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Page 1: Sugar Final

Minal\d:\NCDEX\Sugar Cover.cdr

Page 2: Sugar Final

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What are Sugar futures?

Sugar Futures are exchange traded contractual obligations

to make or accept delivery of a specified quantity and

quality of Sugar during a specified time in the future at a

price agreed upon at the time the commitment is made.

Through Sugar futures contract a Sugar mill or trader will

be able to transact a series of contract set for a specified

period of time in future say 8-10 months ahead in time for a

standardized specification of Sugar (as per our contract)

for a specified location of delivery but only the prices

quoted by the buyers/sellers vary.

Who are the main participants in Sugar Futures markets?

There are three main types of participants in any futures

markets. These are

l Hedgers

l Speculators and

l Arbitrageurs.

Hedgers are users who like to reduce the price risk they

face from potential price movements. Often, hedgers are

willing to sacrifice the potential upside to gain certainty

about prices.

Speculators are participants who like to take directional

view of future price movements and take on the risk that

hedgers like to reduce.

Arbitrageurs are participants who exploit price differentials

on the same commodities / contracts that are traded on

two different markets (for e.g. between futures prices in two

exchanges).

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Major producers-Brazil, India, EU

Sugar is produced in 115 countries. Sugar is extracted

from two different raw materials

l sugarcane

l sugar beet

Sugar

Sugar (sucrose) is a carbohydrate that occurs naturally in

every fruit and vegetable. It is the major product of

photosynthesis, the process by which plants transform the

sun's energy into food. Sugar is separated for commercial

use from sugarcane and sugar beet in which it is abundantly

available.

Global Scenario

World Sugar Production

Sugar: World demand-supply

('000 tonnes,

raw value) 1999-2000 2000-01 2001-02 2002-03

Opening stock 32,372 36,133 37,424 33,989

Production 136,531 130,495 134,888 147,336

Imports 36,073 38,646 37,695 39,169

Total Supply 204,976 205,274 210,007 220,494

Exports 41,448 37,686 41,228 45,724

Domestic

consumption 127,395 130,164 134,790 137,725

Closing stock 36,133 37,424 33,989 37,045

Stock-to-use ratio 21.4 22.3 19.3 20.2

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Sugarcane is cultivated under tropical climates, while sugar

beet is grown in temperate regions. Around 75% of the

sugar produced in the world is from sugarcane, with beet

sugar accounting for the rest.

Sugar : Sugar producing country profile

Total number of 115 Brazil, India,

countries European Union

Produce from 67 Brazil, India,

cane only Thailand, Australia,

Cuba

Produce from 39 European Union,

beet only US, Turkey, Ukraine,

Poland and Russia

Produce from cane

and beet 9 -

World Sugar Trade

Sugar is a widely traded commodity in international markets.

70% of world sugar production is consumed in country of

origin; only the balance 30% sugar is traded in international

markets. The distortions in world sugar are:

l Small percentage of free sugar trade as compared

with total world production

l Various policies of governments of sugar

producers have impact on sugar production and

trade

l Production of 40% of sugar is highly subsidized.

World sugar prices are significantly below the

average cost of production because of various

trade protective policies used by various countries

(refer Table below)

l Domestic prices of 90% of the sugar sold are higher

than the international prices.40% of world sugar

production is sold in international markets at prices

50% to 400% higher than the prices in international

market.

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Sugar: Forms of support adopted by different countries

Minimum Minimum Import Export Other

support sugarcane Controls Subsidies forms of

price for support Support

sugar price

EU India Brazil EU Australia

USA EU EU USA Brazil

China USA CUBA EU

USA Cuba South Africa USA

Japan Turkey Turkey Columbia

Thailand S. Africa India Cuba

Turkey Thailand Mexico

China Thailand

Japan S. Africa

Turkey

India

EU: European Union Source: CRIS INFAC

Note: This is only an indicative list

l Production of sugar in the world is not responsive to

change in prices

l Perennial nature of sugarcane crop - around 75%

of the world area is under sugar crops.

l Ratoon crop grown by sugarcane producers due

to which it is extremely difficult to match sugar

production with price conditions

l Lengthy gestation period for investments in sugar

manufacturing and refining

l Production of sugar is sensitive to weather

conditions

l Export concentration

l Sugar export is concentrated among a small

group of countries- just 5 countries account for

around 66% of world sugar trade

l Major Exporters of sugar - Brazil, EU, Thailand,

Australia, Cuba

l Leading exporters are leading producers of sugar

l Limited number of key sugar exporters makes

the world prices heavily dependent on the

demand-supply position of these countries

l Production status of sugar in key exporting

countries affects world sugar prices

l Varying dependence of sugar exporting countries on

exports

Although Brazil is the largest producer of sugar in the

world but it is not the heaviest dependent on sugar

exports due to its ethanol programme. Amongst major

sugar producers, Australia is the most heavily dependent

on exports. The following table shows the dependence

of sugar producing countries on exports:

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Sugar : World Exports

Production Exports Exports as

Million Million a % of

Tonnes, Tonnes, Production

raw value raw value

India 22,100 1,950 8.82

Australia 5,371 4,220 78.57

Brazil 23,810 14,000 58.80

China 10,637 120 1.13

Cuba 2,000 1,350 67.50

European Union 18,675 5,600 29.99

Mexico 5,229 46 0.88

Thailand 7,303 5,100 69.83

USA 7,600 129 1.70

Source: USDA and CRIS INFAC Data pertains to 2002-03

l Import diversification

l Sugar import is diversified over more than 100

countries. The import requirements of around

100 countries have to be added up to arrive at

the quantum of exports by the top five exporters.

This reflects the widely dispersed nature of

imports

l Major Importers of sugar - Russia, Indonesia,

EU, Japan, USA, Korea, Malaysia, China, Algeria,

Iran etc

l Import duties imposed to curb imports and offer

protection to domestic production. The world

average of import duties is estimated to be

around 79%. India has an import duty of 60%

plus a countervailing duty of Rs 910 per tonne

l Declining share of beet sugar production.

The beet sugar production is declining and also the

cost of production of sugar from beet is costlier than

the sugar produced from cane.

l Differences in rate of growth of sugar consumption

between various continents

l Impact of WTO on world sugar trade

Liberalisation of the world sugar industry under the

WTO is not expected to adversely affect the Indian

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sugar industry. In India, the sugar imports could be

reduced marginally, from the current level of 60%.

(At present, the customs duty in India is lower than the

WTO bound rate of 150%, and the customs duty of

most developed countries is higher)

With the likely removal of the levy quota and quarterly

free-sale quota release systems imposed on the

domestic producers, restrictions on sugar imports

would also have to be removed. As a result, sugar

prices in India would be aligned with the international

prices of sugar.

Given the likely increase in world sugar prices, with

the liberalization of the world sugar markets, import

pressures could be lower in India. Hence, domestic

prices of sugar could increase. In the long term,

export opportunities for efficient Indian sugar

producers would increase.

l Slow response of demand - supply with respect to

changes in prices

l Most of sugar consumption is in developed

countries

l Developed countries have low or nearly zero

price elasticity because sugar consumption

accounts for a marginal proportion of their

disposable income

l Consumption of sugar in developed countries is

in processed food form and the corporate buyers

of sugar in these countries ( food processors

like soft drinks, biscuits, confectionary producers)

are more concerned with preserving the market

shares of their products than the price of raw

material, sugar

Indian Scenario

India has been known as the original home of sugar and

sugarcane.Indian mythology supports the above fact as it

contains legends showing the origin of sugarcane.

In global sugar economy, the Indian sugar industry has

achieved a number of milestones.

l Largest Sugar Producer in 7 out of 10 years

l Second Largest Area under Cane/Cane Production

l Amongst the cost-effective industries with its field cost

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(Sugar cane) being the second lowest, despite small

land-holdings and low productivity

l Fourth efficient processor of sugar despite low

capacity of its sugar plants as compared to very large-

size plants in other parts of the world.

Sugar: India's share in global production

(Million Global India's Indias

tones) production production production

as a % of

global

sugar

production

1997-98 127.0 14.0 11.0

1998-99 133.4 16.9 12.7

1999-00 136.2 19.8 14.5

2000-01 130.0 20.1 15.5

2001-02 135.2 20.1 14.8

2002-03 143.0 21.6 15.1

Source: International Sugar Organization

Indian Sugar Industry

No. of Sugar factories established 507

Total Capital Employed Rs. 50,000 Crores

Total Annual Turnover Rs. 25,000 Crores

Total Payment to Cane growers Rs. 18,000 Crores

Contribution to Central &

State Exchequers Rs. 1700 Crores+

800 Crores

Direct Employment:

Rural Educated 5.00 Lakhs

Farmers / Families

involved in Sugarcane

(7.5% of Rural Population) 45 Million

The Indian Sugar industry is the second largest agro-

processing industry in the country. It can be broadly

classified in to two sub sectors, the organized sector i.e.,

sugar factories and the unorganized sector i.e.

manufacturers of traditional sweeteners like gur and

khandsari.

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INDIAN SUGAR INDUSTRY

Agronomic Suitability /Geographic Location

Sugarcane (Saccharum officinarum) is the main source of

sugar in India and holds a prominent position as a cash

crop. It accounts for 60-65% of the cost of production of

sugar. India is the second largest producer of sugarcane

next to Brazil. Presently, about 4 million hectares of land is

under sugarcane with an average yield of 70 tonnes per

hectare.

Sugarcane Production

Sugarcane production depends on the sugarcane area

under cultivation and the sugar yield. The total sugarcane

area under cultivation depends on:

l Profitability of sugarcane cultivation compared with

that of alternate crops

l Weather conditions during the previous and current

seasons

l Rationing

l Promptness in the payment of the sugarcane dues of

the previous sugar season

l Overall sugarcane yield would depend on

l Type/variety of seed used

l Extent of ratoon crop

l Weather conditions/climate during the sugar season

Organized Sector (Sugar) Unorganised / TraditionalSector (Gur & Khandsari)

Co-operatives

Private

Public

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l Soil conditions

l Availability of water

l Weed, pest and disease control

Sugarcane Crop features

Sugarcane is a tropical crop grown in a frost-free and

warm climate (high temperatures for at least 8 months).

The crop grows for 8-24 months, depending on the climate.

(In general tropical varieties are adapted to an 18-36 month

growing period, while subtropical varieties are adapted to

a 9-12 month period.) It grows best on medium heavy

soils, but can also be raised on lighter soils and heavy

clays, provided there is adequate irrigation available in the

former type of soils and drainage is good in the latter type

of soils. The crop grows best in the tropical regions

receiving a rainfall of 750 to 1200 mm.

Sugarcane is planted vegetatively, wherein a one metre

piece of sugarcane is laid end-to-end in a row, with plants

forming on the nodes of the sugarcane. In order to facilitate

cultivation and easy use of herbicides for early weed control,

the planting is done in rows about 6 feet apart. With plants

becoming taller, the lower leaves along the stems ultimately

drop off and only leaves toward the top remain green and

active. The stems have a hard, thin, outer tissue or rind and

a softer center between the nodes. The high sugar

containing juice is in this centre whose sweetness is

measured by sucrose content of the cane.

Sugarcane Crop in India

India had ideal conditions for growing sugarcane at a low

cost, such as tropical climate, easy availability and low

cost of labour, and low cost of irrigation facilities. More

than one crop is harvested from a planting and after the first

crop is removed, two or more so-called stubble crops

(ratoons) are obtained.

Planting season normally starts in between February to

April, harvesting starts from the following October and

crushing starts in October, peaks in January and continues

till March.

In India, around 90% of the sugarcane cultivation is under

irrigated land. The irrigated area under sugarcane

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cultivation accounts for around 5 % of the total irrigated

area.

Water intensity of sugarcane

Sugarcane is a very water intensive crop. It is second to

paddy in water requirements as shown below:

Crop Water Duration Frequency No. of crops

required per year

(inches)

Paddy 51 2 hours Once in 3 days for One in rainy

4 months season

Sugarcane 40 2 hours Once in 3 days for One crop

4 months

Cotton 21 5 hours Once in 14 days for One crop

4 months

Ragi 21 3 hours Once in 14 days One/two crops

Groundnut 16 4 hours Once in 14 days for One crop

4 months

State wise sugar profile

In India the major sugarcane producing areas are Andhra

Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu and

Uttar Pradesh. These states account for 85-90% of the

sugarcane produced in India.

Major sugar producing states - Maharashtra, UP,

Karnataka, Tamil Nadu, Gujarat, & AP

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Sugar : Statewise Profile

AP Karnataka Maharashtra TamilNadu UP

Area ('000 ha) 234 385 599 284 1852

Yield (tonnes/ha) 65.8 84.4 61.8 106.8 62.8

Cane crushed

('000 tonnes) 11980 17303 53441 16645 59271

Duration of crushing

(days) 130 157 122 173 158

Sugar recovery rate

(%) 10.10 10.79 11.64 9.88 9.53

Cane production

('000 tonnes) 15387 32479 37015 30282 116324

Sugar production

('000 tonnes) 1210 1868 6219 1644 5651

Data pertains to 2002-03

Production Process and By-products

Sugar is primarily extracted from sugarcane and beet. The

difference between the production processes of sugar from

the two raw materials is minor. In India the process of

manufacturing sugar is as follows:

Sugarcane

Extraction of juice

Clarification of juince

Evaporation

Pan-boiling

Crystallisation

Centrifugation

White sugar

pressmud

Bagasse

Co-generationof power

Recovery Molasses

Industrial &PotableAlcohol

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Extraction of the cane juice from the sugar cane, usually by

crushing the sugar cane (at this stage the sweet juice

contains many impurities - the soil from the fields, some

small fibers and green extracts from the plant)

After settling out much of the dirt and other impurities, the

juice is thickened into syrup by boiling off much of the

water (evaporation)

The syrup is placed into a very large pan for boiling and

more water is boiled off until conditions are right for sugar

crystals to grow

Once the crystals have grown the resulting mixture of crystals

and syrup is spun in centrifuges to separate the two (like

spinning clothes in a washer). The crystals are then given a

final dry with hot air before being stored.

The final raw sugar is like a soft brown sugar and is stored

in a large sticky mountain. It can be used like that but usually

it gets dirty in storage and has a distinctive taste, which

most people don't want. That is why it is further refined to

produce white sugar for human consumption. Additionally,

because one cannot get all the sugar out of the juice, there

is a sweet by-product made - molasses.

By-products

There are essentially three main by-products generated

by the sugar industry.

Bagasse: It is the other major by-product of the sugar

industry. It is used for generation of steam and power

required for processing of sugarcane.

Molasses: It is a prime input for the manufacture of alcohol

and Alco chemicals like acetic acid, acetic anhydride. It is

also an important constituent for the production of

compound cattle feed.

Press-Mud: It is rich source of manure for crops.

A ton of sugarcane crushed produces around 350 kg of

bagasse, 45 kg of molasses and 510 kg of press mud.

Substitutes and complimentary products of Sugar

Sugar substitutes can be divided into two major categories:

i) Gur and Khandsari: Gur is unrefined sugar and

khandsari is non centrifuged sugar. These are mostly

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used in villages and by rural folk as sweetners and

also as important sources of nutrition.

ii) Artificial sweeteners: These are compounds

providing the sweetnerss of sugar without the calorific

value. It is mostly used by diabetics, heart patients

and obese people.

Sugar Demand & Supply in India

In India sugar production follows a 5-7 year cycle. Sugar

production increases over a 3-4 year period, reaches a

high, which in turn, results in lower sugar prices. As a result

of lower sugar price realizations of sugar mills, the

sugarcane arrears increase. The increase in sugarcane

arrears results in lower sugarcane production, resulting in

lower sugar production for the next 2-3 years. Because of

lower sugar production the sugar prices shoot up resulting

in increased area under sugarcane cultivation during the

next season.

Sugar: Trends in Demand and Supply

(million tonnes) 1998-99 1999-2000 2000-01 2001-02 2002-03 (E)

Production 15.5 18.2 18.5 18.5 20.1

Local Consumption 15.0 15.4 16.1 18.1 18.5

Exports 0.0 0.1 1.2 1.1 1.8

Imports 1.0 0.4 0.0 0.1 0.0

Opening stock 5.4 6.9 10.0 11.2 10.7

Closing stock 6.9 10.0 11.2 10.7 10.5

Stock-to-use ratio 45.8 64.6 64.7 55.6 52.0

E: Estimate Source: Indian Sugar Mills Association

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Sugar Demand in India

The demand for sugar is mainly dependent on

i. Population growth

ii. Income levels

Consumer preference for sugar vis-a-vis alternate

sweeteners

Being a basic commodity, the demand for sugar increases

with an increase in the population. The increase in per

capita income increases the demand for sugar. Between

1998-99 and 2002-03, consumption increased at a CAGR of

4.5%, due to an annual growth of 1.8% in population and

2.6% in per capita consumption of sugar.

Sugar : Trend in domestic consumption

Year Per capita Per cpaita

consumption consumption

of sugar of Gur &

Khandsari

1997-98 15.54 10.3

1998-99 15.44 9.7

1999-00 15.54 10.0

2000-01 15.92 10.01

2001-02 17.59 10.0

2002-03 E 17.69 9.8

E: Estimate Source: CRIS INFAC

Sugar Supply in India

The supply of sugar in the market depends on factors,

which can be classified as

i. Climatic factors

ii. Technical factors which include

l Sugarcane production

l Sugarcane utilisaton for sugar production

l Duration of the season

l Recovery rate

iii. Political factors

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Sugar Contracts on NCDEX

Sugar (M Grade)

Futures Contract Specifications

Trading system NCDEX Trading System

Mondays through Fridays

Trading Hours - 10:00 am to 4:00

pm and 5:00 pm to 11:00 pm

Closing Session - 11:15 pm to 11:30

pm

Saturdays

Trading hours Trading Hours - 10:00 am to 2:00

pm

Closing Session - 2:15 pm to 2:30

pm

On the expiry date, contracts

expiring on that day will not be

available for trading after 4 p.m.

Basis Price Ex-warehouse basis Muzaffarnagar

inclusive of all taxes

Unit of trading 10000 Kgs (=10 MT)

Quotation/base

value Rs. per Quintal

Tick Size Re. 1.00

Ticker Symbol SUGARMMZR

Delivery Unit 10 MT net basis packed in 50 kgs

new A Twill Bags / PP bags

Quality Sugar in crystal form

Specification manufactured by vaccum pan

method of current season with :

Moisture : 0.08% Max

Polarisation : 99.80% Min

ICUMSA : > or = 150 ICUMSA and

< 200 ICUMSA as determined by

GS2/3 METHOD 8 prescribed in

Sugar Analysis ICUMSA Method Book

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Grade : M

Grain Size : Medium as determined

by the methods prescribed in

IS:498-2003

Quantity Variation +/- 5%

Delivery Center Exchange certified warehouse in

Muzaffarnagar *

Delivery Upon expiry of the contracts, if any

Seller with open position desires to

give delivery at a particular delivery

center, then the corresponding

Buyer with open position as

matched by the process put in place

by the Exchange shall be bound to

settle by taking physical delivery

No. of Active Maximum 12 contracts or

contracts minimum 2 contracts running

concurrently

Opening of October, November and

contracts December 2004 and April 2005

contracts to be launched on July

27, 2004

Subsequently trading in any

contract month will open on the 21st

of the month. If the opening day

happens to be a non-trading day,

contracts would open on the next

trading day

Due Date 20th day of the delivery month. If

20th happens to be a holiday, then

previous trading day. If 20th

happens to be a Saturday or Sunday

then the due date shall be the

immediately last preceding trading

day of the Exchange

Closing of All open positions will be settled

contract as per general rules and product

specific regulations

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Price Band Limit 10% or as specified by

Exchange from time to time. Limits

will not apply if the limit is reached

during final 30 minutes of trading

Position Limits Member-wise: Max (Rs. 20 Crores,

15% of open interest), whichever is

higher Client-wise: Max (Rs. 10

Crores, 10% of open interest),

whichever is higher

Premium M grade sugar with ICUMSA 100 -

150 could be accepted as good

delivery but with a premium of Rs.

25 per quintal

* Also deliverable at designated warehouses at Delhi and Kolkata subject

to location premium/discount differences which shall be announced by

the Exchange from time to time.

Sugar (S Grade)

Futures Contract Specifications

Trading system NCDEX Trading System

Trading hours Mondays through Fridays

Trading Hours - 10:00 am to 4:00

pm and 5:00 pm to 11:00 pm

Closing Session - 11:15 pm to 11:30

pm

Saturdays

Trading Hours - 10:00 am to 2:00

pm

Closing Session - 2:15 pm to 2:30

pm

On the expiry date, contracts

expiring on that day will not be

available for trading after 4 p.m.

Basis Price Ex- warehouse basis Vashi inclusive

of all taxes

Unit of trading 10000 Kgs (=10 MT)

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Quotation/base Rs. per Quintal

value

Tick Size Re. 1.00

Ticker Symbol SUGARSVSH

Delivery Unit 10 MT net basis packed in 50 kgs

new A Twill Bags / PP bags

Quality Specification Sugar in crystal form manufactured

by vaccum pan method of current

season with :

Moisture : 0.08% Max

Polarisation : 99.80% Min

ICUMSA : > or = 100 ICUMSA and

< 150 ICUMSA as determined by

GS2/3 METHOD 8 prescribed in

Sugar Analysis ICUMSA Method

Book

Grade : S

Grain Size : Small as determined

by the methods prescribed in

IS:498-2003

Quantity Variation +/- 5%

Delivery Center Exchange certified warehouse in

Vashi*

Delivery Upon expiry of the contracts, if any

Seller with open position desires

to give delivery at a particular

delivery center, then the

corresponding Buyer with open

position as matched by the process

put in place by the Exchange shall

be bound to settle by taking

physical delivery

No. of Active Maximum 12 contracts or

contracts minimum 2 contracts running

concurrently

Opening of October, November and

contracts December 2004 and April 2005

contracts to be launched on July

27, 2004

Subsequently trading in any

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contract month will open on the 21st

of the month. If the opening day

happens to be a non-trading day,

contracts would open on the next

trading day

Due Date 20th day of the delivery month. If

20th happens to be a holiday, then

previous trading day. If 20th

happens to be a Saturday or Sunday

then the due date shall be the

immediately last preceding trading

day of the Exchange

Closing of contract All open positions will be settled

as per general rules and product

specific regulations

Price Band Limit 10% or as specified by

Exchange from time to time. Limits

will not apply if the limit is reached

during final 30 minutes of trading

Position Limits Member-wise: Max (Rs. 20 Crores,

15% of open interest), whichever is

higher Client-wise: Max (Rs. 10

Crores, 10% of open interest),

whichever is higher

Discount S grade sugar with ICUMSA 150 -

200 could be accepted as good

delivery but with a discount of Rs.

25 per quintal

* Also deliverable at designated warehouses at Kolkata and Chennai subject

to location premium/discount differences which shall be announced by

the Exchange from time to time.

Is Sugar delivery possible on NCDEX?

Yes, delivery of Sugar is possible on NCDEX.

Typically, less than 1 percent of the total traded volume in

futures markets results in delivery. Most market participants

choose to buy or sell their physical supplies through their

regular channel, using futures to manage price risk and

liquidating their positions before delivery.

Why do we need futures contract for Sugar?

The Government has deferred the decontrol till October

2005. Government indicated that it will totally decontrol

the industry after:

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l Rationalization of sugarcane prices

l Initiation of futures/forward trading.

Cane price rationalization is a vexatious issue that can take

years to resolve. It is obvious that sections of the sugar

sector perceive a threat that is why this has been added as

one of the conditions for decontrol.

Commercial prudence demanded that futures trading

follow, not precede, decontrol.

Hedging by itself cannot prevent an apprehended price

collapse in the context of the massive overhang of sugar

stocks unmatched by consumption demand. It is for the

mills to work out a common strategy to mitigate the rigours

of price fall. Indeed, the industry must realise that controls

can do more harm to the market - both physical and futures

- than a free-trade environment.

Immediate Decontrol

Earlier when the decontrol was first proposed in 1998 it

was expected that the sugar prices will come under

tremendous pressure as the industry was carrying huge

stocks. Sugar price were expected to decline by around

10% immediately after decontrol of the industry. It was

recommended by various committees that the price fall

can be controlled through setting up of futures trading

platform and Government announced sugar futures trading

a pre-requisite for decontrol.

The timing of announcing decontrol for sugar is most

propitious now.

There has been a sharp fall in domestic sugar production

in 2003-04 season to a recent low of 140 lakh tonnes down

from 201 lakh tones in the previous season. Closing stocks

at the end of 2003-04 are estimated at 84 lakh tonnes, again

the lowest in the last four years.

Clearly, the period of excess production and burdensome

stocks is over. In fact, imports of raw sugar are taking place

to meet a possible shortage. It is estimated that as much as

10 lakh tonnes have been contracted for and a sizeable

portion has already arrived on Indian ports.

The beet sugar production is also declining. In a report

published by LMC International the sugar cost of production

is 50% higher than the world average cost of production.

The world share of beet sugar has declined from 36% to

25% and the dismantling of government support has started

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in European Union. India can benefit from such world trade

scenario provided the industry is deregulated and becomes

proactive for export of sugar in times of surplus and import

raw sugar in times of domestic deficit.

The present situation of lower domestic production,

tightening stocks and imports is ideal for taking the plunge

- total decontrol. If decontrol is implemented immediately

the impact on sugar prices expected earlier would not be

felt by the industry.

The Government should not defer the dismantling of release

mechanism till October 2005 because the advantageous

position of lower domestic production, tightening stocks

and imports that the sugar industry finds itself in may not

continue till October 2005 and if the Government defers

decontrol the impact of decontrol in on sugar prices either

way could be more devastating.

The first prerequisite of decontrol -commencement of

futures trading in sugar - has already been fulfilled by

NCDEX. Futures trading in Sugar commenced on National

Commodity & Derivatives Exchange Limited (NCDEX)

on July 27, 2004. The Government should now announce

decontrol of sugar industry by way of dismantling the

sugar release mechanism immediately now that futures

trading in sugar is available to the industry on a national

level exchange like NCDEX.

Cyclical sugar production

Sugarcane has a 24 month planting cycle (2 crops of 12

months from same seed) due to which the farmer planting

the crop today faces price risk in 2005 and 2006.

At present no window over such a long time horizon is

available to the farmer, sugar mills at the time of sowing/

processing which can signal the start of excess demand or

excess supply situation through the price movement

resulting out of free demand and supply play.

By keeping prices artificially low or high through sugar

control, price signals do not reach sugar mills and farmers

in time to take appropriate production decisions. The price

signals at present are not reflective of the underlying

demand-supply situation.

NCDEX will offer the long time horizon window through

which such trends shall be visible to the sugar industry

and government alike. At present the Exchange has

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launched contracts in 3 near months, six month forward

contracts pivoting on April and October and once initial

liquidity is captured with the support of Government

support the Exchange shall launch 1 year forward, 18

months forward contracts in due course.

Higher control on sales volumes

In the long term sugar producers are expected to benefit

with the discontinuation of the release mechanism as

producers will be able to control the sales volume based

on the demand-supply signals provided by the sugar futures

trading on NCDEX. They will also start focusing on marketing

of sugar.

Costs of Demand-Supply Imbalance

The necessity of a futures exchange for sugar is dictated by

the fact that sugar production and demand do not rise and

fall in tandem. Price risk is being carried by producers

without an effective hedging mechanism.

At present

l Excess inventory holding costs (over & above the 6

months off season) is

- Rs 1008 Crores per annum

l Unhedged Price risk on inventory is

- Rs 1800 Crores if sugar price changes a

rupee per kilo

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Inventory financing consumes the largest chunk of interest

costs and bank limits. Inventory holding cost is 2nd highest

cost factor of sugar mills after cane price. Inability to manage

stocks (and hence market price) has been the single-largest

reason for problems with cane payments. This resulted in

default of cane payments when sugar prices dipped.

NCDEX is working with banks to design sugar specific

commodity financing products where finance will be

available to the sugar mills against their stock holdings

in dematerialized balances.

NCDEX has launched sugar futures contracts in M and S

grade with multiple delivery centres at Kolkata, Chennai

and Delhi so that the sugar mills can benefit from location

arbitrage. NCDEX will continue to evaluate and add

delivery locations on basis of trade flows so that a fine

mix of deficit and production areas are available as

delivery locations. Spot price dissemination for the

multiple delivery locations will signal the deficit markets

to the sugar producers to take logistics decisions.

Signal for EXIM trade decisions

The industry finds itself in the middle of the demand-supply

imbalance. There are no signals ahead of time for the

farmers, producers and government to change their

decisions.

The leverage available to the government/sugar industry

to adjust the shortage in supply by imports of raw sugar in

short run and export of sugar in long run is not being

exploited well in time.

Annual difference between Production and

Domestic Offtake

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Domestic futures trading over a long time horizon on

NCDEX can act as an advance signal for EXIM trade

decisions to balance domestic sugar availability and

demand. With current level of duty protection for sugar,

domestic market would be more stable provided surplus

is sent out or deficit is brought in every season. Sugar mills

will bring in raw sugar against future export obligations. It

is akin to borrowing from future surpluses and is a self-

balancing mechanism

l If domestic prices rise sharply over world prices , it

makes commercial sense to import

l If domestic prices start falling towards world price

levels, there is incentive to export

Intending Importers can use the domestic futures

contracts of sugar traded on NCDEX to hedge their

exposure of sugar in the domestic market over a long

time horizon up to 18 months forward in due course.

Functions of Sugar futures markets on NCDEX

Sugar Futures markets shall provide several valuable

functions:

l Elimination of Counterparty Risk

In any transaction, the two parties to the transaction

will trade anonymously on NCDEX. NCDEX provides

a mechanism that guarantees that the contract will

be honoured.

All Sugar trades executed on NCDEX are guaranteed

by NCDEX and the counter party credit risk is assumed

by the exchange. NCDEX manages this risk by a

system of margin collection.

NCDEX also has a robust surveillance system in place

to track illegal or circular trading. This was done to

provide a fair forum for all participants, especially to

retail investors. In the rare case of any defaults by

members, NCDEX has the largest settlement

guarantee fund among all commodity exchanges in

the country.

l Hedging Utility

Futures trading markets help transfer risk from one

class of participants to the other.

l Price Discovery

NCDEX exists to provide a centralized marketplace

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on a national level where Sugarcane growers, traders,

arthiyas, commission agents, brokers, exporters,

sugar mills, sugar users like process food

manufacturers can discover the price of sugar for

future delivery and shift their risk in sugar prices

moving up or falling down to others who are willing

to bear it.

Consider all there is to know about Sugar on a given

day. The complete set of this knowledge is vast- too

much for any one person to master. These are more

matters of opinion than of counting. Obviously no

person can possess more than a small part of this

information.

The primary function of NCDEX is to provide a

electronic online trading platform where the

Sugarcane growers, traders, arthiyas, commission

agents, brokers, exporters, sugar mills, sugar users

like process food manufacturers will act on his or her

sugar knowledge can make bids and asks. This online

placing of bids and asks results in the market clearing

price of the moment. This is not a flat price. Nobody

sets it. Not even the Government of India. Rather, this

price is discovered in this free-flowing interplay

among all the Sugarcane growers, traders, arthiyas,

commission agents, brokers, exporters, sugar mills,

sugar users like process food manufacturers .

Since the futures prices reflect the collective

perception of the market participants about the future

price level, futures markets provide an important

function of price discovery. In fact the spot price

generally converges to or is close to the futures price

on expiry of the futures contract.

l Information Function

Price spread between months which is called

calendar spread gives important information about

storage which is very important for sugar.

Positive calendar spreads or carry spread indicate a

willingness on the part of the market to pay at least

partially for storage- a signal that sugar supply is

plentiful relative to demand and the market feels no

urgent need for a flow of supply.

Negative calendar spread or inverted spreads

indicate that the market demand is much more than

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the supply and thus the market is willing to pay more

for immediate or sooner deliveries. Inverted

deliveries penalize storage and may motivate the

movement of sugar.

Carry spreads are limited to the full cost of carry i.e

cost of storage , insurance, shrinkage and interest for

the specified number of months whereas there is no

limit to inverted spread-inverted spreads can be as

wide as the market pushes it till such time that

movement of sugar begins out of storage.

Spot Price Dissemination

The exchange will be disseminating the spot prices for

sugar three times a day from the locations given below to

its trader workstation, its website and to various data

vendors like Telerate. This will give an indication of the

underlying markets to the sugar industry.

NCDEX is partnering with consumer goods industry players,

rural kiosk network entities, technology companies, news

agencies and banks for both spot and futures price

dissemination. NCDEX will continue to evaluate and add

delivery locations on basis of trade flows so that a fine mix

of deficit and production areas are available as delivery

locations.

Priority center -

M grade contract- Muzaffarnagar

S grade contract- Vashi

Non-priority centers -

M grade contract- Delhi, Kolkata

S grade contract- Chennai, Kolkata

The exchange will be polling/calling up randomly upto 25

market participants from a panel of 40 market participants

and ask them for the prices twice daily. Then after collecting

the raw prices, the exchange will carry out a process called

bootstrapping. Bootstrapping is a scientific procedure of

removing the outliers of raw prices (i.e. prices that are too

far away) and averaging the remaining prices. NCDEX has

outsourced the spot price polling for to CMIE (Center for

Monitoring of Indian Economy). The exchange also invites

spot market players for participating in the spot price polling

process.

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Risk Mitigation at NCDEX

Trading on NCDEX eliminates counterparty risk since

NCDEX is the counterparty for all transactions and

guarantees all trades. NCDEX manages to fulfill this role

through a system of margins collection. Each trade on

NCDEX requires the payment of an up front margin (or

good faith money). Typically this margin is a very small

percentage of the actual transaction value. In addition the

positions on the futures market are marked to market on a

daily basis. The client also needs to pay a daily market-to-

market margin. NCDEX uses SPAN system for calculation

of Value at Risk based margin calculated at 99% confidence

interval over a one-day time horizon. In addition NCDEX

will levy additional margin to cover for extreme movements

or distortions in prices.

NCDEX INFORMATION

The NCDEX homepage http://www.ncdex.com will carry

real time price data .In addition the site will regularly provide

historical data on settlement prices, daily and historical

highs and lows for each contract. It will also provide

information on changes in contract specifications, details

of members, market timings and exchange holidays.

NCDEX will make available historical data for research

purposes through different electronic media.

The daily quotes will also be disseminated through different

information service providers. These details will also be

available on the website.

Disclaimer: The brochure has been prepared for general

information purposes only. While NCDEX has made every

effort to assure the accuracy of the information contained,

herein, any affirmation or fact in this brochure shall not

create an express or implied warranty that any example

or description is correct. This brochure is made available

on the condition that errors or omissions shall not be

made the basis, for any claims, demand as or cause of

action.

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Note

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