Derivatives

Sugar sector: Government’s move sweetens sentiment

Gurumurthy K | Updated on November 22, 2014

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The short-term trend in NCDEX sugar futures is up. The contract is likely to rally further

The Government has announced a slew of measures to revive the sugar sector.

One, to help sugar mills pay back their dues to farmers, it has announced an interest-free loan of up to ₹4,400 crore.

This is in addition to the ₹6,600-crore interest-free loan given by the UPA Government in December.

Further, in order to curb rising imports, the import duty on sugar has been raised to 40 per cent from 15 per cent. Data from the Ministry of Commerce show that sugar imports surged to $564.6 million in 2012-13 from just $65.5 million the year earlier, a whopping 762 per cent surge in the value of sugar imports.

This has increased the inventory of domestic sugar.

The inventory at the beginning of the 2013-14 sugar season (October to September) was around 93 lakh tonnes.

This is a 50 per cent surge from the 62 lakh tonnes inventory at the beginning of the 2012-13 season.

However, inventory levels are estimated to come down about 20 per cent to 74-75 lakh tonnes by the end of this season (September 2014) on restricted imports. The duty hike is expected to increase the price of the commodity by ₹2-3 a kg.

The Government has also increased the mandatory level of ethanol blending in gasoline to 10 per cent from 5 per cent.

The ₹3,300-a-tonne subsidy on raw sugar export has also been extended until September.

Though the market has reacted positively to these measures, the catch is that Food Minister Ram Vilas Paswan has said the announced benefits would be available only to those who can guarantee that they will clear their cane arrears to farmers.

However, as an immediate reaction to this news, the sugar futures contract price surged about 3.4 per cent from its intra-week low of ₹3,049 a quintal to a high of ₹3,154 before closing at ₹3,112 on Friday, up 2 per cent for the week.

This has helped keep the short-term uptrend intact on this contract begun in the last week of May.

Long-term view: The long-term outlook is bullish for the sugar futures contract (₹3,112 per quintal) traded on the National Commodity and Derivatives Exchange. The strong downtrend in this contract from its August 2012 high of ₹3,672 a quintal found a bottom at ₹2,621 in January this year. The contract has risen sharply from this low, thereby decisively reversing its earlier downtrend.

Also, this reversal has happened from an important long-term trend line support. As such, a rise to ₹3,500 and even ₹3,700 looks likely in the coming months. Key long-term supports for the contract are placed at ₹2,750 and ₹2,600.

A break below ₹2,750 could give the initial signal of a trend reversal. But only a strong break below ₹2,600 will turn the outlook bearish for the contract.

Medium-term view: The medium-term trend is up. The 200-week moving average at ₹2,922 is a key medium-term support for the contract. The outlook will turn negative if the contract declines below this level.

The ensuing target on such a break will be ₹2,750. On the other hand, the 61.8 per cent Fibonacci retracement level of ₹3,270 is a significant resistance. A strong break above this can take it to ₹3,400 in the medium term.

Short-term view: The recent reversal from the low of ₹2,974 recorded on May 27 has turned the short-term trend also up.

This reversal has happened from the 21-week moving average, currently at ₹3,028, and also from just above the 50 per cent Fibonacci retracement level of ₹2,943. A short-term rally to ₹3,200 and ₹3,270 looks likely now. However, the bullish view will get negated if the contract declines below the 21-week moving average. The target on a break below this level will be ₹2,950.

Published on June 29, 2014

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