India's sugar production for the 2009-10 sugar season was 18.9 million tonnes, which was higher by 30% over the previous year. The production in Maharashtra and Karnataka recorded significant increase of over 50% while Uttar Pradesh recorded an increase of 27%. Other sugar producing states including Tamil Nadu and Andhra Pradesh recorded a decline in production by almost 20%. The overall increase in production has been primarily on account of favourable climatic conditions and lower diversion of cane in Uttar Pradesh for alternate sweeteners in the second half of the crushing cycle.

The sugar prices steadily increased from September 2009 to February 2010 in anticipation of lower production for the season. This prompted the sugar mills to procure cane at higher prices in order to secure better supplies. India imported an all time high quantity of raw and white sugar in the light of initial estimates of lower production for the season. The total import for 2009-10 was 4.3 million tonnes comprising of 3 million tonnes of raw sugar and 1.3 million tonnes of refined white sugar.

The year 2009-10 witnessed huge swings in sugar prices due to volatility in production estimates. Domestic sugar prices touched an all-time high while global sugar prices touched a three-decade high. The sugar prices started moving upwards from September 2009 and touched an all time high of Rs. 4420 per quintal in the first week of January 2010. Lower cane diversion in UP coupled with higher yields in Maharashtra and Karnataka led to the additional sugarcane supplies to sugar factories and resulted in an increase in production of sugar by 4 to 4.5 million tonnes over the initial forecasts.

COMPARATIVE SUPPLY & DEMAND POSITION OF SUGAR FROM 2005-06 TO 2009-10 AND ESTIMATES FOR 2010-11
(Figures in Million tonne)

	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11
						(Estimates)
Opening Stock as on 1st Oct.	4.0	4.3(*)	11.0	10.4	4.4	5.0$
Production during the Season	19.3	28.3	26.3	14.5	18.9	25.0
Imports	-	-	-	2.5	4.0(**)	-
Total Availability	23.3	32.6	37.3	27.4	27.3	30.0
Offtake
i) Internal Consumption	18.5	19.9	21.9	23.0	21.3#	23.0
ii) Exports	1.1	1.7	5.0	0.02	0.2	2.0
Total offtake	19.6	21.6	26.9	23.0	21.5	25.0
Closing Stock as on 30th Sept.	3.7	11.0	10.4	4.4	5.8	5.0
Stock as % of Offtake	20.0%	55.3%	47.7%	19.2%	27.2%	21.7%

(*) Adjustment made as per Central Excise Certificate
(**) Total imports of Raw & White sugar amount to 4.3 million tonne which is equivalent to 4.0 million tonne of white sugar
# Based on net release after adjusting unsold stock plus 0.3 million imports by bulk consumers
$ As per Government data
Source: ISMA upto 2009-10 and Company Estimates

The year 2009-10 also showed high volatility in sugar prices. As the sugar prices continued its rise, the Government initiated various measures such as fixing stock limits for market intermediaries, allowing direct import by bulk consumers of sugar and allowing duty-free import of raws and whites to ease the domestic supplies. With the supply easing and in the backdrop of higher production estimates, sugar prices started declining from February 2010 and fell by about 39% from the peak in January 2010 to September 2010.

The cost of production of sugar for 2009-10 season has been high due to increased cost of cane. The average sugar prices during the year remained below the cost of production. All the mills in Uttar Pradesh ended up paying significantly higher cane price than the State Advised Price (SAP) of Rs. 1650 per tonne for normal variety of cane. Climatic conditions led to below normal recovery of sugar as compared with the earlier seasons. Initial estimates of lower sugar production prompted the Central Government to increase the levy quota obligation for sugar mills from 10% to 20%. These factors resulted in huge losses for sugar mills.

In respect of the forthcoming season 2010-11, the area under cane cultivation is estimated to increase by 15-18%, prompted by the record cane price realisation in the previous season. Favourable monsoon in most of the cane growing regions is expected to result in better yield and recovery. Government of India’s estimates put the total cane production at about 348 million tonnes, reflecting a growth of 25% over the previous season. Initial estimate for sugar production for 2010-11 is at 25 million tonnes which is 33% higher than the previous season. The Government, sensing a comfortable position, has allowed export of sugar under Advance License Scheme (ALS), which will aggregate to a million tonne and may allow more exports under Open General License (OGL) if there is no significant change in the production estimates. With the country's rising consumption, even at the high production estimate of 25 million tonnes, accretion to inventory is expected to be minimal and therefore, the sugar prices are expected to remain stable and firm at the current level of Rs. 29 per Kg.

In view of the higher estimates of sugar production for 2010-11 season, the Central Government has already revised the levy obligation back to 10% of production from the 20% during the previous season. This should considerably minimise losses on the sale of levy sugar during 2010-11 as the levy price is lower than its cost of production.

Global Sugar Industry
India is the largest sugar consuming country in the world. The initial estimates of lower production in India for 2009-10 and physical sugar imported by it resulted in rising global sugar prices. Globally, in view of two successive years of sugar deficit, the sugar prices were ruling high. Later, the prices steeply declined in expectations of record production in Brazil and significant bounce back of production in India. Again the prices have started rising from July 2010 as the production estimates in India are being revised downwards, which may as best lead to parity position, without any accretion to the global sugar inventories.

With one of the strongest "El Nino" phenomena felt in Brazil from the middle of 2009, when the harvesting was at its peak, Brazil experienced the wettest summer during 2009-10. Because of the wet climatic conditions, the sweetener contained in sugarcane was lowest during 2009-10 at 130.2 kg per tonne of sugarcane crush. Due to wet summer months, about 50 million tonnes of cane remained unharvested till the end of 2009-10 season.

The sugar prices internationally, after showing a steep decline from the peak in January 2010, started going up from July 2010 onwards on account of lower estimates of global sugar production. The estimates of sugar production for Brazil was consistently brought down due to adverse climatic conditions and logistics constraints and the same applied to Australia, Thailand, Russia etc. The sugar prices in India moved in tandem with Global sugar prices till June 2010 and since then the global prices moved upwards in view of the lower estimates of production from Brazil.

On account of the above factors, sugar prices further moved up globally in October and November and in November 2010, it touched the record highs.