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TERM PAPER OF MICROECONOMICS

TOPIC: Rise in Price of Sugar in India

SUBMITTED TO:
Palwinder Kaur

SUBMITTED BY:
Gaurav Tyagi

T1910 B48 Reg.no:- 10900356

ACKNOWLEDGEMENT
My thanks is to all those who have helped me to achieve my goal. First my thanks goes to almighty whose has the big role of getting me succeeded in this minor project otherwise it would have been possible for me.

Apart from this there was a great support from my friends, teachers and the net facility provided by the university which is available at any time for students. These things made my work true and live.

More over me got the full fledged guidance from my teacher miss. Palwinder kaur for the project. He was there when I required him and he also helped me like my friends do. I want to thank my PARENTS for supporting

me financially and my friends helping me in searching the data. I am really thankful to my god for providing me such a teacher , good friends and his own help above all.

Introduction
Global sugar prices have jumped to their highest levels since the early 1980s, having squeezed the margins of the companies where sugar is a key input beverages, biscuits and confectioneries manufacturers. India, the second largest producer has suffered an exceptionally wimpy monsoon season as this past June was the driest in 83 years. On the other hand, also in Brazil, the world`s largest sugar producer, the skies are looking downright biblical as some fields have been drenched by as much as four times the normal amount of rainfall. Recently in a press meet, Sharad Pawar, agriculture minister, India said, "The country is passing through a difficult situation due to insufficient monsoon. This has not only affected sowing of important crops like paddy but may also adversely impact sugar recovery." Pawar said the country suffered at both ends of the sugar cycle. "When India exported prices fell and we had to support exports. And now when India is importing, prices have risen." Industrialist believe that due to sheer carelessness shown by the government, now India would have to import sugar in the 2009-10 season, starting October, to meet the unchanging domestic consumption. As not actualizing on India`s dwindling stocks and rising domestic demand, the government continued to export just focusing on the profits which resulted in future surge of the raw sugar to the highest in nearly three decades on prospects of large purchases by the world`s top sugar consumer. Priyagold, the leading brand of biscuit manufacturing company Surya Food & Agro Ltd is under immense pressure due to this all of a sudden sugar price hike. In the case of production in the company, sugar accounts for 12.5 to 16 per cent of overall input on the basis of packaging volumes. Shekhar Agarwal, director, Surya Food & Agro Ltd said, Nevertheless, sugar prices may touch Rs 40 a kg, more than double from a year earlier, when fresh imported consignments land here in the next season. But these problems can be sorted out instead of giving negative reactions. It was a known fact, this year, that sugar production would decrease by 40 per cent since last year, still government

provided export incentives to sugar mills and even gave subsidies for the total exports execution. This mismanagement of export and import ratio has created the problem and has resulted in lots of foreign currency loss. This crisis has not only affected sowing of important crops but may also adversely impact sugar recovery. Further, imports too will be costlier this year despite being duty free, as globally the prices of sugar have reached a 28-year high and India will have to suffer due to inefficient amount of buffer stock. Vinayak Lal, GM-marketing of Cream Bell, the leading ice cream brand of Devyani Food Industries, a unit of RJ International, calls the steep jump of more than 50 per cent in sugar prices an absolute negligence shown by the government towards the storage of buffer stock. He says, It is a fact, that the troubles occurring due weak monsoons, area under cultivation and yield per acre have resulted in the scarcity of sugar but the government continued its exporting volume even when they were alarmed that the season was not great for sugar crop, and they exported all the surplus volume without realising the depletion status of the buffer stock of the country.

Galvanising impacts of sugar rush

With the dip in production of sugar in India and the sugar prices in the market at the level of Rs 32-33 per kg against Rs 17-18 per kg last year. Most of the related manufacturers are mulling over going to hike prices of biscuits and confectioneries further, to cope with rising sugar prices, which are putting margins under pressure. India`s leading biscuit manufacturer giant, which also seem to be affected so much by the sugar drought in the country that the firm will have to import sugar this season. Vinita Bali, managing director, Britannia Industris limited the maker of Tiger Biscuits and Little Hearts sugar accounts for 12-20 per cent of its overall input costs told media in the company`s 90th AGM held in Delhi recently that to cope with the pressure on margins, the company will increase prices of its products. Adding on further on this and commenting on the shifting of adverse affect of cost of production to the consumer, Chitranjan Dar, divisional chief executive, foods, ITC opines, Consequently, I am not sure on whether the manufacturers would be able to cushion this shock as the situation is not comfortable anymore. Hence,

because of the dip in production and runaway prices, it is difficult to balance the situation with the price rise and quality being maintained at the same time. Further he added, We have been working on the factors like how can we cut other cost of production. Regarding price hike of our products, nothing is 100 per cent final but it is on the cards. The price increases could be between 3 and 6 per cent in the long term. However, we yet have to take a decision on effecting the same. The focus is on greater control and running cost-cutting measures, as we will not pass on the full increase in sugar prices to the consumer. Moreover, as inflation is low, companies may not be able to effect an immediate price hike but would probably look at weight reduction and take cost-cutting measures like reduction in advertising spends. Likewise, P T Gopal, CEO and managing director, Scandic Food India Private Limited (Scandic), a subsidiary of the Danish DKK Good Food Group which relaunched the quality brand Sil recently offering a wide range of jams and jellies comments, In last couple of years, sugar has converted into a cash crop and the demand has grown up with the less production also taking place due to demographic emergencies. Resulting these altogether effects, which has cause the rise in price we will watch the market for sometime before effecting any change in prices. Still, it is very difficult to say what we will do as we can only pass a certain amount of input costs to the consumer, rest we will have to absorb. Further he points out saying, We are not planning to decrease any packaging volume content rather we are in talks to compensate with the prices of other raw materials. On the other hand, biscuit manufacturers like Surya Agro are adopting other strategies request to government for abolition of excise duty and reduction in value added tax by as much as four per cent in the Budget, stating that the product is consumed by common man and also distributed as relief material. Supporting this fact, Aggarwal states, The government should consider that biscuit is consumed by common man and is also a product distributed as relief material during natural calamities. At present, central excise duty on biscuits, cookies and wafers with maximum retail price (MRP) above Rs 100 per kg is eight per cent, while VAT in many states is 12.5 per cent. On cakes, however, the excise duty is levied at four per cent. Besides, Uttar Pradesh has increased VAT to 13.5 per cent from June 1, 2009 on cakes, cookies and wafers. So being a biscuit manufacturers we have been pleading for reduction in VAT for the past two years

pointing that processed food products such as bread, bhujia, namkeen attract either four per cent or nil VAT. Further he goes on saying, This is the only industry which is very labour intensive which directly has been affected because of this price rise including the distributor, retailer ant others who have suffered. Hence, the government should adopt policies like abolishing the MRP, which is of no advantage as the industry is not able to control the price of the commodities. Above all, there is already a lot of competition persisting in the market, so increasing the price of our product range wold be very difficult.

Where does sugar go next?

To work on the situation, private sugar mills and government-nominated commodity trading agencies have so far imported 4 million tonnes of sugar (including raw and white) which will be kept as reserves and pipeline inventory. Meanwhile, if the price rises abnormally high, the government would intervene with its own reserve for which an inventory of at least 4 million tonnes is required. Following these steps, the governments timely action on hoarders, that unearthed sugar into markets to the value of Rs 120 crore, pushed prices marginally down and analysts feel that the domestic supply deficit would continue to keep prices firm. Gopal comments, According to me, the farmer middle man is not being benefited and thought about. Therefore, the most estimable measure would be to incentivize Indian farmers to produce more sugar for the next year. Lal suggest, It is important for the government to realise that with the import process, planning is also required which includes projecting area under cultivation, increasing yield per hectare and improving the amount of buffer stock. Whereas Agarwal has another opinion indicating that the government needs to work out on its export subsidy strategy to take control over the sugar price spike. As last year, the Central and the Maharashtra governments continued to give export subsidies after March 2008, despite it being clear that sugarcane production in 2008-09 was short of target. Not keeping it real that if sugarcane production in 2008-09 was poor, the coming season is going to be worse. There was also a report submitted by a former sugar commissioner, placed before the state government in March 2008, recommending a ban on the export subsidy based on the poor outlook for sugarcane production in the 2008-09 season, starting October 2008.

Analysts believe, if there would be timely ban on exports, whether free or obligation-linked, the situation would not have been the same which continue to exist currently. Therefore, pointing on the sugar price rise and now to correct it Agarwal says, We believe, this situation is temporary and in next five months every thing will be on the track again. But now the government needs to work out in an organised manner, on the export subsidies and take control on the sugar production recovery. Moreover to relieve the succumbed situation of the related manufacturers Agarwal opines, The government can maintain the balance of input costs for the related manufacturers by offering other commodities at a reasonable price. Like for us, they can offer wheat, which is at its bumper production at a fair cost. Further, they can offer other components like packaging cost and industrial fuel at a sensitive price.

Effects
Global and Indian sugar prices have been rising for several months now following supply side problems in major origins. The pace of price rise may have slowed of late; but if anyone thought the bull-run has ended they must think again, for, conditions are turning positive for a continued price rise into 2010. From 12 cents a pound a year ago, global sugar prices galloped to nearly 25 cents three months ago with the world's second largest producer India desperately seeking the commodity to meet its domestic shortfall for the second season in a row. In the last one month, prices have settled lower at 22 cents. The market is unlikely to stay at this level for long. Broad range-trading at the 20-24 cents level and absence of break in either direction in recent times may have prompted some analysts to assert that the bullrun has come to an end. Such an assertion ignores ground realities. If anything, from the current levels, sugar prices have risks to the upside. Indeed, the global market is yet to enter the tightest period in 2009-10 market deficit. Production deficit for the year is estimated at 7 million tonnes. Once again, India is set to trigger price escalation. The first advance estimate issued by the Ministry of Agriculture for 2009-10 season shows sugarcane output at 249 million tonnes, down from 274 million tonnes a year ago. There is no

guarantee that cane output will be scaled down in future. For 2008-09, the first advance estimate was 294 million tonnes which as scaled down to 274 million tonnes in the fourth advance estimate. Will there be a repetition this season? One thing is clear: Sugar output in 2009-10 is most unlikely to exceed previous year's output of 15 million tonnes. Demand for cane from producers of traditional sweeteners (gur and khandsari) continues to be strong, cutting into availability for mills. India's opening stock for the new season is one of the lowest in recent memory. The saving grace has been duty-free imports. The country has so far purchased about 4-5 million tonnes of sugar which continues to flow in. Additional imports of at least three million tons may be required to rein in open market sugar prices. Weather induced damage in Maharashtra the largest producer and disruption to cane marketing in the major growing State of Uttar Pradesh can create supply bottlenecks. Importantly, the Government messed up the cane pricing issue which has now taken a political colour. Although Indian market fundamentals are not at all supportive of a price correction anytime soon, with crushing season having started, the upside to prices will be capped effectively for the next three months. When the crushing season comes to an end, by March 2010, the market has the potential change direction. By that time, planting conditions and acreage for 2010-11 would be known. On current reckoning, there is nothing to suggest a bounce back in cane acreage to anywhere close to 5 million hectares. So, in all likelihood, India's sugar woes may well continue. Brazil is caught up in its own problems. Reports point to the situation that the main centre-south Brazilian harvest is now coming to an end; but despite strong level of crush, the impact of heavier rains than usual (associated with El Nino) have markedly reduced yields. Sugar production is likely to hover around 35 million tonnes. Mills are considering closing early due to yields becoming uneconomic. Importantly, now that the flow of Brazilian sugar will trend lower until the start of the next harvesting year (May 2010), in terms of solving global deficit this is the start of the period when the market tightness will begin to be felt most acutely. Elsewhere, Chinese production has been revised down, while Mexico is facing weak production again. So, a combination of slowdown in heavy Brazilian exports, run down in global stock levels and chronic deficit staring India in the face is expected to propel world

sugar prices higher than they currently are. Although appearing somewhat weak at the moment, crude market is likely to turn supportive. It is not beyond expectation that world sugar prices could rise 10-15 percent from current levels to test 25 cents a pound (and even beyond if too much speculative capital flows in) sometime in the first half of 2010, and more likely in the second quarter April-June when Indian conditions crystallise. Policymakers in India are often obsessed with solving current problems and tend to ignore the impending ones. Krishi Bhawan which houses the Ministries of Agriculture and Food must begin to look at ways and means to expand cane acreage to 5 million hectares for the 2010-11 season and assured cane output of at least 300 million tonnes if it is serious about containing the ongoing sugar crisis. Until it happens, consumers will have little relief from high sugar prices.

Price rise send family budgets haywire

Even as India's economy is said to boom, millions of its citizens are groaning under soaring prices of vegetables and food grains and wish the government would do something about this, reports from across the country say. From Chandigarh in the north, to Ranchi in the east and from Bhopal in central India to Kerala in the south, a cacophony of voices has been raised against the relentless price rise, with the common man wondering when things would return to normal. While the poor have been worst hit, the middle class is also feeling the pinch. Tomatoes are selling at up to Rs 50 a kilo, cauliflower at Rs 42 a kilo and chillies at Rs 70 a kilo, playing havoc with household budgets and forcing people to drastically scale down purchases of non-essential commodities. Finance Minister P Chidambaram, at a news briefing here Thursday, made a

passing reference to rising prices of vegetables, even as he focused on steps the government was taking to control the prices of food grains. But, even more than wheat, sugar and pulses, it is the rising prices of vegetables that have hit the common man the hardest. The national capital is no exception to the rising trend, with tomatoes costing over Rs 40 per kilo against Rs 15 a couple of weeks ago, cauliflower at over Rs 42 per kilo and okra at over Rs 22. Among pulses, moong dal is selling at Rs 60-70, an increase Rs 3-13 against a week ago. "For the past two weeks the prices of vegetables are affecting our budget. Looking at the high tomato price, we have curbed its use," said housewife Romi Dash. "Earlier we used to consume over three kg of tomatoes every week, but for the last two weeks we are managing just one-and-a-half kilo," Dash added. Traders said that while un-seasonal rain and a severe heat wave had affected production, the hike in fuel prices was also responsible for the rising prices. "Low production coupled with high transportation costs due to the fuel price hike is the main reason for soaring prices," said Praveen Khandelwal, secretary general of Confederation of All India Traders (CAIT).

India sugar prices rise on slow crushing, demand

Indian spot sugar prices rose on Monday as crushing is off to a slow start in Uttar Pradesh, the country's second biggest producing state, and tracking some buying interest in the biggest producing state, dealers said. Sugar mills in India's second-biggest producing state have started crushing cane but production is off to a slow start up due to farmers' reluctance to sell their produce, the Economic Times newspaper reported.

The paper said farmers, demanding higher prices, refused to sell cane at the 180 rupees ($3.87) per 100 kg offered by mills, causing delays in crushing. In Kolhapur, a key market in top producer Maharashtra, the price of the most traded S-variety sugar rose 0.74 percent to 3,375.4 rupees per 100 kg. The prices fell in the past three trading sessions after crushing in Maharashtra accelerated. "Physical market saw some buying activity after prices fell slightly in the past three sessions," said a trader. Sugar mills in India's top producing state have accelerated cane crushing after last week's unseasonal rains and so far the state has produced higher quantity of the sweetener than last year, a government official said. "Rains had disrupted crushing last week for almost four days, but now fields are dry and crushing is going on in full momentum," Rajendra Chavan, sugar commissioner of Maharastra state, told Reuters in an interview on Friday. As on Nov. 15, 114 sugar mills in the state have begun operations and produced 366,200 tonnes of sugar compared with 325,000 tonnes produced by 97 sugar mills in the year-ago period. In the 2009/10 season, lower acreage and poor rains will keep India's output at 15.3 million tonnes, a little more than last year's output of 15 million tonnes, falling severely short of domestic consumption of about 23 million for a second straight year, a Reuters poll showed. India is expected to receive 700,000 tonnes of imported raw sugar.India allowed tax-free imports in early 2009 after lower cane production decimated output of the sweetener this year.In October, India received a total of 698,231 tonnes of raws and 115,456 tonnes of whites, the sources added. The country's sugar mills have placed orders to import 5 million tonnes of raws and more than 300,000 tonnes of whites in the year to September to overcome the scarcity.

Sugar price rise to hurt cola majors, biscuit..

The cola majors Pepsi and Coca-Cola India stand to lose Rs 300 crore or more annually from the recent hardening of sugar prices. The increase of Rs 4.50 to Rs 5 a kg since October could prove a bitter pill for confectionary and biscuit makers such as Britannia, ITC and Nestle as well. The spokespersons of both the cola companies declined to give details of their sugar consumption needs. Every one-litre bottle of carbonated drink contains around 120 gm of sugar. According to an ACNielsen report for 2006-07 - the last and probably only authentic survey on sugar usage trends - the carbonated beverages segment consumed 7.89 lakh tonnes (lt) of sugar, with organised players accounting for roughly 90 per cent of this. Taking a conservative seven lt figure for just the two cola companies, a rise of Rs 4.50-5 a kg would translate into a combined annual outgo of Rs 300-350 crore. This is more than their yearly ad budgets - estimated at Rs 130 crore for Coke and Rs 145 crore for Pepsi. The cola majors are not the only ones to be affected by costlier sugar. During the year ended March 31, 2008, Britannia Industries consumed 1.15 lt of sugar, with the same amounting to 59,217 tonnes for ITC and 45,057 tonnes for Nestle India. For Britannia, every Re 1 rise in sugar prices entails an extra expenditure of Rs 11.50 crore; a Rs 4.50 a kg increase would set it back by some Rs 50 crore. If you compare over January last year, sugar prices are higher by almost 45 per cent. This has obviously impacted our input costs negatively, said Ms Vinita Bali, Managing Director of the Rs 2,600-crore bakery products company. Britannias main rival, Parle Products Pvt Ltd, may, however, be somewhat better placed because of a captive 3,500-tcd sugar mill it owns in Uttar Pradesh. Ex-factory sugar prices are now averaging Rs 20-plus a kg against the Rs 12.50-13 levels at this time last year. The steep jump in sugar prices will certainly put pressure on our margins. And the outlook does not look positive even for the months ahead, noted Mr Sameer Suneja, CEO of Perfetti Van Melle India, which owns the Alpenliebe, Center Fresh and Mentos confectionary brands.

The President of the Indian Confectionary Manufacturing Association, Mr B.K. Gurbani, said that it is difficult to pass on higher sugar costs to the consumers because of price point and coinage issues peculiar to the industry. The MRP of a Re 1 toffee cannot be raised to Rs 1.30 or Rs 1.45; doubling it to Rs 2 would put off consumers. The ACNielsen survey estimated the countrys sugar consumption during 2006-07 at 18.23 million tonnes. The bulk of this was by industrial consumers (5.26 mt) and small businesses such as sweetmeat makers and restaurants (5.51 mt). Households consumed only 7.46 mt or 41 per cent of the total.

India Gets Caught Short as Sugar Prices Soar

Indian farmers abandoned sugar, prices are surging. The price of refined sugar on international markets has jumped 60 percent since the end of last year, to 23 cents a pound, even as other food commodities have stabilized or fallen. While all commodities move in cycles, sugar in India is a case study in feast-tofamine swings in which bountiful crops are followed by anemic harvests every two or three years. Volatility is aggravated some analysts say caused by government efforts to control prices to balance the interests of farmers and consumers. When prices were rising, for instance, policy makers restricted exports, which helped create a glut. By the time the government reversed course and subsidized exports, many farmers like Mr. Gujar had switched crops. Sugar is a political commodity, said M. R. Desai, president of the National Federation of Cooperative Sugar Factories, and the government is not ready to let go. Even as India rushes toward a future as a technology and services powerhouse, there has been slow, halting progress in its agrarian economy, which still sustains more than half of its 1.1 billion people. Hobbled by small farm sizes, an intense reliance on fickle monsoon rains and extensive government control, Indian farmers are less productive and more vulnerable than their peers in other developing countries like Brazil and China.

Economists say Indias approach to regulating sugar is an example of how populist policies can hurt the very people they were meant to help: farmers and the rural poor. India, of course, is far from alone. The United States restricts imports and uses subsidies to help producers maintain domestic prices at about twice the level of world prices. (Sugar retails for 56 cents a pound in the United States, up 5 percent from December.) Europe also protects its sugar industry. In 2006 the European Commission began changing the way it controls the commodity and started paying high-cost manufacturers to stop making sugar. Sugar policies in the West are typically intended to bolster the incomes of politically powerful farmers and factory owners, but here in India, policy makers try to walk the line between helping farmers and consumers. An estimated 28 percent of Indians still live below the poverty line. Moreover, sugar is an Indian culinary and cultural touchstone. It is liberally mixed into everything from syrupy tea to dense sweets. (The countrys sweet tooth also has a dark side. Diabetes is growing faster here than almost anywhere else in the world.) Even now with sugar prices up sharply, demand is growing, because Indias population is growing, said Sanjay Manyal, a sugar analyst at Icici Direct.com, a securities firm. To meet that demand, India will probably import 20 to 30 percent of the sugar it uses this fiscal year. Less than two years ago, the country exported 20 percent of the sugar it made. To understand Indias sugar problems, industry officials say it is important to consider what happened in 2006 when the government banned exports to bring down prices. Those efforts were almost too successful. Within a few months prices began falling as it became clear that farmers had planted too much cane. Farmers said conditions were so bad in 2007 and 2008 that sugar mills, which usually arrange to have cane harvested, did not even bother to send out crews. Many farmers, including Mr. Gujar, burned their crop in the field.

Government policy, well intentioned though it may have been, seems to have aggravated the cycle, said Samir S. Somaiya, president of the Indian Sugar Mills Association and a mill owner. The government then tried to help by subsidizing exports. At the same time, farmers began switching to other crops. The ground was being laid for the current shortage. Industry officials and analysts say the recent rise in prices has lured some farmers back to sugar cane, but India will not produce enough to satisfy domestic demand until at least 2011. Officials at Indias Agriculture Ministry, which regulates sugar, declined to answer questions. In addition to controlling international trade, policy makers decide how much sugar each mill can sell every month, set the minimum price paid to farmers and require factories to sell 10 percent of their product at below-market prices for distribution to the poor. Recently, policy makers also banned futures trading in the commodity. A worker sorted through bagasse, or the residual fiber leftover after the juice is squeezed from the sugar cane. The fiber is used as fuel to generate electricity.

Rising Sugar Prices and Indian Imports

Some officials have recommended easing control over sugar, but politicians are reluctant to do anything that might be seen as driving up food prices. Brazil, the worlds largest sugar producer, offers an interesting contrast to Indias volatile industry. That country has steadily increased production and exports, and now stands to benefit from Indias shortage. In recent years Brazil has used more than half of its harvests to produce ethanol, which, when blended with gasoline, has become a profitable fuel. Brazilian factories and farmers grow sugar cane on plantations of hundreds or thousands of acres, while Indian farmers have an average of two acres. The small scale makes it

prohibitively expensive for most Indian farmers to invest in efficient irrigation systems or mechanized harvesters. Some industry officials here say they are trying to do what Brazil has done on a smaller scale. Factories are installing distilleries to make ethanol from molasses, a byproduct of sugar production, to sell primarily to liquor companies and, to a lesser extent, for use as fuel. Demand for ethanol-blended fuels is low because the price of regular diesel and gasoline is subsidized by the government. Also, India does not require the use of blended fuels, as Brazil and the United States do. Sugar factories are also investing in power plants that are fueled by the fiber, or bagasse, left over after juice is squeezed out of the cane. Electricity can fetch high prices because of Indias chronic energy shortage, said Rajiv S. Kadapatti, director of Jamkhandi Sugars, which owns a factory in the southern state of Karnataka. Two years ago sugar gave us no profit, he said. It was power generation that kept us afloat. Farmers are also diversifying, growing bananas, vegetables and other unregulated cash crops. Residents of Loni Kalbhor, a village about 14 miles from the city of Pune, are eyeing other opportunities. Mr. Gujar, the banana grower, expects that he will be able to farm for another decade before his land is swallowed up by the urban sprawl around Pune, which is home to many growing manufacturing and technology companies. Many of his relatives have already quit farming and his teenage son and daughter have no interest in growing bananas or sugar cane.They wont do this, he said. They will change.

BIBLOGRAPHY:Websites:www.wikipedia.com www.ask.com