Drought conditions in Maharashtra may hit the domestic sugar production in the sugar year 2016, which is estimated to decline by 10 per cent at around 25.5 million metric tonnes, rating agency ICRA has said.

“We estimate domestic sugar production at around 25.5 million metric tonnes (MT) during the sugar year (SY) 2016, a decline of 10 per cent over the previous year. This was mainly driven by a drought in the largest sugar producing state Maharashtra,” ICRA said in a statement here today.

Lower sugar production along with exports of around 2 million MT is likely to bring down the closing stocks to around 7.6 million MT in sugar year 2016 from around 9.5 million MT in SY2015, it said.

“The decline in sugar stocks is positive and has resulted in an improvement in domestic sugar realisations since August last year.

“With effective cane prices after accounting for duties and state-level subsidies for SY2016 largely remaining unchanged over the previous year, the increase in sugar realisations is expected to improve the contribution margins for sugar in this year,” it said.

These factors, together with the higher recovery rates, are expected to drive a significant improvement in profitability for sugar mills based in Uttar Pradesh (UP), ICRA Senior Vice-President Sabyasachi Majumdar said.

Profitability improvement is likely to be moderate for mills based in Maharashtra and Karnataka. This apart, profitability is also likely to be supported by improved realisations for by-products, Majumdar said.

Although sugar mills will have to sell sugar at the modest global prices prevailing, ICRA expects export-linked subsidies for the current sugar year and the resulting modest increase in domestic sugar realisations to offset the losses from export sales to a large extent.

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