The Hindu Business Line : Bulk buyers may benefit from crash in sugar prices

The Rs 3-4 per kg decline in sugar prices since the Centre's ban on exports in July has been good news for consumers, particularly large buyers such as confectionaries, biscuit manufacturers and cola companies. But the same cannot be said for the increasingly cash-strapped mills and cane farmers.

In Delhi, unbranded sugar is currently retailing at Rs 18-19 a kg, against Rs 21-22 till three months back.

For an average urban middle class family that consumes about five kg every month, the savings from an Rs 3-4 per kg drop in prices comes to Rs 15-20 or just Rs 180-240 for a full year.

Retail households

Moreover, retail households make up only a quarter of the 180-lakh tonnes (lt) sugar consumed in the country.

The real beneficiaries of the sugar price crash are bulk buyers, including both unorganised players (sweetmeat makers and halwais) as well as industrial consumers producing soft drinks, biscuits, chocolates and other confectionaries.

The consumption shares of these two segments, as per ballpark estimates, are 55 per cent and 20 per cent respectively.

The annual domestic sugar purchases of Pepsi and Coke alone are said to be in the range of 1.5-1.6 lt each.

Similarly, Britannia Industries Ltd, according to its 2005-06 annual report, consumed 85,367 tonnes.

Pepsi, thus, stands to gain roughly Rs 45-60 crore from a Rs 3 per kg decline in sugar purchases, while the corresponding figure for Britannia would be almost Rs 30 crore.

Money saved

The money saved would cover a third of the latter's total advertising and sales promotion expenses of Rs 107 crore.

At the other end, a cane grower in Muzaffarnagar or Bijnor who typically sells 50 tonnes of the crop, equivalent to five tonnes of sugar, would be set back by Rs 15,000 from a Rs 3 per kg decline in sugar prices either by way of lower cane rates or a build-up of arrears by factories.

Contrast this to the Rs 180-240 full-year savings for middle class households in Delhi or Chennai!

Maharashtra worst hit

Prior to the export ban, mills in Maharashtra were realising up to Rs 1,750 per quintal on domestic sales and Rs 1,850 on exports.

Now, that has come down to Rs 1,350.

In UP, ex-factory prices have dropped from Rs 1,850 to Rs 1,550, with some sales taking place at even below Rs 1,500.

In Tamil Nadu, realisations have fallen from Rs 1,800 to Rs 1,450.

While mills in UP have already started accumulating cane arrears, the situation in Maharashtra is worse; "short margins" worth Rs 670 crore have so far been created in the factories accounts with co-operative banks. The short margin has arisen due to ex-factory prices ruling below the Maharashtra State Co-operative Bank's (MSCB) reference rate of Rs 1,450 per quintal, at which stocks are pledged against borrowings.

Over the last six months the MSCB has reduced its reference rate from Rs 1,700 to Rs 1,450 per quintal, which, in itself, has reduced the mills' capacity to borrow.

"We are allowed to borrow only up to 85 per cent of the value of the stocks. Even on this lower value, we are now running short margins," a miller said.

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