💸 Why are Sugar Stocks Soaring?
The government went full-circle on its decision around ethanol production. And this has stirred a storm in the sugar industry.
Sugar stocks have gotten sweeter.
Balrampur Chini Mills and Shree Renuka Sugars gained ~ 7.5% each.
Dalmia Bharat Sugar saw a 6.5% increase in its stock price.
Wondering why?
Read on.
Sweet Move by the Government
The government has recently pressed the Undo button.
It unbanned the use of sugarcane juice and sugar syrup to produce Ethanol.
Ehh? What does ethanol have to do with the sugar industry?
Well, producing sugar from sugarcane leaves a by-product called molasses.
This by-product can then be fermented to make ethanol.
The trick here is: the left-over sugar content in molasses determines the quality of ethanol.
It’s kind of a trade-off between producing more sugar or more ethanol.
Now, what good is ethanol?
First, Ethanol is a non-fossil biofuel that can help in the reduction of vehicular pollution.
Second, it will save foreign exchange required for the import of crude oil and reduce import dependence.
Third, ethanol production will also help farmers get payments on time. How?
You see, when sugar production is high, prices tend to fall.
This makes it difficult for sugar manufacturers to pay their farmers on time.
With more ethanol production, they will have a better cashflow, and will be able to make timely payments to farmers.
So, to ramp up ethanol production, in 2021, the government had announced a target of achieving 20% ethanol-blended petrol by 2024-25.
Why the ban then?
In an attempt to go green and sort their cash flow problems, many sugar mills and distillers rushed to produce ethanol.
So much so that mills invested in ethanol plants by borrowing money!
6 lakh tonnes of sugar has been diverted for making ethanol from sugarcane juice!
In 2023, the national ethanol production capacity reached 1,244 crore litres!
Result?
Sugar production is estimated to decline from 373 lakh tonnes last season (October - September) to 323 - 330 lakh tonnes this season.
It has already fallen by 11% year-on-year to 74.05 lakh tonnes during the October-Mid December period in 2023-24.
Low supply pushed prices up (Economics 101).
This is bad for us.
You see, India is the largest producer of sugar across the globe, producing around 373 lakh tonnes of sugar in 2022-23.
Plus, India is the 2nd largest exporter of sugar. We exported 64 lakh tonnes of sugar during 2022-23.
Sugar isn't just a sweetener, it is a lifeline for millions.
The sugar industry impacts the livelihoods of 50 million sugarcane farmers and 5 lakh workers employed in sugar mills.
To increase the supply of sugar for domestic consumption and reduce prices, the government announced this ban on December 7, 2023.
Why lift the ban then?
This ban came as a shock for the sugar industry.
Mills that had invested heavily in ethanol plants were now regretting their move.
After all, sugar mills and distilleries made Rs. 18,000 crores in revenue from the sale of ethanol during 2021–22.
The ban meant no more producing ethanol, no more extra revenue and no guarantee of timely payments to farmers.
Disappointed and disheartened, the stakeholders appealed to the Indian government.
Their argument?
The sugar and ethanol industries could coexist and support each other, contributing to both food security and energy needs.
And the government listened.
It has now lifted the ban.
But to strike a balance between sugar and ethanol production, it has set a limit.
It has capped the amount of sugarcane that can be diverted for ethanol production at 17 lakh tonnes.
This limit will be reviewed every month.
This balancing act aims to ensure adequate sugar availability for domestic consumption while also promoting ethanol as an alternative fuel source.
Did we finally get it right? Let's hope so!
Now this entire saga is a real life lesson about second order thinking.
Basically, thinking about the consequences of our decisions, and the consequences of those consequences.
Nope, we don't expect you to learn crystal ball gazing for this.
Rather you should be able to assess the probabilistic outcomes and build safety nets to prevent unintended consequences.
If the policy makers could foresee the quick diversion of resources to production of ethanol, the ban and unban could have been avoided.
A decision should not be taken solely to solve a problem at hand.
Think before making an important decision: Can there be unintended consequences? How can you prevent them?
Do you know of any real-world mishaps which could have been avoided with robust second-order thinking?
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