Sugar Final

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).

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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) Opening stock Production

1999-2000 2000-01 2001-02 2002-03 32,372

36,133

37,424

33,989

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

Imports

36,073

Total Supply Exports

Closing stock Stock-to-use ratio

37,695

39,169

204,976 205,274 210,007 220,494 41,448

Domestic consumption

38,646

37,686

41,228

45,724

127,395 130,164 134,790 137,725 36,133

37,424

33,989

37,045

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

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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 countries

115

Brazil, India, European Union

Produce from cane only

67

Brazil, India, Thailand, Australia, Cuba

Produce from

39

European Union,

beet only

Produce from cane and beet

US, Turkey, Ukraine, Poland and Russia

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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.

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Sugar: Forms of support adopted by different countries Minimum Minimum Import

Export

Other

support price for sugar EU

sugarcane Controls Subsidies support price India Brazil EU

forms of Support

USA

EU China USA Japan

EU USA Cuba Turkey

USA CUBA South Africa Turkey

Brazil EU USA Columbia

Thailand Turkey

S. Africa Thailand China

India

Cuba Mexico Thailand

Japan

Australia

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:

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Sugar : World Exports Production Million Tonnes,

Exports Million Tonnes,

raw value

raw value

India

Exports as a % of Production

22,100

1,950

8.82

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

Australia

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

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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

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(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 largesize plants in other parts of the world. Sugar: India's share in global production (Million tones)

Global production

India's production

Indias 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 agroprocessing 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

Unorganised / Traditional Sector (Gur & Khandsari)

Organized Sector (Sugar)

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

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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

required

No. of crops per year

(inches) Paddy

51

2 hours

Once in 3 days for

One in rainy

4 months

season One crop

Sugarcane

40

2 hours

Once in 3 days for

Cotton

21

5 hours

Once in 14 days for

4 months 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

Area ('000 ha)

234

385

599

284

1852

UP

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

1210

1868

6219

1644

5651

Sugar production ('000 tonnes)

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

Bagasse

Cogeneration of power

Clarification of juince

Evaporation

Pan-boiling

Crystallisation

Centrifugation

White sugar

Recovery

Molasses

Industrial & Potable Alcohol

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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)

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Gur and Khandsari: Gur is unrefined sugar and khandsari is non centrifuged sugar. These are mostly

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

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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 of sugar

consumption 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.

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Political factors

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

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Grade : M Grain Size : Medium as determined by the methods prescribed in IS:498-2003 Quantity Variation Delivery Center

+/- 5% 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

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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 Trading hours

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 - 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)

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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 contracts

Maximum 12 contracts or 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

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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:

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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

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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

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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

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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

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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 selfbalancing 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

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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

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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.

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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-tomarket 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.

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Note

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Minal\d:\NCDEX\Sugar Cover.cdr