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.”
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This crisis has not only affected sowing of important crops but may also adversely impact sugar recovery with the imports being costlier this year, India will have to suffer due to inefficient amount of buffer stock. |
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Galvanising impacts of sugar rushWith 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 government’s 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.”