Raw Input. After five bitter years, some relief for sugar

After five consecutive seasons of supply glut and steadily falling sugar prices, is India’s sugar market finally turning the corner? The stock market certainly seems to think so, with many sugar producers’ stocks recently hitting their 52-week highs after the companies reported a turnaround in their financials for the quarter ended March 2016.

Commodity price trends also hint at better fortunes for Indian sugar producers. In the domestic markets, retail sugar prices in the Mumbai market have risen from ₹30 a kg to ₹40 in the last one year. Sugar prices had last hit these levels way back in mid-2013. Wholesale prices have climbed from ₹2,397 to ₹3,691 a quintal in the same period, according to data from the Department of Consumer Affairs. The recent rise in sugar prices, producers say, has resulted in more mills attaining break-even in recent weeks. Most large sugar producers reported losses for the last two years as their ex-factory realisations on sugar dipped below production costs.

The industry body Indian Sugar Mills Association estimates domestic sugar output in the soon-to-be concluded 2015-16 crushing season at about 250 lakh tonnes, about 11 per cent lower than last year’s record output of 278 lakh tonnes. Should this estimate prove correct, this would mark the first year of a decline in domestic output after five straight years of surpluses. Sharp declines in sugar output in Maharashtra and Karnataka on account of the drought, even as Tamil Nadu produced slightly more than last year, have contributed to the output falling short of initial estimates.

Given the annual consumption of about 256 lakh tonnes and exports of about 15 lakh tonnes, recent production estimates would mean that industry will flag off the new sugar season (beginning October 1, 2016) with carry-forward stocks of just 70 lakh tonnes. Not only is this substantially lower than the 91 lakh tonnes opening stock last year, this would account for just about 3-4 months’ consumption. Sugar prices, in past cycles, have usually proved responsive to lower stock-to-use ratios. As the stock-to-use ratio of 27 per cent (opening stock divided by annual consumption) for the upcoming season is significantly lower than the 30-38 per cent in the preceding three seasons, domestic sugar prices look set to hold above last season’s levels.

Global price trends also seem to be supportive of a bull market. The benchmark sugar future contract no 11 on the ICE has shot up by nearly 75 per cent from a low of 11.3 cents per pound in August 2015 to 19.7 cents in mid-June 2016, with a 46 per cent gain in the last one year. While global prices are still far below the heady highs of over 29 cents hit in January 2011, the recent rebound from the seven-year low is offering some relief to global sugar producers after an extra-long bear market. The recent revival in global sugar prices has been prompted by predictions from forecasters such as the International Sugar Organisation that demand in the global market will run ahead of production by upwards of 5 million tonnes in the current sugar year with El Nino taking a toll on both the Indian and Thai crops. Increasing diversion of cane from sugar to ethanol in Brazil is also positive for sugar prices.

While domestic sugar prices appear set to hold firm in the next four months or so until the next crushing season begins, trends thereafter may be decided by indications about plantings and sugar yield in the 2016-17 sugar year (to begin in October). The forecast good monsoon could raise cane output from the current year’s depressed levels, which can then moderate prices.

However, in this context, the Centre’s move to restrict the Fair and Remunerative Price (FRP) for cane at ₹230 per quintal for 2016 could prove a dampener to higher plantings. After rising from ₹139 per quintal in 2010-11 to ₹210 per quintal in 2013-14, the FRP for sugarcane declared by the Centre has remained almost stagnant in the last three years, even as MSPs for other crops such as pulses have been pegged higher. This Government’s clear intention to curb food inflation may also prevent sugar prices from pushing much higher from present levels. The recent imposition of export duty of 20 per cent on sugar is an indicator of this. However, thanks to the combination of lower procurement prices and better realisations, sugar producers may still close FY-17 with better sales and profits than the last three years.

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