SECTOR REPORT - SUGAR INDUSTRY

INDUSTRY OVERVIEW
Sugar Industry in 2008-09 witnessed a rapid shift in Sugar cycle signifying reversal of
high supply - low prices scenario. With the trend reflecting falling production in the
current and next Sugar year, sugar prices firmed up in the second half of the year.
The country's sugar production declined from 26.3 mn MT in 2007-08 to 15 mn MT in
2008-09. Consumption of sugar in India is likely to increase by 1.4 mn MT during 2008-
2009. This mismatch between supply & demand resulted in Sugar deficit.

FACTORS THAT LED TO LOWER SUGAR PRODUCTION ARE AS FOLLOWS

Shrinkage in the area under sugarcane led to lesser availability of sugarcane
and in turn lower sugar production. Data released by the Ministry of Agriculture
shows 9.8 % shrinkage in area under sugarcane in 2008 – 2009.

Increasing sugarcane arrears to farmers from sugar mills and the dispute
between sugar mills and some of the State Governments regarding cane
pricing are likely to further reduce the availability of sugarcane for the
manufacture of sugar.

Alternative crops are more remunerative than sugarcane in major sugarcane
producing states. Farmers therefore appear to be shifting to alternatives. This
year, the higher price offered by jaggery manufacturers, also led to a significant
drop in sugarcane supply to mills.

The cane prices have increased significantly over last 10 years, while sugar
prices have remained volatile resulting in declining spread for the sugar
companies.

Sugarcane and sugar production in India typically follows a 6 to 8 year cycle,
wherein 3 to 4 years of higher production are followed by 2 to 3 years of lower
production.

ATTRACTIVE INDUSTRY DYNAMICS
The increasing demand for Sugar, co-generation and Ethanol favor the sugar industry.
Deregulation of sugar business in developed countries lead to reduction of import
restriction. Migration of people to urban areas results in increase in per capita
consumption. Global environmental concerns favor renewable fuels like ethanol.
Consolidation of mills leads to increase in scale and lower production cost. Finally, ever
growing demand for energy creates opportunity for biomass power generation.
All the above said points result in

Significant sugar export opportunities

Potentially higher international price

Strengthen Indian industry's financial performance

Additional and stable revenue from co-generation and Ethanol

SUGAR PRODUCTION OUTLOOK
After two consecutive years of decline in sugar production, and the consequent
increase in sugar and sugarcane prices, Indian sugar production is set to recover in
marketing year (MY) 2009/10 (October/September). India’s total sugar production in
MY 2009/10 is forecast at 20.8 million tons from 15 million tones in MY2008/09
estimate on improved sugarcane supplies due to expected higher cane planting and
yields.
Strong sugar prices during 2008/09, resulted in high cane prices and timely cane price
payment mills encouraged farmers to plant more cane this season. Relatively strong
sugarcane prices vis-à-vis competing food crops (rice, wheat, maize, pulses) also
supported cane planting. Consequently, 2009/10-cane area is forecast to increase by
9 % to 4.8 million hectares.

CONSUMPTION
The recent slowdown in economy and expected strong sugar prices due to forecast
tight supplies should contain any growth in consumption in MY 2009/10 to 23.0 million
tons, unchanged from last year. Bulk consumers such as bakeries, makers of candy
and local sweets, and soft-drink manufacturers account for about 60 percent of mill
sugar demand.

TRADE
After a gap of 3 years, India has emerged as a net sugar importer in 2008/09. Due to
the forecast tight domestic supplies, imports of sugar in 2009/10 is estimated to
increase to a record 2.5 million tons as the government is expected to continue with
the relaxed import policy. Most of the exports should be raw sugar for further
processing to white sugar for sale in the domestic market. However, there may be
some imports of white sugar in the first half of the season as the government may
allow duty free sugar imports by the private trade. Forecast tight domestic supplies
preclude any significant commercial exports of sugar in the near future, and 2009/10
exports will be limited to quota countries. The 2008/09-import estimate is revised
higher to 1.8 million tons; exports are lowered to 140,000 tons based on information
from the industry sources.

PRICES AND STOCKS
Due to tight domestic supplies, sugar prices have been on the rise since July 2008.
Prices have flared up significantly since December 2008 after the shortage of
sugarcane and sugar became more evident.
Sugar prices are expected to gain in the coming months and remain firm during MY
2009/10. However, international prices and policy measures to be taken by the
government could impact future domestic price movements.

INTERNATIONAL MARKET
World sugar production for the 2009/10 marketing year is forecast at 159.9 million
tons, raw value, up 11.2 million from the revised 2008/09 estimate. Consumption is
forecast at 159 million tons, up 1.5 million from a year earlier. Exports are forecast at
51.3 million tons, up 3 million; and ending stocks are forecast at 31.2 million tons,
down 800,000 tons.
Forecast changes in 2009/10-world production and trade are highlighted by higher
production in Brazil, at 36.9 million tons, up 4.5 million. Brazil accounts for 23 percent
of world production, but Asia accounts for 37 percent. Forecasted production in Asia
is up by 5.8 million tons to total 59.2 million. Production in India for 2009/10 is
forecast at 20.8 million tons, up 4 million, China at 14.5 million tons, up one million,
and Thailand at 7.5 million tons, down 300,000. Production in the EU-27 is forecast
at 17 million tons slightly above last year’s output. In 2009/10, the EU is forecast to
be the world’s largest net sugar importer at 3 million tons.
Exports from Brazil for 2009/10 are forecast at 24.3 million tons, up 4 million from
2008/09. Brazilian exports during the last year were off from expected levels due to
relatively low prices, in relation to production costs, high freight rates, early year
competition from India in Near East markets, high oil prices, and high domestic
ethanol demand and India may import 2.5 million tons, up 700,000 from last year.