Increasing Profitability and Sustainability in the Sugar Cane Industry

1/21/2013 1:16:00 PM

Lessons Learned from Godavari: Samir Somaiya, BS ’90, MEng ’92, MBA '93, chairman of the Mumbai-based Godavari Biorefineries talks about the challenges and opportunities in the sugar cane business.


Samir Somaiya began by painting a dismal picture of the sugar cane industry in India with low margins and limited access to international markets.  As chairman of the Mumbai-based Godavari Biorefineries, Somaiya understands the challenge of turning a profit when the price of cane hovers at $50 per ton.  Therefore, the fact that Godavari is investing significant amounts of capital into value creation, rather than simple efficiencies in manufacturing is remarkable.   

 

Two aspects of the Godavari business model were very compelling. First, their value creation activities have the potential to improve the financial stability of both farmer and factory.  Second, efforts to invest in local farming techniques and infrastructure could create a positive feedback loop within the community. 

 

This insight was truly groundbreaking. Based on the numbers presented, sugar by-products, previously considered waste, actually create more value than the sugar itself.  In other words, Godavari can claim that it is in the business of transforming cane, rather than the business of producing sugar.

 

Delving deeper, this approach does not just make good business sense, but makes good environmental sense as well. Somaiya noted that by burning excess molasses and bagass, the byproducts of sugar refinement, the factory is able to power itself and feed power back into the grid. In fact, the amount of power produced could power the entire district, reducing the amount of coal and oil used in the region. By doing this, Godavari is able to simultaneously reduce its carbon footprint and increase its net earnings. This is in sharp contrast to the common mantra of the developing nations asking to pollute more in order to grow their economy.

 

Furthermore, Godavari’s commitment to their suppliers is a rarity.  Just as reducing waste improves the bottom line, investing in the local farming community helps the bottom line as well—a point that Godavari appears to have taken to heart. A small investment in farmer training yields benefits over a period of years. If a farmer is able to produce more cane, he is able to sell more cane to Godavari which it can then process and sell on the market.

 

This is not without its challenges.  The biggest of which is the introduction of complementary crops on the farmers’ land. In other regions, this simple change has proven to increase crop yields and reduce the amount of fertilizer necessary for crops. Through the years Godavari has cultivated (no pun intended) relationships with select farmers to experiment with specific agricultural techniques. This allows them to, in theory, increase adoption of new techniques in various villages. Somaiya noted that these changes could potentially increase the revenue stream from a single plot of land from $6,000 per year to $15,000 per year. This additional income is potentially game-changing, enabling farmers to buy additional land or send their children to better schools.

 

Though the Godavari approach has the potential to be the model for sustainable, profitable, environmentally friendly agriculture in India (and the world), there are still a number of unanswered questions. For instance, much of the technology they are using is experimental and still unproven.  As a result Godavari may find itself losing money for a number of years while perfecting the technology. However, as a first mover, they may be able to recoup much of this loss through later efficiency and licensing of their technology to other cane factories. Lastly, there lies the question of government interference. Somaiya said on a number of occasions that the Indian government often makes decisions that are at direct odds with both corporate and farmer interests. If, however, Godavari embarks on a campaign to lobby the government for support, the outcome could be very different.

 

Overall, Somaiya’s approach to sugar cane processing paints a picture full of opportunity. Since Indian farmers receive some of the highest prices for the raw inputs, the ability to exact greater profits in this market may mean that other sugar can markets, such as Brazil, Indonesia, or even the United States may benefit from Godavari’s new processes and approaches. If successful, the global agriculture industry could take a large step forward.

 

Samir Somaiya spoke at Johnson as part of the Center for Sustainable Global Enterprise lecture series, Leaders in Sustainable Global Enterprise in the fall of 2012. 

 

Based on a write up provided by Daniel Sternberg.

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