian sugar industry

Year-on-year percentage change in sugar production

Comparison of fourth advance estimate of sugarcane production

Rainfall map on sugar producing regions

Comparison on price movement (Pre & post ban period)

International price movement

Seasonality index

World sugar balance

Cane & sugar prices in India

Fuel ethanol production in Asia

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Adding

sweetens the dish a bit more.

But, every piece of sugar cane

grass land adding

makes the price bitter

every grain of sugar,

3

Starting with the sugar cycle, it follows a 3-4 years cycle with a bumper SNAPSHOT

harvest resulting in higher inventory levels. Going around the India's sugar production in 2010-11 expected to rise to 25.5 milliondowntrend in the sugar cycle starts with increased availability of sugars,

tonnes. The opening stock of sugar on October 1, 2010, will be 5.8decline in sugar prices. This prompts the farmers to switch over to other

million tonnes as against 3.2 million tonnes on October 1, 2009.crops resulting in lower cane production. All these leads to higher sugar

Domestic demand of sugar is about 22.5-23 million tonnes.prices and the cycle turns around.

Source: USDA, FAS, PSD database

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Source: SMC Research & Reuters

Cane Pricing

After a two-year freeze, India in June 2009 raised the MSP by a third to INR1,077.60/tonne from INR811.80/tonne in the previous two seasons. Last

December, that was increased further to INR1,298.40 (USD1=INR 46.47) per tonne. For 2010/11, the minimum price has been set higher at INR

1,319.12/tonne.

As per the latest sugar balance sheet prepared by the Indian

Sugar Mills Association (ISMA):

Production in 2009-10 crop season that will end in September 30, is

projected to be around 18.8 million tonne

Added to 5.3 million tonne of imports (both raws and refined) and

Opening stocks of 3.2 million tonnes.

Ensured supplies to around 27.3 million tonne.

This year projected demand to be around 21.4 million tonne.

RAIN GOD's BLESSING

Weather conditions in Brazil and India are a factor behind the price

increase in recent weeks. Two consecutive years of below-average

production drew down Indian stocks and forced the country to become

a significant net importer in the 2008/09 and 2009/10 marketing years,

which put stress on the world supply and demand balance and pushed

up prices in 2009/10.

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1998-99 1999-2000 2000-2001 2001-02 2002-03 2003-04 2004-05 2005-06 2007-08 4thAdvanceestimate

FinalEstimate

Targets 4thAdvanceestimate

2008 -09 2009 -10

COMPARISON OF FOURTH ADVANCE ESTIMATE FOR SUGARCANE PRODUCTION

Lakh tonnes

Source: Agricultural Statistics Division

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5

MAHARASHTRA - During this season the rain gods have been very kind to Maharashtra. In the last two months, out of the 35 districts, 29 have received

over 100 per cent rainfall. Maharashtra expects to produce 86.50 lakh tonnes (lt) of sugar during the 2010-11 season starting October.

Total cane area = 10.22 lakh hectares

Average yield of 81 tonnes/ hectare

Production = 827.36 lakh tonnes

Crushing by mill = 752.15 lakh tonnes

Average recovery of 11.5 per cent

Sugar output = 86.50 lt for the new season

UTTAR PRADESH - Sugar output in India's top cane producing state

of Uttar Pradesh is likely to be 9-12 percent below previous estimatesafter floods ravaged plantations. The estimate of 6.0-6.2 million

tonnes for the season beginning in October is still above this season's

5.8 million tonnes. The state government had initially forecast output

of 6.8 million tonnes.

KARNATAKA

The area under cane has gone up by 125 per cent as against the

normal planting of 315,000 hectares as on August 9.

Mills in the state achieved a sugar recovery rate of 10.79 per cent

as against 10.43 per cent in the previous year.

The total cane crushed would touch 22.8 million tonnes by

September as against 15.4 million tonnes crushed last year, a

growth of 48 per cent.

For the next sugar season commencing in October 2010, mills in

southern Karnataka have already announced advance payment

of`1,800 a tonne, which is 28 per cent more than the fair and

remunerative price (FRP) announced by the Centre.

BRAZILIAN CROP

In terms of the October/September season, in 2010/11 Brazil's sugar

production is expected to grow to 39.585 mln tonnes as against

estimated production of 39.374 million tonnes, raw value, during

2009/10.

Country Beginning stock Production Consumption Change stock Ending stock Import Export Total Exports

Brazil 3747 39585 12670 0 3747 - 26915 26915

India 6606 27445 25900 600 7206 25 970 945

OVERVIEW FOR SEASON 2010/11

Figures in thousand tonnes, raw value - October/September Year Source: International Sugar Organizational

In the overall, considering the

These figures depicts that once again the sugar price may fall in stream line.

stock figures along with the production, the supply is estimated to remain more than the consumption.

USDA PROJECTIONS

The US Department of Agriculture (USDA) has pegged India's sugar

production at 23.6 million tonnes in the ensuing 2010-11 sugar year,

making an increase of over 26 percent from last year (19 million

tonnes).

According to USDA projection, India''s leading sugar producing state

Maharashtra is expected to produce a record 9.5 million tonnes of

sugar this year, against 7 million tonnes last year.

Sugar production in Uttar Pradesh, the country''s second biggest

sugar producing state, may rise to 6.2 million tonnes from 5.18 million

tonnes in the review period.

Barring Karnataka, sugar output is seen to rise in almost all sugar

producing states like Andhra Pradesh, Bihar, Haryana, Punjab,

Gujarat, Tamil Nadu and others.

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The cost of production had been worked out to `30-31 a kg, asPOWERING UP SUPPLY & RE-AFFIRMIMG EXPORTSbecause sugarcane price has moved to `22-24 a kg from `15-16 lastPOTENTIALyear.

The Government has just reduced by nine months the time allowed forThe average realization was`21 a kg.the re-export of white sugar under the ALS T4T. The deadline is now

31st March, 2011 instead of 31st December, 2011. The food ministry had cut down the sugar quota for release in the

open market to 14.50 lt for July, which is 0.4 lt lower than in last JulyAfter several months of export ban, India has recommenced exports.and will include a carry-over of 2lt from the June quota besides whiteAround 25000 tonnes have been shipped to Sri Lanka and anothersugar processed out of raw's in May (1.85lt) and imported white300000 tonnes are understood to be in line for export to Pakistan andsugar (0.50lt) in addition to a normal quota of 10.15 lt.Bangladesh. The exports, however, are expected for the present under

the re-export policy for raw sugar imports under the Advanced License The price rise in domestic market, made imports viable once again. The

Scheme (ALS). union government has allowed duty-free import of raw sugar to tideover the domestic production shortfall. In the 2008-09 season domestic

sugar output fell 42 per cent to 15 million tonnes, causing retail sugar

To the FUTURES MARKET. A Long-lasting vapor prices to more than double. Sugar producers and traders imported 2.29

million tonnes of raw sugar and 225,000 tonnes of white sugar in theFutures trading have always made a positive impact on price discovery.

2008-2009 season to bridge a deficit & jack-down the prices. TheTrading in Sugar futures was introduced at NCDEX and MCX on 27th July

country purchased 480,000 tonnes of lentils in the year started April 1,2004 and 18th August 2004, respectively.

the ministry said. Of the imports, 297,000 tonnes arrived at ports untilThe ban was imposed in May 2009. The suspension of futures trade was November 5, 2009.valid upto September 2010. In recent days, the sugar prices had seen

Later, by the year end, govt. passed a bill that introduced a newsome mind-boggling prices on the retail level. There were many reasons

sugarcane price regime, that enabled the government to pre-empt thefor the upstream.

sugar industry's claim of about`

14,000 crore on it on account of levyprice fixation.

Pre-Ban & Post-Ban Period

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Spot Prices (Muzzafarnagar) Futures (NCDEX)

After ban of futures trade, May 2009sugar price rises by 78% (approx.) to

Post-Banperiod

Govt. control

Source: SMC Research

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harvesting delay in Australia and flood in Pakistan are the major priceThe Big Downshift In Indiadrivers and created a global supply concern. About $3.27 billion valued

Domestic prices have slumped to 25 a kg from record highs of around sugarcane crop is got damaged in Pakistan due to floods and about 50%`46 a kg in January mainly due to stockholding limit on bulk consumers.

cane harvesting being lagged due to rains in Australia.The Food Ministry has decided to relax the stockholding limit for bulk

users and now they can store sugar equivalent to 90 days of their

requirement. In August last year, the government had imposed the

stockholding limit on bulk consumers, asking them to refrain from

stocking sugar for more than 15 days. Later, in February this year, the

government had reduced the stockholding limit to 10 days, which was

again brought back to 15 days in May.

Seasonality Indian Scenario

Analyzing the seasonal index of Indian sugar prices, the prices remain

under the pressure till the third quarter of the year. The fourth quarter is

a seasonal buying period, as the market witness a recovery because of

the festive season.

Price Movement - International

Sugar rose to a five-month high in New York and extended gains in

London after the U.S. Department of Agriculture signaled that domestic

supplies are dwindling. The U.S. will allow one extra month for sugar

imports for the current fiscal year, through Oct. 31, because of

increased tightness in the U.S. raw-sugar market. There is a newbullish target for New York sugar as an ascending channel remains

intact.

ICE raw sugar futures for nearby October delivery climbed to a seven

month high of 0.75 cent higher at 26.84 cents a pound amid on concern

that adverse weather will curb output in Brazil and Australia by which

signs of strengthening demand and supply concerns. Sugar is still

climbing within a big channel with a bullish target at 30 cents, which

could be achieved in days to come. Dry weather in Brazil, cane

`

Surplus crop (if projection by ISO is validated by crop developmentsHIGHLIGHTSin the course of 2010/11) price advances are likely to be capped.

For World

Global sugar consumption in 2010/11 is put at 167.154 million tonnes,The first forecast of the world sugar balance for the period from

raw value (including 2.986 million tonnes of adjustment for unknownOctober 2010 to September 2011 puts world production at 170.375

net trade). Growth rate of consumption increase by 2.06%.million tonnes, 3.221 million tonnes higher than world

Global white sugar export availability is also forecast to shrink toconsumption.

18.673 million tonnes, down 1.280 million tonnes from 2009/10.The 2010/11 picture contains two major elements of a surplus

The increase of export availability in Brazil (+925 thousand tonnes)market:

is not sufficient enough to cover numerous decreases projected for

Projected world production is higher than consumption; nearly all other major exporters including Thailand (-475 thousandExport availability exceeds import demand (50.557 and 48.625 tonnes), Australia (-325 thousand tonnes), South Africa (-275

million tonnes, correspondingly). thousand tonnes), Mexico and Swaziland (-200 thousand tonnes

each).

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Seasonal Index v/s Monthly Price Movement

P ri ce I nd ex M on th ly P ri ce

`/Quintal

Source: SMC Research

Source: SMC Research & Reauters

QUARTERLY MARKET OUTLOOK 2010 - INTERNATIONAL SUGAR ORGANIZATION

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135,278

158,830

170,375

125,758

163,779167,154

9,520

-4,9493,221

55,171 54,903 56,192

43.87%

33.52% 33.62%

0

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-20,000

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140,000

160,000

180,000

in mln tonnes, raw value in %WORLD SUGAR BALANCES (October/September)

Production Consumption Surplus/deficit End stocks Stocks/consumption ratio in %

Source: SMC Research

For India

India is expected to re-join the exporters' camp with estimated net-

exports of 945 thousand tonnes as against estimated net-imports of 3.3

million tonnes in 2009/10.

In 2010/11, for India it is expected that the indicative gap between cost

and realization will be the highest in history.

A statistical surplus is currently projected at 1.445 million tonnes, but the

ISO suggests that some of the surplus may be used for re-building the

stocks depleted during the past two seasons of acute deficit.

At this early stage of the season India's export availability is put at 0.970

million tonnes.

The highest growth rate of consumption @ 4.44% is projected for Indian subcontinent. Sugar use in the region is forecast to grow by 1.277 million

tonnes or 4.02%. Consumption is projected to reach 31.430 million tonnes or 19.8% of global use of sugar.

India's fuel ethanol consumption is forecasted to rise to 140 million litres as against an estimated 90 million litres last year.

Molasses production is presently expected to rise massively in 2010/11 on the back of a forecasted 25% increase in sugar output. This would likely

ensure India returns as the largest exporter of cane molasses in 2011.

Source: International Sugar Organization

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OTHER TOPICS RELATED TO INDUSTRY

BUSINESS OPPORTUNITY - Ethanol Blended Petrol (EBP)

Programme

The national demand for ethanol is 100 crore litres per year.

Assessing the huge market, the cabinet committee on economic

affairs (CCEA) cleared a thought to approve the proposal for

implementation of ethanol blended petrol (EBP) programme. The

panel recommends the blend percentage up to a limit of 10 percent

in the states and union territories, except North- Eastern States, J&K,

Andaman, Nicobar and Lakshadweep. The committee also raised the

price of ethanol for blending with petrol at `27 per litre from existing

`21.50 per litre.

India has 330 distilleries which produce 4 billion litres of rectified

spirit (alcohol) per year. Of the total distilleries, about 115 distilleries

have the capacity to distill 1.8 billion litres of conventional ethanol

per year sufficient to meet the 5% blending mandate.

The brief details of the proposal are:

(i) Fixing of an ad-hoc uniform ex-factory price throughout the country at `27/- per litre for ethanol procured by Oil Marketing Companies (OMCs) from

the date of communication of the order till the time price is recommended by the expert committee and a decision taken thereon by the competent

authority. The price of`27/- per litre would be purely interim in nature and subject to adjustment from the final price so determined.

(ii) Noting the order for constitution of Expert Committee for pricing of ethanol, under the Chairmanship of Dr. Saumitra Chaudhury, Member Planning

Commission, with Principal Advisor (Energy), Chairman, CACP, Joint Secretary from Ministry of Petroleum and Natural Gas, Joint Secretary Sugar), a

representative of Sugar Industry, and a representative from Oil Industry, as members. The committee would follow the procedure to determine the

formula/ principle for pricing of ethanol. The Committee will submit its recommendations expeditiously.

(iii) Instructing the OMCs to close all existing tenders and begin procurement of ethanol at the uniform ex-factory ad-hoc price of`27/- per litre from

indigenous sources only. Thereafter the procurement would be done at the price approved on consideration of the recommendation of the Expert

Committee.

(iv) The procurement would be done under supply contracts with penalties on sugar industry for default in supply and on oil industry for not lifting ethanol.

(v) The suppliers would need to fulfill all contractual obligation under existing supply contracts including for extended period.

(vi) The OMCs will bear the transportation charges from the factory to the depot on the same rate at which the OMCs transport their products. The actual

transportation would be done by the sugar factories. The OMCs would also bear the cost of import/ export-fees, taxes etc. as applicable.

(vii) Constitution of a Working Group of officers which shall apart from allocating quantities and locations amongst suppliers, ascertain the availability of

ethanol and recommend the blend percentage in the States and UTs up to a limit of 10%.

A Study: According to a 2007 report from the Institute of Defence Studies and Analyses (IDSA), 80 million litres of petrol could be saved

annually in India by blending petrol with 10 percent biofuel.

Source: International Sugar Organization

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Projected Benefits

Enhancing benefits to the sugarcane farmers.

Ensure that there is no adverse impact on oil or the sugar industry.

The proposal relating to variable percentage of blending would ensure that surplus of ethanol available in different states is adequately absorbed in

the EBP Programme at the same time, deficit in supply in some parts of the country does not adversely affect the programme on all India basis.

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For every tonne of cane crushed, mills produce roughly 100 kg of sugar,RECENT DEVELOPMENTS45 kg of molasses and 300 kg of bagasse (of which 210-220 kg is used toAfter several months of export ban, India has recommenced

meet a mill's steam consumption requirements, leaving a surplus of 80-exports. Around 25000 tonnes have been shipped to Sri Lanka and

90 kg).another 300000 tonnes are understood to be in line for export to

Pakistan and Bangladesh.

The govt. had given an extension till August 31 to complete theSUGAR DE-CONTROL

sale of sugar quota released for the month of July. Millers could notWeeks after an announcement to decontrol petrol, the government

sell the entire July quota of sugar within the stipulated time owinghinted at a possible decontrol of the sugar sector, where output is set to

to poor offtake from bulk consumers, who account for 60% of therise.

country's annual sugar demand of 23 million tonnes.It would mean professional functioning and not having to keep

The Union Government relaxed the stockholding norms for bulkapproaching the government for loan guarantees

consumers from 15 days to 90 days. This announcement stabilisedHaving the market determine the price would benefit both mills the price at a lower level. Good quality white sugar was in demand.

and sugarcane growers Mills were reluctant to sell, expecting good premium compared to

the regular quality.After decontrol, mills would not need government guarantees or

various packages.The Indian state of Maharashtra yesterday banned imports of

sugarcane from other states to tackle a 30% surplus in production.Also enable cane growers to plan better.

The state of Maharashtra also plans to press into service 20Post de-control, the sugar prices will be linked to international

additional sugar mills in new season beginning from October 1,prices

2010 for which the state government will stand as a guarantor forDecontrol may well exert a downward push on prices as a result of

bank loans. The state has about 190 mills, mostly co-operative.the freedom that factories will get to offer for sale any amount of

The government plans to operate 163 mills in 2010-11 season.sugar that they wish to offload from their buffer stocks

The industry now needs freedom, for value-added diversification

into bio-fuels, cogeneration of power and bioengineering of WRAP UP

crushed cane bagasse into organic fertiliser.The fall in international sugar prices along with improved international &

Global capital will flow into domestic sugar industry as it is domestic supply scenario following higher crop in India, sugar prices

happening in Brazil. Large money flows into any deregulated may feel renewed pressures. As far as the medium to long-term outlook

sector. is considered, the price trends in international markets would be the key

determinants of future profitability with the crude oil price trends, which

determine the diversion of cane crop to ethanol.However the ministry made it clear that the right to fix the support price

of cane for farmers will definitely be with the government. The

objectives of sugar decontrol will be served fully only if the contentious

system of cane price fixation by the Centre and the states is also done

away with.

At the SPOT MARKET.

In the Vashi sugar market: (`/Qtl.)

S-30 grade @ 2,630-2,650

S-grade sugar @ `2,600-2,630 (Naka delivery)

M-30 @ `2,660-2,720

M-grade at`2,640-2,690(Naka delivery).

`

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Delhi High court.

For further any queries, please contact

Subhranil Dey Research Analyst subhranildey@smcindiaonline.com

Ph.: 011-30111000

Extn.: 6953