Minal\d:\NCDEX\Sugar Cover.

cdr
What are Sugar futures?

Sugar Futures are exchange traded contractual obligations

to make or accept delivery of a specified quantity and
quality of Sugar during a specified time in the future at a
price agreed upon at the time the commitment is made.

Through Sugar futures contract a Sugar mill or trader will

be able to transact a series of contract set for a specified
period of time in future say 8-10 months ahead in time for a
standardized specification of Sugar (as per our contract)
for a specified location of delivery but only the prices
quoted by the buyers/sellers vary.

Who are the main participants in Sugar Futures markets?

There are three main types of participants in any futures

markets. These are

Hedgers

Speculators and

Arbitrageurs.

Hedgers are users who like to reduce the price risk they
face from potential price movements. Often, hedgers are
willing to sacrifice the potential upside to gain certainty
about prices.

Speculators are participants who like to take directional

view of future price movements and take on the risk that
hedgers like to reduce.

Arbitrageurs are participants who exploit price differentials

on the same commodities / contracts that are traded on
two different markets (for e.g. between futures prices in two
exchanges).

1
Sugar

Sugar (sucrose) is a carbohydrate that occurs naturally in

every fruit and vegetable. It is the major product of
photosynthesis, the process by which plants transform the
sun's energy into food. Sugar is separated for commercial
use from sugarcane and sugar beet in which it is abundantly
available.

Global Scenario

World Sugar Production

Sugar: World demand-supply

('000 tonnes,
raw value) 1999-2000 2000-01 2001-02 2002-03

Opening stock 32,372 36,133 37,424 33,989

Production 136,531 130,495 134,888 147,336

Imports 36,073 38,646 37,695 39,169

Total Supply 204,976 205,274 210,007 220,494

Exports 41,448 37,686 41,228 45,724

Domestic
consumption 127,395 130,164 134,790 137,725

Closing stock 36,133 37,424 33,989 37,045

Stock-to-use ratio 21.4 22.3 19.3 20.2

Major producers-Brazil, India, EU

Sugar is produced in 115 countries. Sugar is extracted
from two different raw materials
sugarcane
sugar beet

2
Sugarcane is cultivated under tropical climates, while sugar
beet is grown in temperate regions. Around 75% of the
sugar produced in the world is from sugarcane, with beet
sugar accounting for the rest.

Sugar : Sugar producing country profile

Total number of 115 Brazil, India,

countries European Union

Produce from 67 Brazil, India,

cane only Thailand, Australia,
Cuba

Produce from 39 European Union,

beet only US, Turkey, Ukraine,
Poland and Russia

Produce from cane

and beet 9 -

World Sugar Trade

Sugar is a widely traded commodity in international markets.
70% of world sugar production is consumed in country of
origin; only the balance 30% sugar is traded in international
markets. The distortions in world sugar are:

Small percentage of free sugar trade as compared

with total world production
Various policies of governments of sugar
producers have impact on sugar production and
trade
Production of 40% of sugar is highly subsidized.
World sugar prices are significantly below the
average cost of production because of various
trade protective policies used by various countries
(refer Table below)

Domestic prices of 90% of the sugar sold are higher

than the international prices.40% of world sugar
production is sold in international markets at prices
50% to 400% higher than the prices in international
market.

3
Sugar: Forms of support adopted by different countries
Minimum Minimum Import Export Other
support sugarcane Controls Subsidies forms of
price for support Support
sugar price
EU India Brazil EU Australia
USA EU EU USA Brazil
China USA CUBA EU
USA Cuba South Africa USA
Japan Turkey Turkey Columbia
Thailand S. Africa India Cuba
Turkey Thailand Mexico
China Thailand
Japan S. Africa
Turkey
India
EU: European Union Source: CRIS INFAC
Note: This is only an indicative list

Production of sugar in the world is not responsive to

change in prices
Perennial nature of sugarcane crop - around 75%
of the world area is under sugar crops.
Ratoon crop grown by sugarcane producers due
to which it is extremely difficult to match sugar
production with price conditions
Lengthy gestation period for investments in sugar
manufacturing and refining
Production of sugar is sensitive to weather
conditions
Export concentration
Sugar export is concentrated among a small
group of countries- just 5 countries account for
around 66% of world sugar trade
Major Exporters of sugar - Brazil, EU, Thailand,
Australia, Cuba
Leading exporters are leading producers of sugar
Limited number of key sugar exporters makes
the world prices heavily dependent on the
demand-supply position of these countries
Production status of sugar in key exporting
countries affects world sugar prices
Varying dependence of sugar exporting countries on
exports
Although Brazil is the largest producer of sugar in the
world but it is not the heaviest dependent on sugar
exports due to its ethanol programme. Amongst major
sugar producers, Australia is the most heavily dependent
on exports. The following table shows the dependence
of sugar producing countries on exports:
4
Sugar : World Exports
Production Exports Exports as
Million Million a % of
Tonnes, Tonnes, Production
raw value raw value
India 22,100 1,950 8.82
Australia 5,371 4,220 78.57
Brazil 23,810 14,000 58.80
China 10,637 120 1.13
Cuba 2,000 1,350 67.50
European Union 18,675 5,600 29.99
Mexico 5,229 46 0.88
Thailand 7,303 5,100 69.83
USA 7,600 129 1.70
Source: USDA and CRIS INFAC Data pertains to 2002-03

Import diversification

Sugar import is diversified over more than 100

countries. The import requirements of around
100 countries have to be added up to arrive at
the quantum of exports by the top five exporters.
This reflects the widely dispersed nature of
imports

Major Importers of sugar - Russia, Indonesia,

EU, Japan, USA, Korea, Malaysia, China, Algeria,
Iran etc

Import duties imposed to curb imports and offer

protection to domestic production. The world
average of import duties is estimated to be
around 79%. India has an import duty of 60%
plus a countervailing duty of Rs 910 per tonne

Declining share of beet sugar production.

The beet sugar production is declining and also the

cost of production of sugar from beet is costlier than
the sugar produced from cane.

Differences in rate of growth of sugar consumption

between various continents

Impact of WTO on world sugar trade

Liberalisation of the world sugar industry under the
WTO is not expected to adversely affect the Indian

5
 sugar industry. In India, the sugar imports could be
reduced marginally, from the current level of 60%.
(At present, the customs duty in India is lower than the
WTO bound rate of 150%, and the customs duty of
most developed countries is higher)
With the likely removal of the levy quota and quarterly
free-sale quota release systems imposed on the
domestic producers, restrictions on sugar imports
would also have to be removed. As a result, sugar
prices in India would be aligned with the international
prices of sugar.
Given the likely increase in world sugar prices, with
the liberalization of the world sugar markets, import
pressures could be lower in India. Hence, domestic
prices of sugar could increase. In the long term,
export opportunities for efficient Indian sugar
producers would increase.
Slow response of demand - supply with respect to
changes in prices
Most of sugar consumption is in developed
countries
Developed countries have low or nearly zero
price elasticity because sugar consumption
accounts for a marginal proportion of their
disposable income
Consumption of sugar in developed countries is
in processed food form and the corporate buyers
of sugar in these countries ( food processors
like soft drinks, biscuits, confectionary producers)
are more concerned with preserving the market
shares of their products than the price of raw
material, sugar
Indian Scenario
India has been known as the original home of sugar and
sugarcane.Indian mythology supports the above fact as it
contains legends showing the origin of sugarcane.
In global sugar economy, the Indian sugar industry has
achieved a number of milestones.
Largest Sugar Producer in 7 out of 10 years
Second Largest Area under Cane/Cane Production
Amongst the cost-effective industries with its field cost

6
 (Sugar cane) being the second lowest, despite small
land-holdings and low productivity
Fourth efficient processor of sugar despite low
capacity of its sugar plants as compared to very large-
size plants in other parts of the world.
Sugar: India's share in global production

(Million Global India's Indias

tones) production production production
as a % of
global
sugar
production
1997-98 127.0 14.0 11.0
1998-99 133.4 16.9 12.7
1999-00 136.2 19.8 14.5
2000-01 130.0 20.1 15.5
2001-02 135.2 20.1 14.8
2002-03 143.0 21.6 15.1
Source: International Sugar Organization

Indian Sugar Industry

No. of Sugar factories established 507
Total Capital Employed Rs. 50,000 Crores
Total Annual Turnover Rs. 25,000 Crores
Total Payment to Cane growers Rs. 18,000 Crores
Contribution to Central &
State Exchequers Rs. 1700 Crores+
800 Crores
Direct Employment:
Rural Educated 5.00 Lakhs
Farmers / Families
involved in Sugarcane
(7.5% of Rural Population) 45 Million

The Indian Sugar industry is the second largest agro-

processing industry in the country. It can be broadly
classified in to two sub sectors, the organized sector i.e.,
sugar factories and the unorganized sector i.e.
manufacturers of traditional sweeteners like gur and
khandsari.

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 INDIAN SUGAR INDUSTRY

Organized Sector (Sugar) Unorganised / Traditional

Sector (Gur & Khandsari)

Co-operatives

Private

Public

Agronomic Suitability /Geographic Location

Sugarcane (Saccharum officinarum) is the main source of
sugar in India and holds a prominent position as a cash
crop. It accounts for 60-65% of the cost of production of
sugar. India is the second largest producer of sugarcane
next to Brazil. Presently, about 4 million hectares of land is
under sugarcane with an average yield of 70 tonnes per
hectare.

Sugarcane Production

Sugarcane production depends on the sugarcane area

under cultivation and the sugar yield. The total sugarcane
area under cultivation depends on:

Profitability of sugarcane cultivation compared with

that of alternate crops

Weather conditions during the previous and current

seasons

Rationing

Promptness in the payment of the sugarcane dues of

the previous sugar season

Overall sugarcane yield would depend on

Type/variety of seed used

Extent of ratoon crop

Weather conditions/climate during the sugar season

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 Soil conditions

Availability of water

Weed, pest and disease control

Sugarcane Crop features

Sugarcane is a tropical crop grown in a frost-free and

warm climate (high temperatures for at least 8 months).
The crop grows for 8-24 months, depending on the climate.
(In general tropical varieties are adapted to an 18-36 month
growing period, while subtropical varieties are adapted to
a 9-12 month period.) It grows best on medium heavy
soils, but can also be raised on lighter soils and heavy
clays, provided there is adequate irrigation available in the
former type of soils and drainage is good in the latter type
of soils. The crop grows best in the tropical regions
receiving a rainfall of 750 to 1200 mm.

Sugarcane is planted vegetatively, wherein a one metre

piece of sugarcane is laid end-to-end in a row, with plants
forming on the nodes of the sugarcane. In order to facilitate
cultivation and easy use of herbicides for early weed control,
the planting is done in rows about 6 feet apart. With plants
becoming taller, the lower leaves along the stems ultimately
drop off and only leaves toward the top remain green and
active. The stems have a hard, thin, outer tissue or rind and
a softer center between the nodes. The high sugar
containing juice is in this centre whose sweetness is
measured by sucrose content of the cane.

Sugarcane Crop in India

India had ideal conditions for growing sugarcane at a low
cost, such as tropical climate, easy availability and low
cost of labour, and low cost of irrigation facilities. More
than one crop is harvested from a planting and after the first
crop is removed, two or more so-called stubble crops
(ratoons) are obtained.

Planting season normally starts in between February to

April, harvesting starts from the following October and
crushing starts in October, peaks in January and continues
till March.

In India, around 90% of the sugarcane cultivation is under

irrigated land. The irrigated area under sugarcane

9
cultivation accounts for around 5 % of the total irrigated
area.

Water intensity of sugarcane

Sugarcane is a very water intensive crop. It is second to

paddy in water requirements as shown below:
Crop Water Duration Frequency No. of crops
required per year
(inches)
Paddy 51 2 hours Once in 3 days for One in rainy
4 months season
Sugarcane 40 2 hours Once in 3 days for One crop
4 months
Cotton 21 5 hours Once in 14 days for One crop
4 months
Ragi 21 3 hours Once in 14 days One/two crops
Groundnut 16 4 hours Once in 14 days for One crop
4 months

State wise sugar profile

In India the major sugarcane producing areas are Andhra
Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu and
Uttar Pradesh. These states account for 85-90% of the
sugarcane produced in India.

Major sugar producing states - Maharashtra, UP,

Karnataka, Tamil Nadu, Gujarat, & AP

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Sugar : Statewise Profile

AP Karnataka Maharashtra TamilNadu UP

Area ('000 ha) 234 385 599 284 1852
Yield (tonnes/ha) 65.8 84.4 61.8 106.8 62.8

Cane crushed
('000 tonnes) 11980 17303 53441 16645 59271

Duration of crushing
(days) 130 157 122 173 158

Sugar recovery rate

(%) 10.10 10.79 11.64 9.88 9.53

Cane production
('000 tonnes) 15387 32479 37015 30282 116324

Sugar production
('000 tonnes) 1210 1868 6219 1644 5651
Data pertains to 2002-03

Production Process and By-products

Sugar is primarily extracted from sugarcane and beet. The

difference between the production processes of sugar from
the two raw materials is minor. In India the process of
manufacturing sugar is as follows:

Sugarcane

pressmud

Extraction of juice
Co-
Bagasse generation
of power
Clarification of juince

Evaporation

Pan-boiling

Crystallisation

Centrifugation Recovery Molasses

White sugar Industrial &

Potable
Alcohol

11
Extraction of the cane juice from the sugar cane, usually by
crushing the sugar cane (at this stage the sweet juice
contains many impurities - the soil from the fields, some
small fibers and green extracts from the plant)

After settling out much of the dirt and other impurities, the
juice is thickened into syrup by boiling off much of the
water (evaporation)

The syrup is placed into a very large pan for boiling and
more water is boiled off until conditions are right for sugar
crystals to grow

Once the crystals have grown the resulting mixture of crystals

and syrup is spun in centrifuges to separate the two (like
spinning clothes in a washer). The crystals are then given a
final dry with hot air before being stored.

The final raw sugar is like a soft brown sugar and is stored
in a large sticky mountain. It can be used like that but usually
it gets dirty in storage and has a distinctive taste, which
most people don't want. That is why it is further refined to
produce white sugar for human consumption. Additionally,
because one cannot get all the sugar out of the juice, there
is a sweet by-product made - molasses.

By-products
There are essentially three main by-products generated
by the sugar industry.

Bagasse: It is the other major by-product of the sugar

industry. It is used for generation of steam and power
required for processing of sugarcane.

Molasses: It is a prime input for the manufacture of alcohol

and Alco chemicals like acetic acid, acetic anhydride. It is
also an important constituent for the production of
compound cattle feed.

Press-Mud: It is rich source of manure for crops.

A ton of sugarcane crushed produces around 350 kg of

bagasse, 45 kg of molasses and 510 kg of press mud.

Substitutes and complimentary products of Sugar

Sugar substitutes can be divided into two major categories:

i) Gur and Khandsari: Gur is unrefined sugar and

khandsari is non centrifuged sugar. These are mostly

12
 used in villages and by rural folk as sweetners and
also as important sources of nutrition.

ii) Artificial sweeteners: These are compounds

providing the sweetnerss of sugar without the calorific
value. It is mostly used by diabetics, heart patients
and obese people.

Sugar Demand & Supply in India

In India sugar production follows a 5-7 year cycle. Sugar

production increases over a 3-4 year period, reaches a
high, which in turn, results in lower sugar prices. As a result
of lower sugar price realizations of sugar mills, the
sugarcane arrears increase. The increase in sugarcane
arrears results in lower sugarcane production, resulting in
lower sugar production for the next 2-3 years. Because of
lower sugar production the sugar prices shoot up resulting
in increased area under sugarcane cultivation during the
next season.

Sugar: Trends in Demand and Supply

(million tonnes) 1998-99 1999-2000 2000-01 2001-02 2002-03 (E)

Production 15.5 18.2 18.5 18.5 20.1
Local Consumption 15.0 15.4 16.1 18.1 18.5
Exports 0.0 0.1 1.2 1.1 1.8
Imports 1.0 0.4 0.0 0.1 0.0
Opening stock 5.4 6.9 10.0 11.2 10.7
Closing stock 6.9 10.0 11.2 10.7 10.5
Stock-to-use ratio 45.8 64.6 64.7 55.6 52.0
E: Estimate Source: Indian Sugar Mills Association

13
Sugar Demand in India
The demand for sugar is mainly dependent on
i. Population growth
ii. Income levels
Consumer preference for sugar vis-a-vis alternate
sweeteners
Being a basic commodity, the demand for sugar increases
with an increase in the population. The increase in per
capita income increases the demand for sugar. Between
1998-99 and 2002-03, consumption increased at a CAGR of
4.5%, due to an annual growth of 1.8% in population and
2.6% in per capita consumption of sugar.
Sugar : Trend in domestic consumption

Year Per capita Per cpaita

consumption consumption
of sugar of Gur &
Khandsari

1997-98 15.54 10.3

1998-99 15.44 9.7

1999-00 15.54 10.0

2000-01 15.92 10.01

2001-02 17.59 10.0

2002-03 E 17.69 9.8

E: Estimate Source: CRIS INFAC

Sugar Supply in India

The supply of sugar in the market depends on factors,

which can be classified as

i. Climatic factors

ii. Technical factors which include

Sugarcane production

Sugarcane utilisaton for sugar production

Duration of the season

Recovery rate

iii. Political factors

14
Sugar Contracts on NCDEX
Sugar (M Grade)
Futures Contract Specifications
Trading system NCDEX Trading System

Mondays through Fridays

Trading Hours - 10:00 am to 4:00

pm and 5:00 pm to 11:00 pm

Closing Session - 11:15 pm to 11:30

pm

Saturdays

Trading hours Trading Hours - 10:00 am to 2:00

pm

Closing Session - 2:15 pm to 2:30

pm

On the expiry date, contracts

expiring on that day will not be
available for trading after 4 p.m.

Basis Price Ex-warehouse basis Muzaffarnagar

inclusive of all taxes

Unit of trading 10000 Kgs (=10 MT)

Quotation/base
value Rs. per Quintal

Tick Size Re. 1.00

Ticker Symbol SUGARMMZR

Delivery Unit 10 MT net basis packed in 50 kgs

new A Twill Bags / PP bags

Quality Sugar in crystal form

Specification manufactured by vaccum pan
method of current season with :

Moisture : 0.08% Max

Polarisation : 99.80% Min

ICUMSA : > or = 150 ICUMSA and

< 200 ICUMSA as determined by
GS2/3 METHOD 8 prescribed in
Sugar Analysis ICUMSA Method Book

15
 Grade : M

Grain Size : Medium as determined

by the methods prescribed in
IS:498-2003

Quantity Variation +/- 5%

Delivery Center Exchange certified warehouse in

Muzaffarnagar *

Delivery Upon expiry of the contracts, if any

Seller with open position desires to
give delivery at a particular delivery
center, then the corresponding
Buyer with open position as
matched by the process put in place
by the Exchange shall be bound to
settle by taking physical delivery

No. of Active Maximum 12 contracts or

contracts minimum 2 contracts running
concurrently

Opening of October, November and

contracts December 2004 and April 2005
contracts to be launched on July
27, 2004

Subsequently trading in any

contract month will open on the 21st
of the month. If the opening day
happens to be a non-trading day,
contracts would open on the next
trading day

Due Date 20th day of the delivery month. If

20th happens to be a holiday, then
previous trading day. If 20th
happens to be a Saturday or Sunday
then the due date shall be the
immediately last preceding trading
day of the Exchange

Closing of All open positions will be settled

contract as per general rules and product
specific regulations

16
Price Band Limit 10% or as specified by
Exchange from time to time. Limits
will not apply if the limit is reached
during final 30 minutes of trading

Position Limits Member-wise: Max (Rs. 20 Crores,

15% of open interest), whichever is
higher Client-wise: Max (Rs. 10
Crores, 10% of open interest),
whichever is higher

Premium M grade sugar with ICUMSA 100 -

150 could be accepted as good
delivery but with a premium of Rs.
25 per quintal

* Also deliverable at designated warehouses at Delhi and Kolkata subject

to location premium/discount differences which shall be announced by
the Exchange from time to time.

Sugar (S Grade)

Futures Contract Specifications

Trading system NCDEX Trading System

Trading hours Mondays through Fridays

Trading Hours - 10:00 am to 4:00

pm and 5:00 pm to 11:00 pm

Closing Session - 11:15 pm to 11:30

pm

Saturdays

Trading Hours - 10:00 am to 2:00

pm

Closing Session - 2:15 pm to 2:30

pm

On the expiry date, contracts

expiring on that day will not be
available for trading after 4 p.m.

Basis Price Ex- warehouse basis Vashi inclusive

of all taxes

Unit of trading 10000 Kgs (=10 MT)

17
Quotation/base Rs. per Quintal
value

Tick Size Re. 1.00

Ticker Symbol SUGARSVSH

Delivery Unit 10 MT net basis packed in 50 kgs

new A Twill Bags / PP bags

Quality Specification Sugar in crystal form manufactured

by vaccum pan method of current
season with :

Moisture : 0.08% Max

Polarisation : 99.80% Min

ICUMSA : > or = 100 ICUMSA and

< 150 ICUMSA as determined by
GS2/3 METHOD 8 prescribed in
Sugar Analysis ICUMSA Method
Book
Grade : S
Grain Size : Small as determined
by the methods prescribed in
IS:498-2003
Quantity Variation +/- 5%
Delivery Center Exchange certified warehouse in
Vashi*
Delivery Upon expiry of the contracts, if any
Seller with open position desires
to give delivery at a particular
delivery center, then the
corresponding Buyer with open
position as matched by the process
put in place by the Exchange shall
be bound to settle by taking
physical delivery
No. of Active Maximum 12 contracts or
contracts minimum 2 contracts running
concurrently
Opening of October, November and
contracts December 2004 and April 2005
contracts to be launched on July
27, 2004
Subsequently trading in any
18
 contract month will open on the 21st
of the month. If the opening day
happens to be a non-trading day,
contracts would open on the next
trading day
Due Date 20th day of the delivery month. If
20th happens to be a holiday, then
previous trading day. If 20th
happens to be a Saturday or Sunday
then the due date shall be the
immediately last preceding trading
day of the Exchange
Closing of contract All open positions will be settled
as per general rules and product
specific regulations
Price Band Limit 10% or as specified by
Exchange from time to time. Limits
will not apply if the limit is reached
during final 30 minutes of trading
Position Limits Member-wise: Max (Rs. 20 Crores,
15% of open interest), whichever is
higher Client-wise: Max (Rs. 10
Crores, 10% of open interest),
whichever is higher
Discount S grade sugar with ICUMSA 150 -
200 could be accepted as good
delivery but with a discount of Rs.
25 per quintal
* Also deliverable at designated warehouses at Kolkata and Chennai subject
to location premium/discount differences which shall be announced by
the Exchange from time to time.

Is Sugar delivery possible on NCDEX?

Yes, delivery of Sugar is possible on NCDEX.
Typically, less than 1 percent of the total traded volume in
futures markets results in delivery. Most market participants
choose to buy or sell their physical supplies through their
regular channel, using futures to manage price risk and
liquidating their positions before delivery.
Why do we need futures contract for Sugar?
The Government has deferred the decontrol till October
2005. Government indicated that it will totally decontrol
the industry after:

19
 Rationalization of sugarcane prices
Initiation of futures/forward trading.
Cane price rationalization is a vexatious issue that can take
years to resolve. It is obvious that sections of the sugar
sector perceive a threat that is why this has been added as
one of the conditions for decontrol.
Commercial prudence demanded that futures trading
follow, not precede, decontrol.
Hedging by itself cannot prevent an apprehended price
collapse in the context of the massive overhang of sugar
stocks unmatched by consumption demand. It is for the
mills to work out a common strategy to mitigate the rigours
of price fall. Indeed, the industry must realise that controls
can do more harm to the market - both physical and futures
- than a free-trade environment.
Immediate Decontrol
Earlier when the decontrol was first proposed in 1998 it
was expected that the sugar prices will come under
tremendous pressure as the industry was carrying huge
stocks. Sugar price were expected to decline by around
10% immediately after decontrol of the industry. It was
recommended by various committees that the price fall
can be controlled through setting up of futures trading
platform and Government announced sugar futures trading
a pre-requisite for decontrol.
The timing of announcing decontrol for sugar is most
propitious now.
There has been a sharp fall in domestic sugar production
in 2003-04 season to a recent low of 140 lakh tonnes down
from 201 lakh tones in the previous season. Closing stocks
at the end of 2003-04 are estimated at 84 lakh tonnes, again
the lowest in the last four years.
Clearly, the period of excess production and burdensome
stocks is over. In fact, imports of raw sugar are taking place
to meet a possible shortage. It is estimated that as much as
10 lakh tonnes have been contracted for and a sizeable
portion has already arrived on Indian ports.
The beet sugar production is also declining. In a report
published by LMC International the sugar cost of production
is 50% higher than the world average cost of production.
The world share of beet sugar has declined from 36% to
25% and the dismantling of government support has started

20
in European Union. India can benefit from such world trade
scenario provided the industry is deregulated and becomes
proactive for export of sugar in times of surplus and import
raw sugar in times of domestic deficit.
The present situation of lower domestic production,
tightening stocks and imports is ideal for taking the plunge
- total decontrol. If decontrol is implemented immediately
the impact on sugar prices expected earlier would not be
felt by the industry.
The Government should not defer the dismantling of release
mechanism till October 2005 because the advantageous
position of lower domestic production, tightening stocks
and imports that the sugar industry finds itself in may not
continue till October 2005 and if the Government defers
decontrol the impact of decontrol in on sugar prices either
way could be more devastating.
The first prerequisite of decontrol -commencement of
futures trading in sugar - has already been fulfilled by
NCDEX. Futures trading in Sugar commenced on National
Commodity & Derivatives Exchange Limited (NCDEX)
on July 27, 2004. The Government should now announce
decontrol of sugar industry by way of dismantling the
sugar release mechanism immediately now that futures
trading in sugar is available to the industry on a national
level exchange like NCDEX.
Cyclical sugar production
Sugarcane has a 24 month planting cycle (2 crops of 12
months from same seed) due to which the farmer planting
the crop today faces price risk in 2005 and 2006.
At present no window over such a long time horizon is
available to the farmer, sugar mills at the time of sowing/
processing which can signal the start of excess demand or
excess supply situation through the price movement
resulting out of free demand and supply play.
By keeping prices artificially low or high through sugar
control, price signals do not reach sugar mills and farmers
in time to take appropriate production decisions. The price
signals at present are not reflective of the underlying
demand-supply situation.
NCDEX will offer the long time horizon window through
which such trends shall be visible to the sugar industry
and government alike. At present the Exchange has

21
launched contracts in 3 near months, six month forward
contracts pivoting on April and October and once initial
liquidity is captured with the support of Government
support the Exchange shall launch 1 year forward, 18
months forward contracts in due course.

Higher control on sales volumes

In the long term sugar producers are expected to benefit
with the discontinuation of the release mechanism as
producers will be able to control the sales volume based
on the demand-supply signals provided by the sugar futures
trading on NCDEX. They will also start focusing on marketing
of sugar.
Costs of Demand-Supply Imbalance
The necessity of a futures exchange for sugar is dictated by
the fact that sugar production and demand do not rise and
fall in tandem. Price risk is being carried by producers
without an effective hedging mechanism.

At present
Excess inventory holding costs (over & above the 6
months off season) is
- Rs 1008 Crores per annum
Unhedged Price risk on inventory is
- Rs 1800 Crores if sugar price changes a
rupee per kilo

22
Inventory financing consumes the largest chunk of interest
costs and bank limits. Inventory holding cost is 2nd highest
cost factor of sugar mills after cane price. Inability to manage
stocks (and hence market price) has been the single-largest
reason for problems with cane payments. This resulted in
default of cane payments when sugar prices dipped.
NCDEX is working with banks to design sugar specific
commodity financing products where finance will be
available to the sugar mills against their stock holdings
in dematerialized balances.
NCDEX has launched sugar futures contracts in M and S
grade with multiple delivery centres at Kolkata, Chennai
and Delhi so that the sugar mills can benefit from location
arbitrage. NCDEX will continue to evaluate and add
delivery locations on basis of trade flows so that a fine
mix of deficit and production areas are available as
delivery locations. Spot price dissemination for the
multiple delivery locations will signal the deficit markets
to the sugar producers to take logistics decisions.
Signal for EXIM trade decisions
The industry finds itself in the middle of the demand-supply
imbalance. There are no signals ahead of time for the
farmers, producers and government to change their
decisions.
The leverage available to the government/sugar industry
to adjust the shortage in supply by imports of raw sugar in
short run and export of sugar in long run is not being
exploited well in time.

Annual difference between Production and

Domestic Offtake

23
Domestic futures trading over a long time horizon on
NCDEX can act as an advance signal for EXIM trade
decisions to balance domestic sugar availability and
demand. With current level of duty protection for sugar,
domestic market would be more stable provided surplus
is sent out or deficit is brought in every season. Sugar mills
will bring in raw sugar against future export obligations. It
is akin to borrowing from future surpluses and is a self-
balancing mechanism
If domestic prices rise sharply over world prices , it
makes commercial sense to import
If domestic prices start falling towards world price
levels, there is incentive to export
Intending Importers can use the domestic futures
contracts of sugar traded on NCDEX to hedge their
exposure of sugar in the domestic market over a long
time horizon up to 18 months forward in due course.
Functions of Sugar futures markets on NCDEX
Sugar Futures markets shall provide several valuable
functions:
Elimination of Counterparty Risk
In any transaction, the two parties to the transaction
will trade anonymously on NCDEX. NCDEX provides
a mechanism that guarantees that the contract will
be honoured.
All Sugar trades executed on NCDEX are guaranteed
by NCDEX and the counter party credit risk is assumed
by the exchange. NCDEX manages this risk by a
system of margin collection.
NCDEX also has a robust surveillance system in place
to track illegal or circular trading. This was done to
provide a fair forum for all participants, especially to
retail investors. In the rare case of any defaults by
members, NCDEX has the largest settlement
guarantee fund among all commodity exchanges in
the country.
Hedging Utility
Futures trading markets help transfer risk from one
class of participants to the other.
Price Discovery
NCDEX exists to provide a centralized marketplace

24
on a national level where Sugarcane growers, traders,
arthiyas, commission agents, brokers, exporters,
sugar mills, sugar users like process food
manufacturers can discover the price of sugar for
future delivery and shift their risk in sugar prices
moving up or falling down to others who are willing
to bear it.
Consider all there is to know about Sugar on a given
day. The complete set of this knowledge is vast- too
much for any one person to master. These are more
matters of opinion than of counting. Obviously no
person can possess more than a small part of this
information.
The primary function of NCDEX is to provide a
electronic online trading platform where the
Sugarcane growers, traders, arthiyas, commission
agents, brokers, exporters, sugar mills, sugar users
like process food manufacturers will act on his or her
sugar knowledge can make bids and asks. This online
placing of bids and asks results in the market clearing
price of the moment. This is not a flat price. Nobody
sets it. Not even the Government of India. Rather, this
price is discovered in this free-flowing interplay
among all the Sugarcane growers, traders, arthiyas,
commission agents, brokers, exporters, sugar mills,
sugar users like process food manufacturers .
Since the futures prices reflect the collective
perception of the market participants about the future
price level, futures markets provide an important
function of price discovery. In fact the spot price
generally converges to or is close to the futures price
on expiry of the futures contract.
Information Function
Price spread between months which is called
calendar spread gives important information about
storage which is very important for sugar.
Positive calendar spreads or carry spread indicate a
willingness on the part of the market to pay at least
partially for storage- a signal that sugar supply is
plentiful relative to demand and the market feels no
urgent need for a flow of supply.
Negative calendar spread or inverted spreads
indicate that the market demand is much more than

25
 the supply and thus the market is willing to pay more
for immediate or sooner deliveries. Inverted
deliveries penalize storage and may motivate the
movement of sugar.
Carry spreads are limited to the full cost of carry i.e
cost of storage , insurance, shrinkage and interest for
the specified number of months whereas there is no
limit to inverted spread-inverted spreads can be as
wide as the market pushes it till such time that
movement of sugar begins out of storage.
Spot Price Dissemination
The exchange will be disseminating the spot prices for
sugar three times a day from the locations given below to
its trader workstation, its website and to various data
vendors like Telerate. This will give an indication of the
underlying markets to the sugar industry.
NCDEX is partnering with consumer goods industry players,
rural kiosk network entities, technology companies, news
agencies and banks for both spot and futures price
dissemination. NCDEX will continue to evaluate and add
delivery locations on basis of trade flows so that a fine mix
of deficit and production areas are available as delivery
locations.
Priority center -
M grade contract- Muzaffarnagar
S grade contract- Vashi
Non-priority centers -
M grade contract- Delhi, Kolkata
S grade contract- Chennai, Kolkata
The exchange will be polling/calling up randomly upto 25
market participants from a panel of 40 market participants
and ask them for the prices twice daily. Then after collecting
the raw prices, the exchange will carry out a process called
bootstrapping. Bootstrapping is a scientific procedure of
removing the outliers of raw prices (i.e. prices that are too
far away) and averaging the remaining prices. NCDEX has
outsourced the spot price polling for to CMIE (Center for
Monitoring of Indian Economy). The exchange also invites
spot market players for participating in the spot price polling
process.

26
Risk Mitigation at NCDEX
Trading on NCDEX eliminates counterparty risk since
NCDEX is the counterparty for all transactions and
guarantees all trades. NCDEX manages to fulfill this role
through a system of margins collection. Each trade on
NCDEX requires the payment of an up front margin (or
good faith money). Typically this margin is a very small
percentage of the actual transaction value. In addition the
positions on the futures market are marked to market on a
daily basis. The client also needs to pay a daily market-to-
market margin. NCDEX uses SPAN system for calculation
of Value at Risk based margin calculated at 99% confidence
interval over a one-day time horizon. In addition NCDEX
will levy additional margin to cover for extreme movements
or distortions in prices.

NCDEX INFORMATION

The NCDEX homepage http://www.ncdex.com will carry

real time price data .In addition the site will regularly provide
historical data on settlement prices, daily and historical
highs and lows for each contract. It will also provide
information on changes in contract specifications, details
of members, market timings and exchange holidays.
NCDEX will make available historical data for research
purposes through different electronic media.
The daily quotes will also be disseminated through different
information service providers. These details will also be
available on the website.

Disclaimer: The brochure has been prepared for general

information purposes only. While NCDEX has made every
effort to assure the accuracy of the information contained,
herein, any affirmation or fact in this brochure shall not
create an express or implied warranty that any example
or description is correct. This brochure is made available
on the condition that errors or omissions shall not be
made the basis, for any claims, demand as or cause of
action.

27
 Note

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