Govt’s moves sweeten sugar prices

Gurumurthy K | Updated on March 02, 2014

Sweet outcome Increase in exports could reduce stocks. - SEA WAVE/SHUTTERSTOCK


Export subsidy and interest-free loans will help bring down inventory

Sugar prices have been under pressure for over a year now.

Prices have tumbled 29.7 per cent, from a high of ₹37 per kg in 2012 to a low of ₹26 in January 2014. India is the second largest producer of sugar after Brazil and is the largest consumer. Increasing inventories and high sugarcane prices are the major factors that have dragged sugar prices. According to data from the Indian Sugar Mills Association, the country had a stock of 11.7 million tonnes (mt) in January 2014.

Low prices have also affected production in this sugar year (October to September). Sugar production till February 15 was 14.37 mt, down 13.4 per cent from 16.58 mt during the corresponding period a year ago.

Government to the rescue

The Centre has unveiled a couple of measures to rescue the sugar industry. In December, the Government announced an interest-free loan of ₹7,200 crore to sugar mills to settle cane arrears.

According to the Indian Sugar Mills Association (ISMA), the arrears to farmers from mills have crossed ₹12,000 crore as of February 19.

Widening payment dues to farmers is also one of the reasons for lower production.

Farmers tend to shift to alternative crops and supply more to competing industries such as gur and khandsari during such times since they get immediate payment, that, too, in cash.

In February, a subsidy of ₹3,333 a tonne was offered to raw sugar exporters. This subsidy is applicable during February-March. The Centre has also fixed a cap of 4 mt for getting the subsidy. The decision is expected to help increase exports which, in turn, could bring down the inventory level. However, the scheme will be reviewed after March.

The interest-free loan and export subsidy could help reverse the sugar price cycle. Increase in exports could cut inventories. If the Government decides to extend the subsidy after March, then it could be a major trigger for a sustained reversal in sugar prices. Coupled with this, if the interest-free loan scheme helps bring down farmers’ arrears, it will help improve sentiment and encourage farmers to shift back to sugarcane cultivation.

Long-term view: The sugar futures contract traded on the National Commodity and Derivatives Exchange (NCDEX) has been going through a sharp downtrend since 2012. The contract recorded a high of ₹3,672 a quintal in August 2012 and has tumbled to the current level of ₹2,770. Although the contract reversed higher from the January low of ₹2,621, the downtrend still remains intact as the key resistance at ₹2,920 has not yet been breached. However, there is strong support available for the contract at ₹2,500 which could limit the fall. Chances are high for the current downtrend to reverse in the coming months.

The contract will have to breach ₹2,920 in order to signal a confirmed trend reversal.

Such a break can take the price higher to ₹3,400 over the long term. On the other hand, if the contract declines below ₹2,500, it can target ₹2,200.

The world benchmark contract for raw sugar traded on the US Intercontinental Exchange (ICE) is suggesting a trend reversal. The ICE futures contract tumbled 59 per cent from its 2011 high of $36.08 a pound to $14.7 in January 2014. This fall is reversing now from an important long-term trend-line support at $14.6.

A break below this support might not be very easy. While the contract trades above $14.6, a fresh leg of rally targeting $22.8 and $25.4 looks likely in the coming months.

Medium-term view: The medium-term trend is down. Key resistance is at ₹2,850, where the 200-week moving average is positioned. While below this resistance, the outlook will remain negative and the contract could fall to ₹2,550 over this time period. The immediate target on a break of ₹2,850 will be ₹2,920 and the subsequent target ₹3,100.

Short-term view: The short-term trend for the NCDEX sugar contract is up. The contract is witnessing a corrective fall within this uptrend after recording a high of ₹2,850.

Short-term support is at ₹2,742, the 21-day moving average.

The trend will remain up as long as the contract trades above this support. A reversal from this support can take the contract higher to ₹2,830 in the short term. On the other hand, a fall below the 21-day moving average will take the contract to ₹2,650.

Published on March 02, 2014

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