I was just trying to figure out probable questions related to the Indian sugar industry to reduce my chances of missing out on any potential negative pointer. I have listed the possible points I can think of.
In case you have any additional question, please write in the comment below. I will answer or try to find an answer for the same.
Q1. Will the capacity expansion by Sugar mills lead to a glut in ethanol production?
Ans: Yes. It will. But it will take time(at least a couple of year). Current capacity can cater to only 6-7% of the total 10% of blending required. But, if the govt goes forward with the 20% blending, it will require far more distillation capacity.
Q2. Are the Indian vehicles equipped to use fuel with 20% ethanol blending(E20)?
Ans: Yes. The current level of technology in Indian vehicles permit the usage of E20.
Q3. Will the diversion of sugarcane towards ethanol create sugar scarcity?
Ans: Average recent year production: 32.8MT
Consumption in India: 26MT
Plus last year’s stock. There is ample room to use the sugarcane for ethanol production.
Even if there is a scarcity, additional sugar could be imported given that imported sugar costs lesser by ₹10/kg.
Q4. Is it better to produce ethanol via C heavy molasses than B Heavy ones?
Ans: The margins are way better when you make Ethanol from C heavy molasses since no sugar is extracted from them and hence the cost of raw material is almost zero.
But when you produce ethanol from B-heavy molasses you are foregoing sugar production & hence a higher cost of raw material.
The benefit of making ethanol through B-heavy comes from getting rid of excess sugar, higher realization, lower sugar inventory, lower inventory cost, etc. But, this will take some time to reflect in the numbers.
Q5. Are sugar mills making ethanol via B-heavy molasses and Sugarcane juice?
Ans: As of now, the majority of ethanol is being made via C-heavy ethanol. A very small percentage is being made via B-heavy.
I think mills are in a wait and watch mode in terms of doing expenditure to convert the C-heavy plants to B heavy one. As of now only Dhampur Sugar Mills are making ethanol via B- heavy molasses in a slightly bigger way than others whereas Balrampur’s expanded facility which will come on board by Dec 2019 will make ethanol via B heavy.
Q6. Why are sugar mills not happy with the mandatory export quota?
Ans: Since the international sugar prices are at least ₹10/kg lower than Indian prices, so they will have to sell at a loss. The Indian govt gives subsidy to compensate for the loss but it takes time. So, sugar mills with a weak balance sheet face difficulty managing their finances.
Q7. What is the problem faced by sugar mills with respect to govt’s fixed monthly sugar release mechanism?
Ans: Every month govt fixes the amount of sugar that can be released by each sugar mill. Now, this hinders mills to take advantage of any demand-supply mismatch. Also, increase the amount of sugar held in inventory.
On the other hand, this mechanism along with MSP, protects the downside risk associated with fall in sugar prices.
Every mill is given a sales quota based on the govt’s stockholding level as well as the demand in the country during that period.
Q8. Since Sugarcane is a water-intensive crop. Does fall in the amount of rainfall is bad for farmers?
Ans:
Lower rainfall means lower sugarcane production.
Lower production leads to lower crushing and lower sugar production.
Demand-supply mismatch in favor of supply.
Sugar prices go up. The profitability of sugar mills increases.
Earlier clearance of sugarcane arrears.
Q9. How regulated is the Indian Sugar industry?
Ans:
Sugarcane prices: Fixed by Indian Govt
Sugar prices: Minimum selling price fixed by Indian govt.
Monthly sugar released by sugar mills into the market: Decided by Indian Govt
Minimum Indicative export quota for each mill: Decided by Indian Govt
Ethanol Prices: Decided by Indian Govt
Power prices: Decided by Indian/ State Govt
Quite clear, that the Indian Sugar industry is tightly regulated.
Q10. Since all the distillery is made to produce Ethanol from C Heavy molasses, can it be used to make ethanol from B Heavy?
Ans: Yes. It can be done readily without spending anything on capex.
Q11. Since all the distillery is made to produce Ethanol from C Heavy molasses, can it be used to make ethanol from Sugarcane juice?
Ans: In order to make ethanol from sugarcane juice, the existing distilleries will require capex in the form of storage & pipelines.
Q12. Is there any probability that the current NDA govt can go back on their push towards the sugar industry?
Ans:
Positive: The current NDA govt which pushed all the incentives have come back with a greater majority.
They are very clear & serious on their push towards:
a) Curtailing fuel imports- Push towards EV & ethanol
b) Reducing pollution- Quite visible from the aggressive EV policy
c) Help the Indian sugar sector
Negative: These kinds of industry push is usually given pre- election. But history says you can never trust governments. In case of renewable energy push where the rate was decided on the basis of 20 years of power purchase agreements, the govt refused to oblige on them & forced these companies to reduce the rate within a short period.
BUT WHICH WAY THE POLICY CAN GO IS ANYONE’S GUESS.
Q13. Although, the Sugar mills are quite happy with the number of initiatives taken by the govt. They want a little more to be done. And these are:
Ans:
1. Buffer stock: To stock the excess sugar. Govt have agreed for 4Mnt of buffer stock for FY20.
2.Export incentives: To divert excess sugar . Govt has approved ₹6,268 crore subsidy for export of 6 million tonnes of sugar for FY20.
3. Sugarcane & sugar price linkages: BIGGEST DEMAND. Right now sugarcane prices are fixed whereas sugar prices are market dependent. That creates a skewed environment. Sugarcane prices increase, sugar price drops.
4. Monthly release quota. Few have demanded to remove this quota should be removed to take advantage of any demand-supply gap in the market. But this quota in a way help stabilize sugar prices.
Q14. Why is Uttar Pradesh better placed than other Indian states?
Ans:
Better variety of cane is used
Better infrastructure catering to sugar industry
Better state govt support
Q15. Despite large payment arrears, why do farmers prefer Sugarcane over other crops?
Ans:
1. Sugarcane is a cash crop
2. It is a tough crop. Requires a lesser amount of fertilizers & pesticides.
3. Assured returns, minimum losses
4. Also, among other crops, sugarcane farmers are the most respected ones.
5. Robust, requires lesser maintenance, lesser labor intensive but needs larger land parcel.
Q16. What is the difference between SAP & FRP?
Ans:
SAP stands for State Advised Price. It is decided by the State govt. FRP stands for Fair & Remunerative price, decided by central govt.
FRP is more logical which takes into account all the factors that influence the prices. SAP are more towards pleasing the farmers for votebank politics.
Implying most of the time, SAP is greater than FRP by big margins.
Q17. Why the sugar inventory held by the sugar mills are of great importance?
Ans:
Since sugar prices keep varying based on demand and supply scenario. If suppose the mill hold sugar at an cost of ₹30/kg at the end of one season but the prices in the next season drops to say ₹25/kg, the company/mill will have to write down the value of sugar inventory by the difference amount.
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