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Sugar companies are looking forward to the added flexibility from the partial decontrol announced recently by the central government to enter into forward contracts with bulk buyers.
Sanjay Tapriya, director, finance, at Simbhaoli Sugar Mills, said, "With the levy arrangement and quota system being discontinued, it will be easier for mills to enter into forward contracts with buyers like ice-cream and beverage companies. Generally, these start buying when winter begins, for their products in the summer."
Such an arrangement would give mills more stability, avoiding open market volatility.
Asitava Sen, head of food and agri business research at Rabo Bank, said, "Institutional food and beverage demand for sugar accounts for 30 per cent of the sugar available in India and is rapidly growing."
Until now, bulk buyers were restrained from entering into forward contracts as the sale release mechanism was complex, where even mills were unsure on how much sugar would be available for the open market. Since this has gone, forward contracts will now be possible.
Meanwhile, the price of sugar in the open market after decontrol has come down because exports have been halted due to unviable prices. State governments were asked to procure their requirement for the Public Distribution System from the open market after decontrol. As a result, prices in many regions have fallen below the cost of production. In Uttar Pradesh, the second largest producer, prices are Rs 3 a kg lower than the cost of production, said a senior official of a UP mill.
Mills are now relying more on byproducts. Last month, tenders were floated for supplying ethanol for mixing with petrol. A price of Rs 35 a litre has been fixed, 30 per cent higher than earlier. Rating agency Icra has said, "Prices of byproducts such as bagasse and molasses continue to remain remunerative, driven by healthy demand from consuming sectors such as power, paper and alcohol. Higher realisations for fuel ethanol in the current financial year will further result in improved returns from byproducts."
Further, forward integration into distilleries and power generation continue to yield healthy returns, driven mainly by a supportive regulatory framework and healthy offtake, and pricing for alcohol and power, said Icra.
