Sugar Cycles: 7-8 years of losses followed by 2-3 years of super gains!

If the probability is high that bottom will be made in 2013-early 2014 why wait for ultimate bottom. You can always up average when the stock doubles. You don’t need any better timing indicator than stock price doubling in short time.

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On behalf of Manish Dave International sugar price went down to almost 50% from 2011 high. This is how I see change in deman/supply situation. Deman Side: *China is big for demand growth and it will remain so for years due to change in food habits. That is secular trend and unlikely to change. *There is restocking demand. Many food companies and countries went down in inventory and now they are filling up as price is low. *Disparity between ethanol/Sugar. Sugar needs to go to 20C/lb for mills in Brazil to switch from ethanol to sugar. Right now, Ethanol price is strong and sugar is low so lot of cane is going into ethanol, so higher demand for cane into ethanol production.

Supply side: Brazil is the most competitive producer and still at CMP many mills are struggling. 20% mills in center-south Brazil will shut or get sold as they are not sustainable. In India UP mills lost 3000cr and banks have refused to give them loan unless cane price comes down. If so it surely reduce supply. If not, sugarmills won’t be able to pay to the farmers and there will be more long term damage. If Brazil can not make money, can Russia/EU make money?They produce sugar from beet, which is costly and acreages are already down. So less prodution from marginal cost producers. Govt. pays subsidy but overall production has to come down. Sugar beet production is expected to come down to 20%. Sugar is not one year crop like beet crop. Ratoon(sprout) is, when farmer harvest sugarcane, they leave small portion of cane. So next year cane grows from there. It is play off between cost/benefit. Next year they save cost of preparing field, buying seed/planting cane. At the same time yield comes down. There is also higher incedance of pest. Mostly only one ratooning is done. So if sugar price is low and cane price is low, some farmers may continue with ratoon crop but next year, they won’t plant fresh crop. India is black swan. If Akhilesh goes with election bounty, it will damage sugar industry and despite of higher price, production will go down. Banks won’t lend to mills, mills won’t pay to farmers. As it happened in 2010-11. And remember it is going to be election year. When price is too low, farmers spend less money on fertilizer and other expenses, which also will bring production down marginally. They won’t go extra mile. There is always uncertainty of rain at wrong time and frost. Which reduces yield dramatically. So far we had good weather and production kept on increasing. But situation can change dramatically. IMO one more year we will see stable sugar price as there is too much glut at every level. But once it gets absorbed and demand/supply economics play its part,2015 can be a roaring bull maket for sugar price. Stocks can move in advance though. If the most competitive country is facing trouble while currency is favorably low, think about situation for others. My vote goes for Renuka Sugar. Usually companies with the best management gets hammered the least. But here due to debt, some unforeseen situation in takeover, they went into deep trouble. But tide is turning now. Slowly debt is coming down. They successfully refinance some debt so no imminent payment. Levy relief will add up. UP doesn’t make big part of overall business which is always an uncertainty. Their refineries and Dubai operation generates cash and that helps in tough time. This company produces their own cane (I think 50%) in Brazil so have control over cost. Their mkt cap/sales ratio is three times that of Balrampur. If institutions buy sugar stocks, they will go for Renuka rather an unknown name. So why go for unknown name? Another interesting company is Kakatia cement and Sugars. Zero debt and high level of cash. Some of which is in form of excess inventory. Debt is zero, cash plus inventory is 2Xmkt cap. EPS is usually not less than 20/share. If sugar cycle turns and economy in Andhra recovers, it can post much higher profit. There was some canal repair problem in past and sugarcane production was less. I don;t have latest update but if that gets fixed, sugar division can perform much better and cogen production will be higher too. Management looks clean but over-conservative. Not doing anything with cash. No expansion, no increase in div and not buyback.

Key takeaways from CARE report on sugar industry

  • In SS 2012-13, the sugar cane acreage increased marginally by 0.5 per cent on a yoy basis to 5,064 thousand hectares. Despite the rise in acreage under sugarcane, the industry is likely to witness a lower sugar production in SS2012-13.
  • During the period of October 2012-June 2013, the country produced about 24.8 mn tonnes of sugar. The sugar production is expected to reach about 25.2 mn tonnes in SS 2012-13.The drop in sugar production is mainly attributed to the sharp drop in acreage under sugarcane in Maharashtra which is the largest sugar-producing state in the country.
  • The impact of deficiency in rainfall experienced by Maharashtra in 2012 will trigger down the sugarcane acreage in 2013-14. CARE Research believes that the increase in yield and the recovery rate in Maharashtra will moderate the impact of drop in acreage on sugar production to some extent in SS2013-14.
  • In SS 2012-13, the average wholesale sugar price grew by about 4 per cent on a yoy basis to Rs.33 per kg. CARE Research expects average wholesale sugar price to increase marginally in the near term on account of the augmented demand led by the festive season. In SS 2013-14, the average wholesale sugar price is expected to be at about Rs.34 per kg.

Next sugar season is on us - Oct 2013- Sep 2014. How and why will/can sentiment on Sugar Sector change to more positive?

1. Lower than expected sugarproduction and higher sugar prices

2. Higher exports from India (INRdepreciation/better global sugar prices)

3. Less than Rs 40/quintal increase inSAP in UP (announcement in Oct/Nov 2013)

4. Linkage of sugarcane price torevenue gathering momentum in states, especially Uttar Pradesh, and/or

5. Hike in blending ratio (from current 5%) and therefore diversion of sugar forethanol production

How likely/unlikely are some of these? I have been scouting around for answers to these. These is what I found and seems like reasonable views to me.

Experienced sugar players, please comment:) and guide.

Key Concerns/Events:

Key Concerns/Events JM Financial View
What is India's Sugar production estimate for FY14? Production around 23.7-25.0 mtas lower acreage is partiallycompensated by higher yield/recovery rate inMaharashtra/Karnataka and higher acreage in UP
How much drop in Maharashtra/Karnataka? Area is down 5-15% YoY.However, production decline will beminimal on account of improvementin yield/recovery ratedue to robust monsoon
How would local price behave? Domestic price have remained stable for past 8 months onon account of inventory and lower levy off take.Expect ex-mill of `32/34 per kg for FY14/15respectively (vs current sugar realisation at `30-31/kg)
What government actions are likely? 1. Higher ethanol blending ratio (currently at 5%, proposed to make it upto 20% by 2017 in staggered manner).
2. Cane pricing linkage in states, especially Maharashtra and Karnataka
Global prices outlook? Global prices have been soft on surplus scenario.We expect global prices to remain stable as Brazil is expected to see favorable climatic conditions and improvement in yield
Sugarcane prices? 1. SAP for Uttar Pradesh to be announced in October/November 2013. We factor in 11% increase in SAP (SAP of `310/quintal vs `280/quintal last season), but do not rule out different outcome.
2. Maharashtra/Karnataka cane prices are likely to remain stable/decline as it plans to link to sugar revenue (last year cane prices were fixed, when sugar prices were ruling at `34-35/kg vs `30-31/kg currently)
Key events to monitor for sugar stocks? 1. SAP announcement in UP
2. Production outlook and cane pricing for Maharashtra/Karnataka
3. Improvement in ethanol price (and overall distillery realisation)

Source; JM Financial

SAP for Uttar Pradesh to be announced in October/November 2013.

the SAP announcement is a key event, esp for Blarampur Chini and other UP based mills.

Should we anticipate lower BCML entry prices:)?? Wouldn’t that be a better time to take initial positions in Balrampur Chini?

Sugarmills have begun the 2013-14 marketing year, that started this month, with an opening stock of 8.5 million tonnes and this hugeinventorycould spell trouble for the sector, according to industry bodyISMA.

In 2012-13 marketing year (October-September), mills had an opening stock of 6.2 million tonnes, sufficient to meet three months’ demand.

“We have the opening stock of sugar of about 8.5 million tonnes, higher than last year. The production estimate for 2013-14 is also more than the demand,” Indian Sugar Mills Association (ISMA) Director General Abinash Verma said.

“It will be a difficult situation for the industry unless there is support from the state, central governments and rationalisation of sugarcane pricing,” he added.

Ex-factory prices of sugar are currently lower than the last year’s level, he said, adding that banks are reluctant to give loans to Uttar Pradesh-based mills unless there is linkage between cane and sugar prices.

Verma feared that sugarcane arrears to farmers will increase substantially from the current outstanding of about Rs 3,000 crore in the absence of government support. Maximum arrears pertain to Uttar Pradesh, the second biggest sugar producing state in the country.

ISMA has pegged sugar production in 2013-14 at 25 million tonnes as against the annual demand of 23.5 million tonnes.

With likely surplus production this year, mills will have to focus on exports, said Verma.

Asked about crushing operation, Verma said mills in Uttar Pradesh will start after the announcement of state advisory price (SAP) for this year.

In Maharashtra, the country’s largest sugar producing state, mills are expected to begin crushing operations by the end of this month.

The Centre has fixed a fair and remunerative price of sugarcane at Rs 210 per quintal for 2013-14 marketing year.

Last year, the country produced 25.1 million tonnes of sugar and imported 0.75 million tonnes, taking the total availability of sweetener to 25.85 million tonnes. The demand was about 23 million tonnes and exports were 0.35 million tonnes.

For Sugar market Brazil and local petrol price are extremely important factor. In Brazil also has fuel subsidy and they also suffer from currency. SO sooner or later they will raise petrol price. Now lot of cars are flexi-fuel. They can run on mix of petrol/ethanol in any percentage. So higher petrol means more use of ethanol. That means less sugar.

Renuka used to produce 65% sugar and 35% ethanol from cane. Now it is opposite. So COnsidering some mills closing in Brazil, more ethanol from cane, problem in UP(either way, if they keep cane price less, less acreage, if price high, mills won’t be able to pay).

Renuka sugars looks classic turn around candidate. Why buy UP based mills with SP Govt. at helm? There is no way sugar price not bounce. If weather is good, it can go to 24-25c/lb. If weather is tough, it can cross 30 as it did in 2010. Also turning fortune of sugar industry will make it easy for Renuka to sell stake. If they can hang on w/o selling stake till bear mkt is over, their BS may suddenly look better.

When cane tastes bitter

Hindu Business Line, Oct 6, 2013


Uttar Pradesh is only a month away from a fresh political conflagration centred around its biggest industry: sugar.

Muzaffarnagar and Shamli last month experienced communal violence that was unprecedented for being largely_rural_-centred, unlike the anormala city or town-based phenomenon.

These two western Uttar Pradesh (UP) districts along with Meerut, Saharanpur and Bijnor a besides areas such as Bareilly, Shahjahanpur, Hardoi and Lakhimpur Kheri in the central or Sitapur, Gonda, Balrampur and Kushinagar in the eastern parts of the State a are set for a renewed crisis. It threatens to be bitter and rural yet again, albeit centred around sugarcane.

Mills in UP usually start crushing for the new sugar year (which technically begins in October) from early to mid-November. Prior to that, the State Government holds meetings with millers and growers for earmarking cane areas to individual factories. The consultations happen in August-September, after which the Cane Commissioner issues areservation ordersa binding growers to supply cane to the particular mill to whom their area has been exclusively assigned.

This time, there have been no reservation orders nor any cane area meetings. The reason: millers not being in a position to crush and, hence, showing no interest in securing cane allocations. As things stand, nobody knows the fate of the cane ready to be crushed in hardly a month from now.


Why arenat millers keen to start? Because the economics just doesnat permit them to.

A typical mill with daily cane crushing capacity of 5,000 tonnes would produce 3,220 tonnes of sugar over seven days, taking the average 9.2 per cent recovery recorded by UP factories during the last 2012-13 season. At current ex-mill realisations of Rs 30 a kilo, the value of this sugar comes to Rs 9.66 crore.

On the other hand, the State Advised Price (SAP) fixed by the UP Government for cane in 2012-13 was Rs 280 a quintal. At that rate, the 35,000 tonnes of cane crushed during the same seven days would be worth Rs 9.8 crore.

Simply put, the present realisations from sugar will not cover even the millas basic cane cost a which excludes purchase tax, commission paid to the cooperative society through which procurement is carried out, and transport charges. Adding them would take the cost of cane delivered at the factory gate to Rs 295 a quintal.

But mills not only have to pay for cane; they also incur other operational expenses on workera salaries, chemicals or gunny bags, besides on repairs and maintenance before and after the start of crushing. On top of it, there are corporate administration and marketing overheads, plus interest on borrowed funds.

True, some of the non-cane costs can be met from sale of byproducts such as molasses and bagasse or their value-added derivatives, including ethanol and power. But even after accounting for these, the effective cost of sugar from cane bought at an SAP of Rs 280 a quintal today will be Rs 34 a kilo or so, exclusive of overheads and interest. The latter would push it closer to Rs 36 a kilo.


Last year, ex-factory sugar realisations in UP averaged Rs 34.50 a kilo during October, before crushing operations took off.

Mills are normally provided working capital from banks up to 85 per cent of the value of their stocks. So, if a mill produced 3,220 tonnes of sugar during a week, its value at Rs 34.50 a kilo was Rs 11.1 crore. The 85 per cent working capital entitlement on that, at about Rs 9.4 crore, would have almost financed the Rs 9.8 crore value of the cane crushed over these seven days.

But as the season progressed, ex-factory sugar prices fell to around Rs 31.50 a kilo by March, bringing down the value of millsa stocks while also exhausting their cash credit limits for purchasing cane.

So, what did the mills do? Well, they started delaying payments to farmers, despite the law requiring them to pay within 14 days of taking cane delivery. Effectively, they were buying cane on credit at zero interest from growers!

Today, the situation is such that even as the new sugar year has formally commenced, UP mills owe farmers nearly Rs 2,500 crore for their_last_seasonas cane. This, without factoring in any interest on delayed payments.

Such unpaid arrears from the previous season are unusual for the fact that the defaultersa list this time comprises not just those with a reputation for delaying payments a the U.K. Modi Group, for instance. On the contrary, it has virtually every big player, including the likes of Balrampur Chini that are known for conservative cash management and a track record of paying farmers in time (see table).


For growers, receiving payments for last yearas cane may be an immediate concern. The real crisis, however, is going to be over the crop now standing in the fields.

For mills, crushing the new cane is clearly unviable when sugar is fetching Rs 30 a kilo. Their problems are compounded by banks refusing to extend working capital.

Nor do they have the option of aborrowinga again at zero interest from growers; why should anyone supply fresh cane without being paid for the previous crop?

What is the solution then? The millers will tell you the problem lies in the SAP and factories cannot run without linking cane prices to sugar realisations. A committee headed by the Chairman of the Prime Ministeras Economic Advisory Council, C. Rangarajan, had recommended that farmers be entitled to 75 per cent of the ex-mill value of sugar. At Rs 30 a kilo, the corresponding cane price, thus, works out to Rs 225/quintal. The current situation, in other words, demands a_reduction_in the SAP.

Economically sound though this logic is, it is politically not feasible; farmer organisations actually want the SAP for 2013-14 to be hiked to Rs 330 a quintal!

The only way to resolve the deadlock is for the Government to foot the difference between an SAP that gives_reasonable returns_to growers (they definitely need to be compensated for increases in diesel, fertiliser and labour costs) and a cane price mills can_afford_to pay. The latter could well be based on the Rangarajan formula, taking into account the expected average sugar realisation for the entire season.

The above price difference can be paid by transferring the money straight into farmersa accounts. This is eminently implementable, as mills already have a system of supplying data in CDs/USB flash drives to banks on their cane purchases made from every farmer. The data is used by banks to credit payments directly to their accounts (a single mill deals with 20,000 or more growers).

There is no reason why the UP Government cannot pay for the difference between the SAP and the Rangarajan formula-based cane price by transferring the said monies directly to farmersa accounts. After all, the SAP is the price it has fixed.

For farmers, the worst case scenario is if mills refuse to begin crushing. In that event, they will not be able to even vacate their fields for planting wheat before the winter sets in. Without liquidity in their hands, they will be pushed into desperation.

This deadlock over cane pricing needs to be broken. If it doesnat happen, we might end up seeing worse things that what we saw last month in Muzaffarnagar and Shamli.

The Hindu Business Line article above - provided a perfect summary of the current sugar situation in UP - that I felt compelled to reproduce it in full.

Q is will the politicians listen to Economic sense. This can generate tremendous goodwill for Samajwadi party too , if they follow the direct transfer of SAP subsidy burden to farmers - and may make the industry viable once and for all.

But do you think, this is likely?? I need to find a bureaucrat in UP:-). Remember that meanwhile Haryana government has already announcedin September the highest sugarcane SAP in the country for 2013-14 season @ 290-301/quintal. And Punjab government fixed SAP at 275-290/quintal in June 2013. The pitch is already queered.

Manish - you may be right - there is a case building up for non-up Mills, especially Karnataka and/or Maharashtra based?

IMO Renuka has the most dynamic management. Brazil has cost advantage. They have choice between ethanol and sugar. Local players don’t have that flexibility. Renuka gets probably 50% cane from own farm(in Brazil) so they have some control over cost. Don’t have much idea about non-up mills.

Recently I was re-reading âInvesting the templeton wayâ by John Davis. In of the section the author describes John Templeton investment in metal stocks. I think that methodology can be applied to invest in sugar stocks too [though the biggest difference is, in India sugar industry operates under severe regulations]. Three important points

**1) **Find out the breakeven price for commodity companies to survive rather than trying to predict the future prices of commodities

  1. Derive the range of price outcomes that would be necessary for the companies to make a satisfactory return on capital over a period of years.

  2. The way that competitive capitalist industries work, that in turn [market price below break-even price] would eventually lead to capacity shortages and a consequent revival, after a number of years, in the industryâs fortunes.

Extract from the book…

Think about the breakeven price for commodity companies to survive rather than trying to predict the future prices of commodities: It might be thought that analyzing companies in an industry with globally priced, homogeneous products, such as metals and oil, would be particularly difficult for a âbottom upâ investor who primarily focuses on individual company analysis. Actually, experience suggests that this is not the case**. Clearly, in industries such as these it is necessary to form a view about the future path of product prices. Unfortunately, attempts to produce price forecasts with econometric models have proved singularly unsuccessful whenever they have been attempted. This approach has never been part of the Templeton investment method. **The better, alternative approachâand the one adopted by John Templeton himselfâis to aggregate a range of âbottom-upâ information about all the companies in an industry. From that can be derived the range of price outcomes that would be necessary for the companies to make a satisfactory return on capital over a period of years.

For the major metals companies of the world, it is relatively simple to calculate what return on assets is needed to ensure their long-term survival**. The analytical task is then to determine the commodity price at which the industry as a whole is able to replace its assets. This is the minimum price that will allow a mining company, for example, to finance the capital expenditure required to maintain and replace its existing mines, or for an aluminum company to maintain and renew its smelters**. Unless those price levels could be obtained at some point in the future, it follows that the industry would simply go into decline. The way that competitive capitalist industries work, that in turn would eventually lead to capacity shortages and a consequent revival, after a number of years, in the industryâs fortunes.


Hi Donald,

Here are a few links which may provide some direction:

Seems like quality mid-size sugar stocks are where the action is…

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Sugar keeps on moving higher in intl mkt. One of the reasons is BRL, INR compared USD is getting stronger. But sugar is outperformig them. So it is good news for Renuka Sugars.

Sugar soars on Brazil warehouse fire

Updates from Uttar Pradesh on fixing of SAP for sugarcane

A standoff betweenthe sugar industryand the Uttar Pradesh government over cane prices could lead to an economic crisis for sugarcane growers in the state.

Private mills have not yet started preparatory work to begin cane crushing operations in Uttar Pradesh forthe new sugar seasonthat started October 1, as they want clarity on prices before starting their factories. These mills buy more than 90 per cent of the cane that goes into making sugar in the country’s second-largest producer of the sweetener after Maharashtra.

Sugar mills in Uttar Pradesh purchasedcane worth Rs 22,000 crorefrom farmers last year at Rs 280 a quintal. However, with sugar prices remaining depressed, the mills have yet to pay Rs 2,350 crore to cane farmers.

An executive at a sugar mill, who does not want to be named, says companies have told the state government they can pay Rs 230 per quintal for cane to farmers. “There is no way we can pay a higher price,” the executive says.

The mills have also assured the government that if they realize more than Rs 3,000 per quintal on sugar, they will share 75 per cent of that realization with farmers. Currently, mills are realizing Rs 2,900 for every quintal of sugar.

Uttar Pradesh has 122 millswith Bajaj Hindusthan, Balrampur Chini and Triveni Engineering among the top sugar companies. Livelihood of about seven million farmers in the state depends on sugarcane.

Mills will likely face difficulties in making payments to farmers this season as well. The huge sugarcane payment is a trigger for sales of automobiles, tractors, consumer goods, consumer durables, cement and steel in the state, and problems in the sugarcane economy will impact these sectors indirectly.

As majority of cane growers are Hindus, the crushing season begins after the Ganga Snan (Bath) every year. This year the Snan falls on November 17. But it is unlikely mills will start crushing before the end of November.

“It takes over 10 days to get the boiler ready before a mill can start crushing sugarcane. So, mills will not start buying cane before the end of this month,” says an industry observer, who does not want to be named. Most mills, it is learnt, are sitting on large sugar inventory and are in no hurry to start crushing.

The state government is in a fix. With general elections scheduled to be held by May, the state government is under political compulsion to announce a higher sugarcane price. But the sugar industry is not even willing to pay the price it had agreed to last year. A way out is the grant of direct subsidy to mills, but this does not seem feasible given the strained condition of state finances.

Would the trouble in UP sugar industry be of any help to the South based mills like EID Parry, Shree Renuka and Ponni where there is much less state government interference in sugarcane pricing?

UP Govt fixes SAP at 285 rs/quintal with 2rs tax waiver. industry is disappointed with this, they are demanding SAP to be fixed at 225 rs. the stalemate will continue for some more time (not much time left for the formers to hold onto the cane, either they need to sell to jagery industry at 160rs or burn it)

Talks between UP govt and the sugar mills have failed. Mill owners have asked the UP govt to nationalize the mills so that farmers interests can be addressed. ( I think is this is just for posturing). Meanwhile Govt has initiated coercive measures and has FIRs have been filed against Triveni and Dhampur.

I guess Sugar Industry will agree to a compromise solution where UP govt gives some subsidy to the farmers or offers some sort of financial aid to the sugar mills.

Sugar mills have to start crusing by early Dec or else it will be of no use to the farmers.

Farmers are protesting in Karnataka and one farmer has committed suicide as a protest.

One thing is reasonably clear, sugarcane acreage will go down drastically next year. In fact, I read news reports where UP based farmers had said they will reduce cane cultivation by 30%.

Is the present standoff similar to the previous instances or is it worse than the past? What would be the long-term impact of any coercive measure that the UP Govt might take?

Would like to know the thoughts of other investors here.