- Wealth PMS (50L+)
India raises sugar import duty to 40% from the old 15%. In addition the government will continue to pay Rs. 3,300 per tonne of export till September as a subsidy. And then, mandatory blending of ethanol into petrol will go up from 5% to 10%, and the sugar industry’s a huge source of ethanol.
Sugar is a political story. Sugar mills buy from farmers at rates the state government dictates. Sugar farmers can’t even sell to others, they have to sell to the local mills. (who have first right of refusal)
The by-product of the crushing, molasses, is used for making ethanol. This can be used in cars (as a blended fuel) or in alcohol products. Political influence is high in those sectors too.
With the ethanol blend increase we will see a large demand for molasses, and therefore the revenues of sugar mills should increase.
India has produced surplus sugar for five years now, and millers are sitting on large stockpiles of the commodity. That’s why they can’t really produce more, and they can’t buy from farmers until current stocks are gone. And there’s no export demand because there’s a worldwide glut of sugar now.
However that may change with a drought in Brazil (the largest sugar producer).
But here the problem is of the whole system. Too much stock? Prices must fall. But they can’t fall too much because the government dictates what the farmer will get (and he has no choice of going elsewhere).
And then the sugar mills have massive loans. Around 11,000 cr. is due. With continuing surplus sugar stocks they will have to default if the sugar prices don’t rise. Some of the biggest lenders in this system are public sector banks, who are owned by the government.
The import duty increase isn’t massive because we don’t import much. But it does mean that if sugar prices go up, and the world wants to give us cheaper sugar, that the duty is a deterrent. That 40% is a buffer for the sugar cartel to hike up prices, if they want to.
Meanwhile, we’ll end up paying more for sugar anyhow. The only way to profit will be to either buy companies making sugar, or to eat less of it! (Companies like Balrampur Chini, Bajaj Hindustan, Shree Renuka Sugars etc. will benefit)