Sugar will stay firm despite ample stocks, govt control

Domestic sugar prices have surged more than 47 per cent during the current marketing season, starting October 2015. To combat this, the Union government recently imposed stock limits for traders and withdrew the production-linked subsidy for the mills against their prescribed sugar exports quota.

Thus, mills are now forced to sell the sweetener in the spot market to pay farmers and avoid suspension of their crushing licence. This ensures regular supplies in the physical market, keeping prices in check.

However, prices in the international market have been improving in recent months on expectation of a global deficit for the second consecutive season, as output is expected to drop in India and Thailand.

The benchmark raw sugar contract on the Intercontinental Exchange (ICE) has gained 34 per cent since February 2016.

India is the second-largest producer and largest consumer, while Thailand is the second-largest exporter after Brazil.

India’s sugar production in 2016-17 is forecasted to decline for a second consecutive year as thousands of sugarcane growers in major producing States — Maharashtra and Karnataka — may continue with the existing cane or ratoon crop for the next marketing year due to the first back-to-back drought in nearly three decades. The yield from the ratoon crop will be less.

The Indian Sugar Mills Association (ISMA) sees production dropping by 11.7 per cent to just about 25 million tonnes (mt) compared to last year.

Thus, sugar production is going to fall below the expected consumption of 25-26 mt for the second consecutive year. In 2015-16, ISMA predicted carry-forward stocks of 9 mt from the previous season and export of 1.5-2 mt.

Sugar mills would have carry-over stocks of 6-7 mt at the end of the current season.

The Centre is taking every possible measure to ensure adequate supply and stabilise prices in the range of ₹30-40 a kg in the retail market. If prices rise unusually, the government may stop exports and lower the import duty to increase domestic sugar availability.

The supply side in the global market is also not comfortable due to the rising pace of global consumption.

In its first forecast for 2016-17, the US Department of Agriculture (USDA) sees global stocks nearing historically low levels, at 32.8 mt.

However, the USDA forecasts that world sugar output will increase by 4.4 mt to 169.3 mt in 2016-17, well below the five-year average production of 173.7 mt. Moreover, a strong Brazilian currency is not helping world supplies either.

As the government is trying to rein in prices, sugar prices may trade in the range of ₹3,200- 3,500 a quintal on the NCDEX until a clear picture of the South-West monsoon emerges.

Reports of a production deficit may keep traders interested in buying sugar in anticipation of a price surge.

The writer is Associate Director – Commodities & Currencies Business, Equity Research & Advisory, Angel Broking. Views are personal.

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